EU tendering and public subsidies: Have you anything to declare?

Introduction

Amidst concerns about foreign subsidies from non-EU countries distorting the EU’s internal market, the European Commission introduced the Foreign Subsidies Regulation (2022/2560/EU) on 12 January 2023.

This regulatory measure seeks to maintain a level playing field for companies operating in the EU.  It does so by ensuring that businesses do not enjoy an unfair advantage from foreign public subsidies when tendering for lucrative public contracts.

For UK-based businesses bidding on EU tenders, this brings a new layer of compliance, especially if they’ve been recipients of financial contributions from sources outside of the EU such as government bodies (e.g. COVID related support) in the three years preceding the tender.   However, the notification obligations will equally capture EU businesses who have (even through group entities) received foreign subsidies from these sources.  That could therefore pose a real headache for EU-active companies, especially those with global operations or multiple subsidiaries.

There is also a degree of urgency here.  As a condition of participation in every bid, an extensive notification of any previous subsidies will need to be given.  The duty to notify will go live from 12 October 2023.  Failure to notify could lead to the imposition of serious financial penalties.

Notification obligations

The notification obligation applies to companies bidding for public tenders that reach defined tender value and foreign financial contribution (“FFC”) thresholds.

The FFC provides that participants in EU procurement processes must notify certain financial subsidies provided to the bidder by non-EU governments, public authorities, or entities tied to a non-EU state, covering a wide scope of interactions.   The purpose of the notification is to determine whether the receipt of FFCs by either the bidder or a member of its corporate group could distort the tender process.

FFCs can include direct transfers of funds like grants or indirect benefits such as tax exemptions. It could even include certain commercial relationships between companies and public bodies.

However, not all FFCs are Foreign Subsidies (“FS”), which are the target of the EU legislation.  FSs are a sub-set of FFCs.  In order to qualify as a FS, the FFC must also confer a commercial advantage to a particular recipient and be selective, targeting specific entities or industries over others.  This concept, rooted in EU state aid law, examines whether advantages are limited to specific sectors or criteria.

Notifications must be made in the language of the relevant contracting authority using the Commission’s prescribed form (which runs to around 30 pages).

There is some consolation that the Commission only requires bidders to provide details of those contributions that are likely to give rise to a distortion of competition.  More specifically the aggregate amount of contributions must firstly exceed €4 million or more per third country over three years.  Moreover, only contributions falling within the following categories will need to be provided:

• Aid to ailing undertakings.
• Unlimited guarantees.
• Export finance measures that are not in line with OECD rules.
• A foreign subsidy that facilitates an unduly advantageous tender
• Contributions relating to operating costs.

Where contributions within these categories have not been received, the bidder must provide a declaration to that effect. It will also need to provide a list of those contributions it has received from foreign governments (which it considers not to be within the categories) in the relevant time period.  While the Regulation is aiming to tackle FSs, this listing requirement will give the Commission the ability to review and consider wider FCCs.  Moreover, where there is any doubt as to whether a particular FCC is a notifiable FS, businesses may err on the side of caution and notify.

The notification should provide details of dates, values, and counterparties along with description of measures, justification for any undue advantage.  The prescribed form for notification is extensive and bidders affected by these measures should lose no time in familiarising themselves with it.

What does the Commission do with this information?

The Commission will assess foreign subsidies by weighing their pros and cons. If the negatives surpass the positives, the Commission can take corrective actions or request guarantees from involved entities.  As with any notification to the EU Commission, careful consideration should be given (and a lawyer’s help provided) when answering the questions.

Implications for UK Bidders

1. Public Procurement: The thresholds defined by the Regulation necessitate UK bidders to notify of foreign financial contributions if they:
   • bid for public contracts valued at €250m or more.
   • apply for lots with an aggregate value of €125m or more.
   • have received aggregate foreign contributions of €4m or more from a third country in the preceding three years.
2. Notification process: Notifications must be detailed and updated regularly. The focus is on FFCs that can distort competition. If no qualifying FFCs are present, a declaration to that effect, along with a list of received FFCs, must be provided.
3. Timing Considerations: The Regulation stipulates specific timelines, depending on the type of tender. For instance, in open stage tenders, the notification is part of the tendering process, while in multi-stage tenders, it is part of the initial expression of interest. Bidders have a limited timeframe to rectify incomplete notifications, failing which their tender might be deemed irregular.
4. Review Phases by the Commission: The initial notification must be made to the authority conducting the tender. The filing will then be transferred to the EU Commission.  The Commission’s two-phase review will balance the pros and cons of a subsidy. If it concludes that a bidder has gained an unfair advantage due to a foreign subsidy, that bidder might face prohibition from being awarded the contract.
5. Penalties: Companies risk fines up to 10% of their group turnover for breaches failing to discharge their notification requirements (or making incomplete disclosures). Fines may also be imposed for providing misleading information.
6. Ex Officio Investigations: The Commission now has powers to initiate investigations into foreign subsidies without external prompting.

Conclusion

Failing to make the proper declarations at customs will delay your journey and possibly lead to costly penalties.  It is time for businesses tendering for public contracts in Europe to check their subsidies “baggage” and work out if they have anything to declare.

With the notification obligations due to take effect in October, businesses should start preparing themselves for the new regime.  One important step would be to take stock of contributions received in the past three years which they may need to notify when tendering.   This could include, for example COVID related support.  Once relevant potential subsidies have been discovered, consider any arguments or supporting evidence for the proposition that they would not have distorted competition (e.g. was the advantage offered on the basis of a competitive tender?  Has it led to new technology which could enhance consumer choice?).

It is essential for businesses to be advised on how these complex rules will affect them as well as to seek their lawyers’ assistance with filling out the prescribed forms which must be used when tendering in the EU.

Finally, consider instituting a reporting protocol so that subsidies received in future from non-EU bodies will be captured in a database and can be listed more easily when participating in future processes.

Please do not hesitate to get in contact with us if we can assist you with these issues.