Source: YI CAI 

Authors: Feng Difan ▪ Gao Ya

I. Basic Provisions of the FSR

The Foreign Subsidies Regulation (FSR), published by the EU on December 14, 2022, aims to establish a review and supervision mechanism for undertakings that have received subsidies from non-EU countries when engaging in merger and acquisition transactions or participating in public procurement tenders within the EU, with the goal of preventing or reducing the distortion of the EU internal market caused by foreign subsidies.

The investigation procedure under the FSR is designed to examine whether activities such as public procurement and concentrations carried out within the EU involve foreign subsidies that distort the EU market, and to make corresponding decisions based on the investigation results to eliminate the adverse effects of such foreign subsidies.

The FSR published on December 14, 2022, the Implementing Regulation published on July 10, 2023, and the Implementing Regulation Explanatory Note published on July 13, 2023, together form the legal basis for FSR investigations.

FSR investigations are divided into two stages: preliminary review and in-depth investigation. The European Commission conducts a preliminary review based on information received from notified parties or gathered through its own initiative investigations. No formal announcement is required to initiate a preliminary review, nor is the outcome of the review published. If the Commission concludes during the preliminary review that there is a strong likelihood of foreign subsidies distorting the EU internal market, it will formally announce the initiation of an in-depth investigation. In practice, after announcing the initiation of an in-depth investigation, the Commission also publishes a Summary of the Notice of Initiation, outlining its preliminary considerations regarding the initiation of the case, the foreign subsidies received by the notifying party, and the market distortion situation.

II. Relevant Cases

Since the FSR entered into force, the European Commission has publicly announced the initiation of three in-depth investigations and has issued corresponding Summaries of the Notice of Initiation. These are summarized as follows.

Bulgaria Tender Project

(I) Bid by CRRC Qingdao Sifang Co., Ltd.

1.Overview of the Investigation

CRRC Qingdao Sifang Co., Ltd. (“the notifying party”) participated in a public procurement project in Bulgaria. The public procurement tender issued by the Bulgarian Ministry of Transport and Communications involved 20 electric “push-pull” trains and maintenance services for a period exceeding 15 years. The estimated value of the procurement was approximately €610 million.

On January 22, 2024, the notifying party submitted a notification under the FSR. Based on the information provided, the Commission conducted a preliminary review and determined that there was sufficient evidence to indicate that the company had received foreign subsidies distorting the EU market. On February 16, 2024, the Commission announced the formal initiation of an in-depth investigation under the FSR concerning the notifying party’s participation in the Bulgarian public procurement project. On February 29, 2024, the Commission published a Summary of the Notice of Initiation, outlining its preliminary considerations regarding the initiation of the case and the parties involved. In March, the notifying party announced its withdrawal from the Bulgarian contract tender, and the investigation procedure was consequently concluded.

2.Determination of the Existence of Foreign Subsidies

The Summary of the Notice of Initiation stated that, based on the information available, the Commission considered that there were sufficient indications that, pursuant to Article 28(1)(b) of the FSR, the notifying party had received the following foreign subsidies as defined in Article 3 of the FSR:

(1) The notifying party and its holding companies had been awarded public procurement contracts totaling more than €7.5 billion, from which the notifying party benefited, and the notifying party failed to provide sufficient evidence that these public procurement contracts were awarded under competitive market conditions.

(2) Government grants totaling €804 million, recorded as deferred income, from which the notifying party benefited.

(3) The notifying party’s holding companies received “government grants other than grants closely linked to the business of the company,” totaling €355 million in 2020, €301 million in 2021, €234 million in 2022, and €51 million in the first half of 2023, from which the notifying party benefited.

3.Determination of Distortion of the Internal Market

According to the Summary of the Notice of Initiation, the total amount of foreign financial contributions received by the notifying party was approximately €1.745 billion, five times the value of the notifying party’s bid. There were sufficient indications that the above foreign subsidies enhanced the company’s competitiveness in the EU internal market, causing or potentially causing adverse effects on the EU internal market.

Romania Solar Park Public Tender Project

The Romanian ENEVO Group, Longi Solar Technologie GmbH, a subsidiary of China’s Longi Green Energy Technology Co., Ltd., and a subsidiary of Shanghai Electric Group Co., Ltd., participated in a public tender for a solar park project in Romania, involving the design, construction, and operation of a photovoltaic park with an installed capacity of 454.97 MW. The total project value was approximately €375 million, partially funded by the EU Modernisation Fund.

On March 4, 2024, the two bidders submitted notifications under the FSR. Based on the information provided, the Commission conducted a preliminary review and determined that there was sufficient evidence to indicate that the companies involved had received foreign subsidies distorting the EU market. On April 3, 2024, the Commission announced the initiation of two in-depth investigations under the FSR to examine whether the two Chinese bidders had unduly benefited from subsidies in the public tender for the Romanian solar park. On April 22, 2024, the Commission published a Summary of the Notice of Initiation, outlining its preliminary considerations regarding the initiation of the cases and the parties involved. The results of the in-depth investigations were to be issued within 110 days of March 4, 2024.

