Coinciding with the regulation’s third anniversary, the European Commission has adopted long-awaited guidelines for the EU Foreign Subsidies Regulation (FSR) against a backdrop of mounting criticism. Many observers have lamented that the FSR system is burdensome and the efforts required are disproportionate.
The FSR is designed to close a regulatory gap resulting from the fact that the EU State Aid rules place strict limits on the extent to which Member States can subsidise companies operating in the EU, while there are no comparable controls for subsidies granted by third countries. The regulation provides the European Commission with three powerful tools to address subsidies granted by non-EU countries:
- The most important instrument is the M&A tool, also known as “merger control 2.0”, which requires additional notification of M&A deals to the Commission if certain turnover thresholds are exceeded.
- The procurement tool requires that bidders for high-volume public contracts notify the Commission of foreign financial contributions (FFCs).
- Beyond these notification obligations, the Commission can investigate foreign subsidies ex officio using the third instrument (ex officio tool).
The thresholds in the new notification regime are relatively low. In particular, they refer to the extremely broad concept of foreign financial contributions (covering everything from a market-rate contract with a state-owned authority to a tax break) rather than foreign subsidies (i.e. state support measures). As a result, a large number of mergers with no plausible link to subsidies must nonetheless be notified, which requires the parties to perform extensive data collection.
Practice so far
That mismatch is evident in enforcement statistics. The case load under the M&A tool was three times higher than expected. Out of more than 200 burdensome notifications, only a fraction (two cases) were examined in an in-depth investigation (“phase 2”). The rest was cleared or withdrawn. That seems to suggest that real distortions are rare, or that most filings create unnecessary red tape. For dealmakers, the practical consequences are significant. The FSR now sits alongside national FDI screening regimes and EU merger control, turning many cross-border transactions – particularly those involving sovereign wealth funds, state-owned enterprises, or private equity vehicles with minority public investors – into procedural nightmares.
For the other tools, the overall picture is better, at least from the perspective of EU industry. The FSR had a certain protectionist effect on public procurement. After first in-depth investigations were opened, the non-EU bidders concerned withdrew their offers and pulled out from the procurement procedure (CCRC, Shanghai Electric and Longi) – to the benefit of EU producers. Contrary to general expectations, the Commission has also made significant use of the ex officio tool (wind turbines, security technology, online platforms) and even conducted some dawn raids. In this regard, EU players seem generally happy with the effet utile of the new set of rules.
However, the M&A tool continues to be a headache for EU industry and foreign investors alike. It is particularly striking that about 90% of the notifications concern players from the EU, the UK and the US, but hardly any from China or other economies with strong state-owned enterprises (SOEs). Nevertheless, these notifications involved a great deal of effort for the notifying parties but very limited substantive reviews. This was also due to the fact that the Commission has shown great interest in the ownership/financing structure of companies with links to third countries. This can be time-consuming, as the numerous private equity investors often include state-backed partners (sovereign wealth funds, pension funds, universities and state-affiliated funds, etc.).
The new guidelines
The new guidelines do not address the notification thresholds (nor the burden involved with preparing FSR filings), but aim to clarify (i) the concept of distortion of competition under Article 4 FSR and the (ii) balancing test under Article 6 FSR. In addition to specifying the substantive test to be performed by the Commission once it has identified a foreign subsidy (in line with the EU State Aid benchmark), the new rules also hints as to how the Commission intends to exercise its far-reaching procedural “call-in” powers under Article 21(5) and Article 29(8) FSR, according to which it can also examine cases that do not meet the notification thresholds and subject them to a standstill obligation.
The overall impression of the elaborate document (42 pages!) is somewhat mixed. Despite the Commission’s efforts to provide assistance and increase transparency, significant legal uncertainty remains. This is also due to the very strong economic focus and the vagueness of the new concepts, some of which appears a bit like trying to nail jelly to the wall.
Distortion of competition
Regarding the concept of distortion of competition pursuant to Article 4 FSR, the Commission (unsurprisingly) still favours a broad interpretation. The Commission’s attempt to identify certain types of cases and indicators to clarify the concept of distortion of competition has some utility. The two-step test applied by the guidelines is whether (1) the subsidy strengthens the company’s position in the EU (including possible cross-subsidisation) and, if so, (2) whether it is likely to distort market dynamics.
In order to assess whether a subsidy strengthens the company’s position in the EU, the document distinguishes between “targeted foreign subsidies”, i.e. the direct or indirect support of a company’s activities in the EU (manufacturing, distribution, investments, acquisitions, etc.), and “non-targeted foreign subsidies”, where the support has a general scope or relates to non-EU activities. Whereas the first group is generally considered to improve the company’s competitive position in the internal market, the second category is more complex. In a nutshell, such measures can still lead to distortion in the EU in cases of cross-subsidisation. In this regard, the Commission looks at a number of factors that could facilitate cross-subsidisation, such as overlaps in the shareholding structure; functional, economic and organic ties; binding contractual agreements; regulatory provisions imposing accounting or functional unbundling obligations between entities; bankruptcy or insolvency laws that protect creditors and therefore may be considered as obstacles for cross-subsidisation; and/or the economic situation of the recipient undertaking.
