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Executive summary

Following the European Commission's proposal to postpone the application date of the EUDR by 12 months (to 30 December 2025 for large companies, and 30 December 2026 for micro and small enterprises), the European Parliament voted in favor of the EUDR and included new material changes, such as a new "no-risk" category for countries. Parliament decided to refer this file back to committee for interinstitutional negotiations. For these changes to enter into force, the agreed text will have to be endorsed by both European Union (EU) Council and European Parliament and published in the EU Official Journal.

This Alert sets out the current status and timeline of the EUDR, outstanding questions regarding the proposed "no-risk" category, noteworthy points of the published frequently asked questions (FAQs) and guidance in October, and implications for businesses in scope.

Recap on EUDR

Deforestation and forest degradation are significant contributors to climate change and biodiversity loss. The EUDR imposes stringent supply chain due diligence (DD) and reporting requirements on certain commodities and products imported into, traded within and exported out of the EU. Commodities and products include cattle, cocoa, coffee, palm oil, rubber, soy, wood, as well as certain related products such as leather, chocolate, certain furniture, tires, paper or natural rubber spare parts.

Companies must verify that goods are both deforestation-free and have been produced in compliance with relevant legislation of the country of production/harvest. EUDR compliance requires geolocation data collection down to the "plots of land" where relevant commodities have been produced or harvested, in addition to checking that local laws have been observed. DD statements need to be filed with the competent authorities evidencing "EUDR-compliant" status on a batch-level basis. Effective EUDR compliance requires a traceability system that allows the origin of relevant commodities to be identified throughout the upstream supply chains.

Consequences of noncompliance could be severe and can include significant fines, temporary exclusion from the EU market and public procurement processes or, in certain countries, personal liability for managing directors (non-exhaustive).

Current status and timeline of the EUDR

Given the need to extensively and transparently map chains of activities (including inhouse/intragroup) and collect and validate data throughout the supply chain, the original timeline of 30 December 2024 poses a significant challenge for many companies. Coupled with public scrutiny from various countries and organizations, the European Commission proposed a 12-month postponement to provide more time to prepare.

Following the EU legislative process, the EU Council approved the proposal to postpone. The European Parliament voted in favor and also included other material changes, including introducing a "no-risk" category for countries. For these changes to enter into force, the agreed text will have to be endorsed by both the Council and Parliament and published in the EU Official Journal.

When the European Commission proposed a 12-month extension, the substance of the EUDR was not in question and, in earlier negotiations, the European Commission and EU co-legislators had objected to a "no-risk" country category owing to potential increased EUDR circumvention risk. One outcome could see the European Commission disapprove the proposed material changes and withdraw its postponement proposal, meaning the original deadline of 30 December 2024 would apply.

Proposed "no-risk" category: potential issues

According to the European Parliament's proposal, whether a country or a region within a country qualifies for the "no-risk" category, is to be assessed based on three criteria:

1. "[F]orest area development has remained stable or has increased compared to 1990."
2. "[T]he Paris Agreement and international conventions on human rights and on preventing deforestation have been signed by those countries and parts thereof."
3. "[R]egulations on preventing deforestation and forest conservation at national level are strictly implemented and enforced in full transparency and monitored."

These three criteria may need to be defined in more detail to constitute a valid legal basis for categorization. Following are some areas that will also require further clarification:

Terms: Certain terms such as "forest area development," "international conventions on human rights," "international conventions on preventing deforestation," and "strict implementation, enforcement in full transparency and monitoring" are not defined in the EUDR or the Parliament's proposal, which could lead to a high level of interpretation uncertainty.

Conventions applicability: Reference is made to "signing" of relevant international conventions, rather than "ratification" — ratification constitutes a country's expression of consent, while signing refers to intention to examine and consider ratification. It is also unclear which signed conventions would qualify. Similar concerns can be seen with signing of international conventions on preventing deforestation — i.e., the United Nations Framework Convention on Climate Change (UNFCCC), the Convention on Biological Diversity (CBD) and the United Nations Convention to Combat Desertification (UNCCD) have been signed by all Member States of the United Nations, making it difficult to see if and how any distinction between individual countries can be made.

Forest area development: There is a lack of guidance on key performance indicators (KPIs) for determining the stability or increase of "forest area development," compared to 1990. Another question remains in cases where primary forests — essential for carbon storage and biodiversity — have been destroyed but replaced by monoculture tree farms and how this will be considered in the context of "forest area development."

Role of national regulations: Whether national regulations on preventing deforestation and forest conservation "are strictly implemented and enforced in full transparency and monitored" appears to require a more subjective assessment. The idea may be to potentially assess countries against relevant law enforcement indices (e.g., Rule of Law, Fragile States Index).

In summary, the suggested criteria for defining "no-risk" countries do not seem clearly defined. At this stage, it is also unclear whether the principle of legal certainty is wholly met.