(II) Bid by the ENEVO Group – Longi Green Energy Consortium

1.Determination of the Existence of Foreign Subsidies

According to the Summary of the Notice of Initiation, the Commission determined that there were sufficient indications that the Romanian ENEVO Group and Longi Solar Technologie GmbH, a subsidiary of China’s Longi Green Energy Technology Co., Ltd. (“the notifying party”), had received the following foreign subsidies:

(1) Government grants received by the notifying party and its holding companies in the three years prior to notification.

(2) Tax refunds and fiscal and tax incentives received by the notifying party and its holding companies in the three years prior to notification.

(3) Financing received by the notifying party and its holding companies in the three years prior to notification.

2.Determination of Distortion of the Internal Market:

(1) The amount of potential foreign subsidies received by the notifying party significantly exceeded the value of the contract for which the notifying party was bidding. According to recital (19) of the FSR preamble, in public procurement procedures, a foreign subsidy that accounts for a large portion of the estimated contract value is likely to cause distortion. The Commission was unable to obtain the bid price from the tenderer and could not assess the notifying party’s bid, but it could not rule out the potential distortive effect of the above subsidies on the bid price.

(2) The notifying party did not provide information on the specific nature, conditions, purposes, or uses of the potential foreign subsidies. However, although these subsidies were directly granted to the notifying party’s holding companies, given the holding companies’ capital rights in the notifying party, the evidence available to the Commission concerning intra-group financing, and the absence of indications that the subsidies received by the holding companies were restricted in a way that would preclude the notifying party from benefiting, the Commission considered that these foreign subsidies had a potential distortive effect on the bid price, thereby distorting the EU internal market.

(3) The notifying party’s holding companies also received export credits, which, under Article 5(1)(c) of the FSR, constitute a type of foreign subsidy that is highly likely to distort the market.

(III) Bid by a Subsidiary of Shanghai Electric Group Co., Ltd.

1.Determination of the Existence of Foreign Subsidies

According to the Summary of the Notice of Initiation, the Commission determined that there were sufficient indications that Shanghai Electric UK Co., Ltd. and Shanghai Electric Hong Kong International Engineering Co., Ltd. (“the notifying parties”) had received the following foreign subsidies:

(1) Government grants received by the notifying parties and their holding companies in the three years prior to notification.

(2) Tax refunds and fiscal and tax incentives received by the notifying parties and their holding companies in the three years prior to notification, totaling at least approximately €389 million.

(3) Financing received by the notifying parties and their holding companies in the three years prior to notification.

(4) Benefits from the supply of goods and services received by the notifying parties and their holding companies in the three years prior to notification, totaling at least approximately €546 million.

2.Determination of Distortion of the Internal Market:

(1) The amount of potential foreign subsidies received by the notifying parties significantly exceeded the value of the contract for which they were bidding. According to recital (19) of the FSR preamble, in public procurement procedures, a foreign subsidy that accounts for a large portion of the estimated contract value is likely to cause distortion. The Commission was unable to obtain the bid prices from the tenderers and could not assess the notifying parties’ bids, but it could not rule out the potential distortive effect of the above subsidies on the bid prices.

(2) The notifying parties did not provide information on the specific nature, conditions, purposes, or uses of the potential foreign subsidies. However, although these subsidies were directly granted to the notifying parties’ holding companies, given the holding companies’ capital rights in the notifying parties, the evidence available to the Commission concerning intra-group financing, and the absence of indications that the subsidies received by the holding companies were restricted in a way that would preclude the notifying parties from benefiting, the Commission considered that these foreign subsidies had a potential distortive effect on the bid prices, thereby distorting the EU internal market.

(3) Additionally, the notifying parties’ holding companies provided financial support for the notifying parties’ business activities, and these holding companies were characterized by losses in their overseas operations. These indications, considered together, also suggested that foreign subsidies may have had a distortive effect on the EU internal market.

III. Preliminary Observations

To date, the European Commission has not conducted a large number of FSR investigations. However, based on the three published Summaries of the Notice of Initiation, compared with traditional countervailing duty investigations, FSR investigations exhibit the following characteristics:

1.Faster Procedural Timeline

The preliminary review under the FSR typically lasts 20 days, while the in-depth investigation should be concluded within 110 days of receiving a complete notification. In contrast, traditional countervailing duty investigations usually take one year and can last up to 13 months. Furthermore, in terms of information gathering, at least during the preliminary review stage, the time given to the companies involved to submit or supplement materials is often very short. For example, CRRC Qingdao Sifang was given only three days to submit information on relevant subsidies, while the ENEVO Group was given 15 days to rectify information. To some extent, this subsidy information is similar to that required in traditional countervailing duty questionnaires. However, in traditional countervailing duty investigations, companies have at least 30 days to prepare and submit their questionnaire responses. Without a detailed prior assessment and review of the subsidies they have received, it is often very difficult for companies to submit the complete information required by the Commission within such a short timeframe before participating in public procurement.

