EU FSR Investigation into Nuctech

The European Commission has initiated an in-depth ex-officio investigation into Nuctech, a Chinese security inspection equipment supplier and a subsidiary of Tsinghua Tongfang Group, which is alleged to be indirectly controlled by the Chinese government. The probe stems from a dawn raid conducted in April 2024 in EU premises of Nuctech in Poland and the Netherlands. The Commission suspects that Nuctech received foreign subsidies—potentially in the form of grants, tax incentives, or preferential loans—within the last ten years. The preliminary view is that these subsidies allegedly enabled Nuctech to submit unduly advantageous bids in a large-scale procurement tender for threat detection systems (TDS) equipment and related services within the EU, distorting the internal market by outcompeting other bidders. The Commission will now assess whether these preliminary findings are substantiated.

The FSR endows the European Commission with extensive investigative authority, operating through a structured, two-phase procedure for ex-officio inquiries. The process commences with a preliminary review, which may be initiated absent any financial thresholds based on mere suspicion of distortive foreign subsidies received within the preceding decade. During this phase, the Commission employs potent information-gathering tools, including formal Requests for Information (RFIs) and unannounced dawn raids on business premises and IT systems. Should this preliminary examination yield sufficient indications of a distortion, the Commission proceeds to an in-depth investigation. This subsequent phase involves a comprehensive assessment, culminating in a balancing test that weighs the negative competitive effects of the subsidies against any potential positive contributions to policy objectives, such as environmental protection or research and development. The potential determinations following this investigation range from a clearance decision where no concerns are identified, to the acceptance of binding commitments from the company—which may entail remedial actions such as subsidy repayment, asset divestiture, or R&D licensing—or, in the most severe cases where distortions cannot be remedied, the prohibition of the implicated public procurement award or merger transaction.

From a compliance and risk mitigation perspective, it is imperative for Chinese enterprises operating in or targeting the EU market to adopt proactive protective measures. A critical first step involves conducting an internal subsidy audit to meticulously catalogue all forms of financial contributions received from governmental or public entities over the past ten years. Concurrently, companies should establish robust internal compliance protocols, including clear data retention policies and comprehensive staff training on FSR requirements, particularly regarding preparedness for potential dawn raids. Engaging specialised EU legal counsel to conduct a pre-emptive assessment of the company's financial structures and potential subsidy exposure is highly advisable. Furthermore, maintaining detailed documentation that commercially justifies the competitiveness of bids—demonstrating that advantages stem from efficiencies rather than distortive state support—is essential for building a defensible position should an investigation arise.

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