Other areas of uncertainty

Assuming further clarity follows in these areas, the next question focuses on measures needed to validate that relevant commodities and products have been produced in "no-risk" countries. When looking at the suggested "Amendment No 7," the DD requirement (Article 4 para. 1) is still relevant and this refers to Article 8, which points to Articles 9 to 11 (tracing relevant goods all the way down to the plots of land from which the commodities originate, collection and assessment of information including geolocation data, assessing and mitigating risks). This appears to be contrary to Article 13, which states that for goods from "low-risk" countries, the obligation to collect data under Article 8 must be fulfilled, but meeting the obligations to assess and mitigate risk under Articles 10 and 11 is not necessary.

Essentially, this would eliminate the requirement to file corresponding DD statements. However, it is worth noting that for imports into the EU, the relevant customs declarations would presumably have to be accompanied by a statement confirming the commodities contained in relevant goods stem from no-risk countries.

Based on the suggested "Amendment No 10," only 0.1% of the operators trading "no-risk" goods shall be covered by checks performed by the competent authorities and corresponding monitoring will be limited to an absolute minimum, which runs the significant risk of abuse. It also remains unclear how authorities will identify operators trading "no-risk" goods produced within the EU, given the trades would not be subject to the filing of any DD statements.

For imports from outside the EU, there may be a risk that goods produced in countries not categorized as "no risk" are routed through "no-risk" countries to disguise their actual origin and therefore mislead competent authorities. There may also be an increased threat of false indications of origin in customs declarations, in an attempt to mislead the relevant authorities (i.e., similar occurrences are known regarding anti-dumping duties).

If the "no-risk" category is retained, further substantive changes could be necessary to integrate this category into the overall EUDR framework.

Latest FAQs and guidance: noteworthy developments

The recently published FAQ document and guidance provide helpful clarity for businesses. Following is a non-exhaustive list of practical noteworthy developments.

Composite products: Composite products contain multiple relevant commodities or products (i.e., chocolate bars containing cocoa, coffee, soy and palm oil). In these cases, the DD statement must only cover the main commodity contained in the composite product — e.g., for a chocolate bar covered by HS Code 1806, this would be cocoa. However, it appears that if such chocolate bars are produced within the EU and, for production purposes, various commodities are imported into the EU, the import of each of those commodities will nonetheless require the filing of corresponding DD statements. Accordingly, the scope of the DD requirements for the same product may vary depending on where it is produced (import of chocolate bar vs. import of raw materials to produce chocolate bars).

Synthetic rubber: The new guidance documents state that synthetic rubber is not covered by EUDR requirements. This is of significant practical importance for a large number of companies and in line with the purpose of the EUDR, because synthetic rubber, by definition, does not contribute to deforestation.

"Own use" of relevant commodities and/or products: For instance, where companies purchase rubber spare parts (i.e., o-rings) within the EU for use in machines they manufacture, EUDR requirements do not apply. However, where respective spare parts are imported into the EU, the filing of DD statements is still required. This is of particular relevance in the aftersales market.

DD statements by other operators in the supply chain: The new documents suggest that traders may not be required to systematically reassess every individual DD statement made by operators to which they refer, if they have ascertained that DD was properly carried out. It may therefore suffice for traders to verify that upstream operators have an operational and up-to-date DD system to mitigate and manage risks effectively. A respective audit will likely be required, which goes beyond the collection of a self-declaration by the operator and requires a certain level of validation instead.

Annual reporting obligations (Art 12): Annual reporting obligations do not seem to relate exactly to the calendar year, meaning the first report will only be due when one year has passed during which the EUDR applied. Accordingly, there seems to be no requirement to publish a report in the year when DD requirements become effective to cover only two days (i.e., 30-31 December).

Non-EU established companies: The guidance suggests that if non-EU established companies are the importer of record, they qualify as operators and must file DD statements; however, it is unclear how competent EU authorities shall carry out checks on such operators. In such situations, the first EU-established company is likewise deemed to be an operator and subject to DD-statement filing requirements, irrespective of whether a subsequent supply to another party takes place. The respective guidance appears to indicate that in cases of imports, DD statements are always compulsory, irrespective of whether the relevant goods remain within the sphere of the first company established within the EU.

Data sharing laws: According to the FAQs, national laws prohibiting the sharing of data relevant for purposes of validating EUDR conformity are irrelevant from an EU perspective. Where the necessary data cannot be obtained, the respective goods will not be marketable in the EU once the DD obligations apply. Observance of local laws contradicting the requirements of the EUDR cannot serve as justification for not having all information necessary for EUDR compliance.

Potential implications for businesses

While it is still a waiting game with regard to the latest proposed changes, in-scope companies should continue, or begin, the journey toward EUDR compliance. Plans should anticipate the worst-case scenario from a timing perspective and a long-term plan to address potential issues.

Experience has shown that considerable lead time is typically needed to achieve traceability across relevant supply chains and establish effective data collection systems. It will be important to consider traceability tools and data management solutions; however, affected entities should note that an IT solution will not be able to seamlessly ensure batch-level traceability "overnight," given the need to onboard all relevant supply chain actors and share information required under the EUDR (which typically requires additional measures beyond the IT solution). Furthermore, establishing reasonable processes and checks to validate that relevant legislation in the country of production has been observed, can require considerable effort and a sophisticated approach.

For more information, listen to the replay of this EY webcast from earlier in the year.