Clifford Chance

The European Commission has published a Q&A document for the EU Foreign Subsidies Regulation (FSR) clarifying, among other points, that a filing is required for any qualifying transaction which signs on or after 12 July 2023, but which has not closed by 12 October 2023.

On 6 June 2023, the European Commission issued a Q&A document aiming at clarifying several points related to the implementation of the Foreign Subsidies Regulation.

One of the points addressed relates to the application of the notification obligation. In particular, the European Commission considers that a filing is required for any qualifying transaction that meets the thresholds and which signs on or after 12 July 2023, but which has not closed by 12 October 2023. The Regulation itself is unclear as to whether such transactions are notifiable. As a formal filing cannot be made until 12 October, and a prohibition on closing prior to clearance will apply thereafter, there could be delays for deals that sign between 12 July and 12 October and which would otherwise close in October or November. For a filing made on 12 October, the European Commission would have until 20 November to issue a Phase 1 clearance decision, i.e., assuming there will be no issues / no in-depth investigation. It may be possible to mitigate some of those delays by engaging in pre-notification discussions with the European Commission with a view to being ready to formally notify on 12 October. The Q&A clarifies that pre-notification contacts will be possible as of the date of publication of the Implementing Regulation and filing forms, which appears imminent.

Qualifying transactions are those involving an acquisition of at least decisive influence in a target (i.e. veto rights over strategic commercial decisions such as budget, business plan and appointment of senior management, the same as for the EU Merger Regulation). The thresholds for mandatory filing are:

• the target (or one of its subsidiaries) is established in the EU (e.g., through a legal entity or branch) and generates an aggregate EU-wide turnover of at least EUR 500 million in the previous financial year. For joint venture transactions, the JV must meet this threshold and for legal mergers it can be either of the merging parties; and
• the parties to the transaction received from non-EU governments, or entities with links to such governments, combined aggregate "foreign financial contributions" (FFCs) of more than EUR 50 million in the preceding three financial years. The relevant parties are the target and each party acquiring a controlling or jointly-controlling interest in it. FFCs are defined very broadly, to include the provision or purchase of goods or services and financing arrangements (regardless of whether the transaction is on arm's length terms), as well as the foregoing of revenue that is otherwise due, such as tax exemptions. Consequently, if the first (turnover) threshold is met, this second threshold will usually also be met.

The Q&A also clarifies certain other points, including the following:

• For transactions involving a change from sole to joint control over a target (with the seller retaining a controlling interest), only the turnover of the target is taken into account. Unlike the position under the EU Merger Regulation, the turnover of the seller that retains an interest should not be aggregated with that of the target.
• When determining whether a FFC falls within the three year period, the relevant moment in time is the date on which the legal entitlement to the contribution arises. For example, the entire amount of a loan should be considered as having been granted at the moment when the loan agreement was signed, even if it is payable in several instalments. For sales or purchases of goods or services, the FFC should be treated as the entire purchase price, arising on the date when the contract is signed or, if the exact amount to be purchased or sold (and thus the price to be paid) is not determined in the agreement (e.g. a regular supply of a service over several years), each portion of the price should be allocated to the moment on which it is finally determined.
• Iceland, Liechtenstein and Norway are “third countries” for the purposes of the FSR, despite them being associated with the EU through their membership of the European Economic Area (EEA). It remains to be seen whether FFCs from these countries would have to be reported in the notification forms.
• There are no exceptions from the definition of a FFC for sales or purchases of goods or services on arm’s length terms, subsidies falling within the scope of the WTO Agreement on Subsidies and Countervailing Measures or tax exemptions and should accordingly be taken into account when determining the notification threshold. That said, information on some of these categories of FFC may not be required in the (soon to be published) filing form. Direct financial contributions from international organisations such as the World Bank are not attributable to a third country, and therefore should not be considered as FFCs.

The Q&A is non-binding and the European Commission has indicated that it may evolve from time to time.

The final Implementing Regulation and filing forms are expected to be published soon and to impose significantly lower information burdens than the draft versions that were published for consultation earlier this year. We will issue a separate update on these, when published.