The Regulation on foreign subsidies distorting competition in the internal market establishes a notification obligation to the European Commission in connection with certain public procurement procedures. Although the notification obligation has applied since 2023, many contracting authorities and companies participating in public procurement procedures are still not aware of the notification obligation or what a notification obligation entails. Both contracting authorities and companies participating in public procurement procedures should, however, be mindful of the existence of any notification obligation. Overlooking a notification obligation may have serious implications and result in fines of up to 10% of a company's total turnover in the previous financial year. In this article, we summarise the main features of the notification obligation and process before the European Commission.
Background information
The Regulation on foreign subsidies distorting competition in the internal market (the "Regulation") entered into force on 12 July 2023.
The reason for the Regulation was the regulatory distinction between subsidies received from other EU Member States and those received from third countries. Subsidies from EU Member States were subject to EU state aid rules, whereas subsidies from third countries were not governed by equivalent regulations. As a result, such subsidies had the potential to distort competition in the internal market.
Thus, the purpose of the Regulation was to provide the European Commission (the "Commission") with a set of tools to address subsidies from third countries that may distort competition in the internal market. This includes a notification obligation to the Commission in connection with certain public procurement procedures.
Read more about the Regulation in our previous article.
Which public procurements are covered?
The Regulation imposes a notification obligation when participating in public procurement procedures if the following thresholds are exceeded:
- The estimated total value of the public procurement, calculated in accordance with the EU public procurement rules, is at least EUR 250 million and – in case the contracting authority has pided the procurement into lots – the value of the lot or the combined value of all lots for which the tendering company submits an offer is at least EUR 125 million.
- The tendering company, including its subsidiaries without commercial autonomy and its holding companies as well as the main subcontractors or suppliers involved in the same tender, have received financial contributions from third countries in the last three years of at least EUR 4 million per third country.
Which companies are required to assess whether they have received financial contributions from third countries?
It is first and foremost the tendering company, i.e. the company submitting an offer for the contract, which must assess whether it has received financial contributions from third countries.
In addition to the tendering company, the assessment must also include the tendering company's subsidiaries without commercial autonomy as well as its holding companies but excluding any sister companies (unless they act as main subcontractors or suppliers). Subsidiaries without commercial autonomy refer to any company over which the tendering company is able, directly or indirectly, to exercise control or decisive influence and a holding company refers to any company that, directly or indirectly, exercises control or decisive influence over the tendering company. For both subsidiaries and holding companies, this applies in cases of 100% ownership. However, smaller ownership stakes may also be covered if control or decisive influence is exercised.
Moreover, the assessment must include any subcontractors or suppliers involved in the same offer if they qualify as main subcontractors or suppliers. A subcontractor or supplier is considered to be "main" if its participation is essential to fulfilling key elements of the contract. This applies in all cases where the financial share of its contribution exceeds 20% of the value of the offer submitted for the contract or where they play a role in fulfilling one or more selection criteria.
The notification obligation is triggered if the tendering company, including its subsidiaries without commercial autonomy and its holding companies as well as the main subcontractors or suppliers involved in the same tender, has received financial contributions from third countries in the last three years totalling at least EUR 4 million per third country. Accordingly, the notification obligation is triggered if one of these entities, e.g. a main subcontractor, exceeds the threshold alone.
What constitutes financial contributions from third countries?
The Regulation adopts a broad definition of the term "financial contributions". It provides a non-exhaustive list of examples, including:
- Transfer of funds or liabilities, such as capital injections, grants, loans, loan guarantees, tax incentives, coverage of operating losses, compensation for financial burdens imposed by public authorities, cancellation of debt, conversion of debt to equity or debt restructuring.
- Waiving revenue that is otherwise due, such as tax exemptions, and granting special or exclusive rights to a business without adequate consideration.
- Supply of goods or services or purchase of goods or services, regardless of whether it is on market terms.
The financial contribution must originate from a "third country", which refers to any country that is not a member of the EU. This includes financial contributions received from the United Kingdom and the EEA countries (such as Norway, Iceland, Switzerland, and Liechtenstein).
The financial contribution must originate from a third country state, public authorities in a third country, or public and private undertakings whose actions can be attributed to a third country.
What is the procedure for notification?
If both of the above conditions are met, a notification must be submitted to the Commission. The notification must be prepared in accordance with the Commission's prescribed form and must include details of the public procurement procedure and the notifying parties, including a detailed description of the financial contributions received.
