EU Third Country Subsidies Regulation

The TCSR has applied to transactions and contract award proceedings since October 2023 – further information on the TCSR can be found here.

All Phase 2 proceedings initiated to date relate to award proceedings involving Chinese investors.

The TCSR applies in principle to all subsidies granted by "third countries". A third country is any country that is not a member of the European Union. However, the (more or less clearly formulated) main motivation for the TCSR was always Chinese subsidies. This is now confirmed.

Chinese investors as well as the partners of these investors must be prepared for the fact that investments from China in the European Union will no longer only be (strictly) scrutinised within the framework of investment control, but will also be subject to the TCSR – which will have a significant impact on transaction (in)security.

1. Three Phase 2 proceedings with Chinese participation

a) Electric push-pull trains / Bulgaria
On 16 February 2024, the European Commission initiated the first Phase 2 proceedings under the TCSR. The proceedings concerned the participation of CRRC Qingdao Sifang Locomotive Co, Ltd, a subsidiary of the Chinese state-owned train manufacturer CRRC Corporation, in a tender organised by the Bulgarian Ministry of Transport and Communications for the supply of electric push-pull trains. The European Commission suspected that CRRC might have an advantage over other bidders due to state subsidies. As a result of the initiation of the Phase 2 proceedings, CRRC withdrew its offer and cancelled its participation in the tender. This also ended the proceedings under the TCSR. The European Commission saw the cancellation as a success and a sign that the TCSR was fulfilling its purpose.

b) Photovoltaic park in Romania
On 03 April 2024, the European Commission initiated two additional Phase 2 proceedings. The proceedings concern a tender for the planning, construction and operation of a photovoltaic park in Romania with an installed capacity of 110 MW. Two of the bidders are Chinese companies, Shanghai Electric and a consortium formed by the Enevo Group and LONGi Solar Technologie.
Following a preliminary examination of the documents and comments received during Phase 1, the European Commission sees "sufficient evidence" that the two Chinese bidders have received state subsidies and that this could distort competition in the European Union. The European Commission now has at least 90 working days to investigate the matter.

2. Background TCSR
Since 1957, European state aid law has prohibited the member states of the European Union from granting "state aid". Exceptions are only possible under strict conditions. The aim of European state aid law is to enable fair competitive conditions (level playing field) in the EU Single Market. The flaw: Subsidies (and the associated impairments of the level playing field) granted by non-EU states are not covered by European state aid law.
The European Commission published a "White Paper" on third country subsidies in summer 2020 and a first draft regulation in May 2021. In January 2023, the TCSR entered into force. Since July 2023, the implementing regulation, which specifies the proceedings under the TCSR, has also been in force.

a) Three regulatory instruments
The TCSR provides for three regulatory instruments:

-a merger control,
-a review procedure for public contracts
-as well as an ex-officio review.

b) TCSR merger control
The TCSR merger control stipulates that transactions must be notified to the European Commission if the transaction is a "concentration", the target or joint venture has a turnover of at least EUR 500 million in the European Union and the parties to the transaction have received "financial contributions" from third countries of more than EUR 50 million in the last three years.

As under the European Merger Regulation, a "concentration" is defined as the merger of two or more companies, the acquisition of sole or joint control and the formation of "full-function joint ventures".

To determine whether the turnover threshold of EUR 500 million has been reached, not only the direct target company but also the respective group of companies ("economic unit") must be taken into account. In contrast to traditional merger control, the turnover of the acquirer is not to be taken into account.

Third countries are all non-EU states. A third country is defined as all public and private organisations or companies that can be attributed to the respective third country.

A "financial contribution" is in particular the transfer of funds or liabilities, the waiver of income otherwise due and the provision or purchase of goods or services. The purchase or sale of goods and services from or to a third country is also considered a financial contribution. In the opinion of the European Commission, it is also irrelevant whether the purchase or sale took place on market terms when determining whether the thresholds of the TCSR merger control are met.

The proceedings essentially correspond to the proceedings known from classic merger control, and in any case consist of a de facto mandatory pre-notification and the "preliminary review" (Phase 1, 25 working days). The preliminary review ends when the European Commission declares the proceedings closed or initiates an "in-depth review" (Phase 2, 90 working days). The detailed review ends with a release, a "commitment decision" or a prohibition.

A ban on enforcement applies to mergers subject to registration. Transactions executed in violation of the prohibition of execution are invalid. There is also the threat of high fines.

c) TCSR contract award audit
As part of the TCSR award audit, companies must notify the European Commission of their participation in public tenders if the estimated contract value is at least EUR 250 million and the companies have received at least EUR 4 million in financial contributions from a third country in the last three years.
If the European Commission comes to the conclusion that a bidder has received subsidies from a third country and that these distort competition, it can prohibit the award of the contract to this company.

d) Ex-officio review
The European Commission is authorised to investigate ex officio "any foreign subsidy in an industry" and may rely on "information from all available sources". This includes comprehensive information and inspection rights.

With the ex-officio review, the European Commission also has the possibility to review transactions that do not fall within the scope of the TCSR merger control. This applies both to mergers that do not fulfil the applicable turnover or contribution thresholds and to transactions that do not qualify as "mergers" (for example, the acquisition of non-controlling minority interests).

e) Standard of review
As part of the TCSR merger control, the review procedure for public contracts and the ex-officio review, the European Commission examines whether a third country subsidy exists that distorts competition in the European Single Market.

"Financial contribution from a third country" and "third country subsidy" are not congruent. Only financial contributions that are limited to a specific company or a specific economic sector and that confer a benefit on a company operating in the European Union are deemed to be a foreign subsidy.

A third-party subsidy distorts competition if the subsidy is likely to improve the competitive position of the subsidy recipient and impair competition. The review is to be based on "indicators" such as the type and amount of the third-party subsidy, the size of the subsidy recipient and the markets in which the company operates, as well as the purpose of the subsidy.