Proposed rules would allow EU to block acquisitions by foreign companies receiving tax benefits

By Doug Connolly, MNE Tax

On May 5, the European Commission proposed regulations that would enable it to scrutinize and potentially block acquisitions of EU-based companies by companies that benefit from certain preferential foreign tax treatments, subsidized loan arrangements, or other types of state aid.

The rules are intended to address distortions in the European market caused by subsidies from non-EU countries that create unfair competitive advantages in acquisitions and procurements within the EU. The new rules would supplement long-standing rules for addressing state aid by EU countries.

The foreign subsidies at issue could come in various forms, including tax credits or other preferential tax treatments, zero-interest loans or other financing subsidies, and/or direct financial grants.

The foreign subsidies at issue could come in various forms, including tax credits or other preferential tax treatments, zero-interest loans or other financing subsidies, and/or direct financial grants.

The proposed rules would aim to address any unfair advantages that the foreign subsidies confer to recipients acquiring EU companies or participating in public procurements in the EU.

To achieve their aim, the rules would introduce notification requirements for acquirers and bidders with respect to any financial contribution received from a non-EU government in relation to acquisitions or public procurements meeting certain thresholds.

One notification requirement would apply to acquisitions where the EU revenues of one of the merging parties is EUR 500 million (approximately USD 600 million) or more and the foreign financial contribution is at least EUR 50 million (approximately USD 60 million). Another notification requirement would apply to public procurements with an estimated value of EUR 250 million (approximately USD 300 million).

Following notification, the rules would prohibit the acquisition from being completed or the investigated bidder from being awarded a contract until the Commission has reviewed the arrangement. If the Commission determines that a distortive foreign subsidy exists, it could impose redressive measures (e.g., prohibiting the acquisition) or accept commitments from the company involved to remedy the distortion.

Although no general notification requirement applies to acquisitions and procurements below the threshold amounts, under the rules the Commission can also start investigations on its own initiative and request ad-hoc notifications in such cases where it suspects foreign subsidies may be involved.

The Commission is accepting feedback on the proposed rules for eight weeks. Once the rules are adopted, they will directly apply across the EU.