2.Broader Scope of Subsidy Programs

From a legal perspective, the WTO Agreement on Subsidies and Countervailing Measures and the EU’s countervailing duty regulation cover only the provision of goods or services by governments or public bodies and government procurement of goods (excluding services). The FSR, however, also covers government procurement of “services.” Moreover, based on the cases published so far, government procurement of goods—such as the companies’ participation in Chinese government tender projects—appears to be the largest source of subsidies for the companies involved. For instance, CRRC Qingdao Sifang’s participation in €7.5 billion worth of government procurement projects was noted. However, in traditional countervailing duty investigations, the European Commission does not appear to have determined whether participation in government procurement projects constitutes a subsidy in any specific countervailing duty investigation. The Commission’s determination during the preliminary review stage of the FSR was significantly based on the fact that the notifying party “failed to provide sufficient evidence that these public procurement contracts were awarded under competitive market conditions.” Therefore, for companies participating in EU public procurement, it is necessary not only to conduct a detailed assessment of the subsidies they have received in advance but also to thoroughly organize evidence that may demonstrate the absence of subsidies—such as detailed evidence of other government procurement contracts obtained through market competition.

3.Questionable Determination of Tax Rebate Programs

The published Summaries of the Notice of Initiation mention “tax refunds,” which likely refer to China’s VAT export rebate system. However, China’s VAT export rebate system is an internationally accepted practice permitted under the Agreement on Subsidies and Countervailing Measures and does not violate its provisions. Specifically, the amount of regular export rebates provided by the Chinese government to enterprises does not exceed the input VAT accumulated during the production stage and therefore does not constitute a subsidy. The Commission’s direct classification of tax rebate programs as subsidies during the preliminary review stage of FSR investigations appears inconsistent with WTO rules. In current countervailing duty investigations conducted by the EU or the United States against China, there does not seem to be any precedent for determining that export rebates constitute a subsidy program. The Commission’s characterization of VAT export rebates as subsidies in FSR investigations seems to reflect a lack of in-depth understanding of China’s export rebate system.

4.Unclear Concept of “Amount of Financial Contribution”

In traditional countervailing duty investigations, concepts such as “amount of benefit,” “subsidy amount,” or “subsidy margin” exist, but there is no concept of “amount of financial contribution.” Financial contribution itself is a qualitative concept—a specific action by a government or public body—and does not involve a specific amount. In practice, not all financial contributions constitute subsidies; only financial contributions that confer a benefit constitute subsidies. However, the FSR directly uses the “amount of financial contribution” as the threshold for notification obligations. This raises two obvious issues. First, it is unclear what exactly the “amount of financial contribution” refers to. Second, if the principal amount of any loan, the value of any procurement, or the value of any goods supplied is considered the “amount of financial contribution,” this could significantly lower the threshold for the notification obligation. Of course, in the CRRC Qingdao Sifang case, the Commission did not appear to treat the full €7.5 billion value of government procurement contracts as the “amount of financial contribution,” but rather determined that “the total amount of foreign financial contributions received was approximately €1.745 billion.” However, it is unclear how the Commission arrived at this conclusion during the preliminary review stage. For the companies involved, calculating this amount of financial contribution is crucial—not only because it determines whether the notification threshold is met but also because the magnitude of this amount influences the assessment of potential distortion mentioned below.

5.Highly Subjective Distortion Determination

In all three published Summaries of the Notice of Initiation, it was noted that the potential subsidy amount significantly exceeded the bid value, leading to a potential distortive effect. However, due to the ambiguity surrounding the concept of “amount of financial contribution,” it is unclear how the “potential subsidy amount” referred to by the Commission relates to the “amount of financial contribution” in practice. Furthermore, the simple comparison of the magnitude of the subsidy amount with the magnitude of the bid value to directly conclude the existence of distortion appears highly subjective. For large companies with annual revenues in the hundreds of billions, a subsidy amount of several billion might be considered de minimis in a traditional countervailing duty investigation. Such a de minimis subsidy amount would not have a significant distortive effect on the company’s costs and prices, nor would it distort the EU internal market. However, by comparing this subsidy amount solely to the value of the tender at issue, the Commission often creates an illusion of a massive subsidy. Therefore, during the preliminary review stage, companies must not only organize facts and evidence regarding subsidies but also thoroughly argue whether a distortive effect is likely to occur, avoiding the Commission’s potentially overly subjective conclusions based solely on superficial data.