Chinese Train Firm Subject to First EU Probe for Foreign Subsidies

Adopted in December 2022, the EU Foreign Subsidies Regulation (FSR) addresses the European Union (EU) internal market distortion caused by foreign subsidies. The notification obligations under the updated FSR came into force on 12 October 2023. Learn more about the impact on EU suppliers in our previous blog, "EU Foreign Subsidies Regulation Go Live: Impact on Public Procurement Bidding".

The European Union's executive arm opened a probe into whether a subsidiary of Chinese state-owned train maker CRRC Corp. benefited from subsidies to bid for a contract in Bulgaria, the first investigation under the bloc's new foreign subsidy rules. According to a statement by the European Commission, the investigation concerns a public procurement procedure launched by Bulgaria's Ministry of Transport and Communications regarding the provision of electric trains, maintenance and training.

The commission said it followed a notification by CRRC Qingdao Sifang Locomotive, a subsidiary of CRRC. The commission stated that a preliminary review found sufficient indications that this company has been granted a foreign subsidy that distorts the internal market. The in-depth investigation is the commission's first ever under the Foreign Subsidies Regulation.

The regulation allows the commission to examine whether companies get an unfair advantage in the EU from foreign subsidies. The commission said it has until 2 July to make a final decision.

This probe demonstrates that the FSR empowers the European Commission to investigate foreign subsidies that may distort the EU's internal market. The regulation introduces a mandatory notification system for subsidies received by bidders in EU public procurement above a threshold of €5 million over three years.

Authorities can prohibit bidding if they find the subsidy affects the outcome. The probe suggests the commission intends to fully utilise these powers to level the playing field in public procurement. Companies should expect much greater scrutiny of foreign subsidies they receive.

For bidders like CRRC, this means more complex compliance requirements when participating in EU public tenders. The need to assess subsidies and determine if notification is required creates additional red tape. If a subsidy breaches the regulation, bids can be invalidated.

The regulation poses dilemmas for public buyers, too. They must exclude bidders if required but risk compromising value for money and competition. Buyers may also incur more significant costs validating subsidy compliance.

As the first case under the FSR, the CRRC investigation will set an important precedent. The outcome will signal how extensively the commission can wield these new powers over foreign bidders. Companies worldwide need to closely monitor resulting developments.

The probe demonstrates the European Commission's intent to fully operationalise the FSR's public procurement provisions. Companies bidding for EU contracts will now contend with much greater scrutiny of foreign subsidies received. Careful compliance and monitoring of resulting decisions are essential to avoid falling afoul of the new regime.

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