The European Commission opened the first investigation against a foreign company on the basis of the new State aid regulatory framework for non-EU countries, the Foreign Subsidies Regulation (FSR, or the Regulation), Regulation (EU) 2022/2560.

The FSR entered into force on 12 July 2023 with the obligation to notify certain concentrations from 12 October 2023. Under the FSR, the European Commission can investigate foreign market interventions which provide state aid/ subsidies which are not considered compatible with the level-playing field of EU’s Single Market, after a balancing test of EU’s policy objectives. The first case concerns a Chinese state-owned train manufacturer, following a notification to the Commission.

The European Commission published a policy brief setting out the preliminary findings and observations of the new regulatory regime in the first 100 days of its application. The policy brief notes that the Commission in the first 100 days has assessed the source of financing of the notified transactions which included capital injections, equity contributions and loans obtained from financial institutions attributable to a non-EU jurisdiction. Other forms of foreign financial contribution observed by the Commission include state guarantees, direct grants for specific projects, as well as tax benefits, notably for R&D expenses and investment projects.

According to the Regulation, where a foreign subsidy is liable to improve the competitive position of an undertaking in Single Market and where, in doing so, that foreign subsidy actually or potentially negatively affects competition in the internal market, it shall be deemed to be distortive.

As such, certain tax benefits, i.e. the foregoing of revenue that is otherwise due, such as tax exemptions or the granting of special or exclusive rights without adequate remuneration shall be considered a foreign financial contribution. In terms of clarifying which tax benefits are subject to notification, the Commission has clarified that exemptions granted by non-EU countries from ordinary tax regimes (e.g. profit-based taxes, property taxes, stamp duties etc.) constitute “foreign financial contributions” and should be counted for determining whether the notification threshold is met.

However, as indicated in the Commission Implementing Regulation, the following tax measures do not need to be reported in the notification, unless they fall into any of the categories of foreign subsidies most likely to distort the internal market, which are listed in Article 5 of Regulation (EU) 2022/2560:

1. deferrals of payment of taxes, tax amnesties and tax holidays as well as normal depreciation and loss-carry forward rules that are of general application;
2. application of tax reliefs for avoidance of double taxation in line with the provisions of bilateral or multilateral agreements for avoidance of double taxation; as well as
3. unilateral tax reliefs for avoidance of double taxation applied under national tax legislation to the extent they follow the same logic and conditions as the provisions of bilateral or multilateral agreements.

The list of tax measures which are exempt from notification to the Commission is exhaustive, which means that other or similar tax measures cannot benefit from the exception. Tax measures not listed should be reported regardless of whether the notifying parties consider them to be of general application, and consult the case-teams at the European Commission/ DG COMP.

The Commission may, based on a case-by-case assessment, require additional information on those transactions at any stage of the assessment. Further exceptions to these rules include provision or purchase of goods and services at market terms in the ordinary course of business, de minimis transactions below EUR 1 million, certain tax and social security reductions of general application and some tax reliefs for the avoidance of double taxation.

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