If only the first condition is met, the tendering company must submit a declaration to the Commission confirming that no financial contributions exceeding EUR 4 million have been received from third countries in the last three years. The statement must also be prepared in accordance with the Commission's prescribed form and must – like a notification – include details of the public procurement procedure and the notifying parties. Additionally, it must confirm that no notifiable financial contributions have been received.
Regardless of whether a notification or a declaration is required, it must be submitted to the contracting authority. In open procedures, it must be submitted together with the offer, while in restricted procedures and other two-stage procedures, it must be submitted both with the application for prequalification and with the offer. If a notification or a declaration is not submitted with the application for prequalification and/or the offer, the contracting authority is entitled to exclude the tendering company from participating in the public procurement procedure. Further, the Commission may impose fines of up to 10% of the aggregate turnover of the companies involved in the offer in the previous financial year in case of breach of the notification obligation.
It is the responsibility of the contracting authority to forward the notification or declaration to the Commission. In the case of notifications, the Commission will conduct a preliminary examination upon receipt. If the Commission deems the notification incomplete, it will request the tendering company to finalise the notification within 10 working days. If the tendering company fails to finalise the notification within this deadline, the Commission will issue a decision declaring the offer of the tendering company non-compliant. Consequently, the contracting authority must exclude the tendering company from participating in the public procurement procedure.
Upon receipt of a complete notification, the Commission has 20 working days to assess the financial contributions. In duly justified cases, this deadline may be extended by 10 working days. If, before the expiry of the 20/30 working days, the Commission considers that further investigation is required, the Commission may open an in-depth investigation. In such cases, the Commission has 110 working days, calculated from the date of receipt of the complete notification to conduct the investigation. In duly justified cases, this period may be extended by a further 20 working days.
During the Commission's investigation, all procedural steps of the procurement procedure may continue, except for the award of the contract, which must await the Commission's investigation.
If the Commission finds that the foreign subsidies distort competition in the internal market and that the negative effects are not outweighed by positive impacts, it may accept commitments from the tendering company. If the distortion of competition cannot be remedied, the Commission may prohibit the award of the contract to the tendering company.
Practical considerations
The Regulation adds further complexity to public procurement procedures by establishing a notification obligation to the Commission for certain public procurement procedures. Both contracting authorities and companies participating in public procurement procedures should be mindful of this notification obligation.
For contracting authorities
When preparing public procurement procedures, the contracting authorities must carefully consider a potential notification obligation to the Commission for the tendering companies, as the contracting authorities must then adhere to a number of procedural requirements that are essential for the organisation of the public procurement procedure. This includes informing the tendering companies about the potential notification obligation, forwarding notifications to and handling further communication with the Commission, and potentially excluding tendering companies from the procedure if they do not submit a notification or submit an incomplete notification.
Further, when setting deadlines in the public procurement procedure, the contracting authorities should take into account that the preparation of a notification can be a complex and time-consuming task for the tendering companies and that it also requires prior discussions with the Commission. Therefore, careful consideration should be given to setting longer deadlines in public procurement procedures where a potential notification must be submitted to the Commission.
Finally, the contracting authorities should be aware that the contract cannot be awarded without the Commission's approval. If the Commission decides that an in-depth investigation is required, this will extend the period between the award of the contract and the conclusion of the contract. To date, the Commission has opened three in-depth investigations all relating to Chinese tendering companies with the result that the companies withdrew their offers on the contract.
For tendering companies
For tendering companies, it is crucial to examine not only whether the tendering companies themselves have received foreign financial contributions from third countries but also whether their subsidiaries without commercial autonomy, their holding companies and their main subcontractors or suppliers have received such financial contributions.
As examining whether financial contributions from third countries have been received can be a complex and time-consuming exercise, it is advisable to begin identifying any such financial contributions from third countries – including requesting such information from main subcontractors or suppliers – as early as possible in the public procurement procedure. This will allow for the timely preparation of a notification as well as prior discussions with the Commission. If a notification is not required, it is important to be aware that a declaration must then be submitted as part of the offer instead.
Finally, financial contributions considerations may be considered before entering into agreements with subcontractors and suppliers. This includes gathering information on financial contributions received from third countries, including their source of origin, purpose, etc.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