The new guidelines introduce some sort of safe harbours, i.e. types of subsidies considered not liable to improve the undertaking’s competitive position in the EU. These (rather modest) harbours cover subsidies granted (i) to address market failures for activities taking place exclusively outside of the Union (especially if the foreign subsidies materially comply with the Union rules on compatibility with the internal market had they been granted by a Member State); (ii) for purely non-economic or social objectives; (iii) for natural disasters or exceptional occurrences; (iv) below de minimis amounts (i.e., EUR 4 million collectively or EUR 200,000 from a single non-EU country over any consecutive period of three years); or (v) amounts insignificant relative to the undertaking’s EU activities.
On this basis, it will rarely be possible to rule out distortion of competition with legal certainty. Some stakeholders have pointed out that the guidelines contain a hidden reversal of the burden of proof, i.e. they require companies to prove the absence of a distortion of competition, which would not be in the line with the FSR itself.
In general, there appears to be a slight mismatch between the wording of the guidelines, which suggest a broad interpretation of the concept of distortion, and Commission practice to date, where the Commission has only found distortion in a very rare number of cases. This does not make the issue less confusing.
Balancing test
Regarding the balancing test pursuant to Article 6 FSR, i.e. whether the positive effects of a subsidy outweigh the negative effects of a distortion, it is important to bear in mind that this test only comes into play if and to the extent the Commission has identified any distortive foreign subsidies, and therefore opened a “phase II” investigation. In its new guidelines, the Commission aims to provide greater clarity primarily by identifying the positive effects on the economic activity concerned in the internal market and examining them in relation to other relevant policy objectives and weighing them against negative effects. In particular, such policies could include objectives recognised under primary law or the State Aid acquis communautaire (e.g. remedying market failures, competitiveness, resilience). It is interesting – and to be welcomed – that positive effects outside the EU, e.g. environmental protection, human rights and R&D leading to innovation in the EU, may also be taken into consideration. These effects must be clearly linked to the third-country subsidy under investigation.
The guidelines make it clear again that the burden of proof in the balancing process lies with the notifying parties, i.e. they must provide information on any positive effects of the third-country subsidy. The guidelines suggest that the bar is set (very) high here and the Commission emphasises the potential need for remedies.
Call-in powers
While the EU Merger Regulation normally does not cover transactions below the notification threshold, such transactions are not ‘out of scope’ under the FSR. Under the FSR, the Commission has the authority to “call in” transactions or public procurement bids for review – even if they don’t automatically trigger notification requirements. The broad and far-reaching call-in powers under Articles 21(5) and 29(8) FSR contain virtually no substantive conditions to limit the Commission’s broad powers under these provisions. Any suspicion of third-country subsidies with a certain “impact” in the EU is sufficient to subject below-threshold transactions to the notification requirement and the standstill obligation. The guidelines identify a number of possible factors that the Commission intends to take into account (economic activity or sector concerned, relevant value chain, strategic importance, influence or economic presence, characteristics of third-country subsidies, etc.).
This gives the Commission maximum freedom. From the point of view of planning certainty, this is not very reassuring. It is, however, in line with a general trend. Call-in powers are becoming increasingly popular in national merger control regimes and the Commission has also tried to extend merger control to deals that do not meet the thresholds under the EU Merger Regulation (e.g. in Towercast and Illumina/Grail).
The guidelines also contain a “mini safe harbour”. Cases of subsidies below EUR 4 million over 3 years will not be taken up. The guidelines also recall that, according to the wording of Article 21(5) FSR, a call-in is only possible before the transaction has (fully) closed. Likewise, the call-in of a public procurement bid under Article 29(8) FSR is only possible before the contract is awarded.
However, even closed M&A deals and awarded contracts can still become subject to an investigation under the ex officio tool. The new guidelines do not provide any guidance as to the criteria to be used by the Commission in the ex officio context, i.e. when deciding whether to investigate below-threshold M&A deals or public procurement procedures pursuant to Article 9 et seq. FSR.
Key takeaways
The new guidelines are not a major step forward, and the initial reaction of most stakeholders shows that the document does not really meet the expectations of the competition law community. The new guidelines largely repeat the wording of the FSR provisions, with the Commission merely stating the obvious across extended sections. They therefore offer companies only limited assistance in reducing uncertainty. The so-called “safe harbours” are modest at best.
In particular, the explanations on cross-subsidisation show that, at least in theory, the threshold for finding a distortion (requiring the Commission to open a phase II) appears to be very low, at least in the Commission’s view (which is however somewhat at odds with the Commission barely having opened any phase II proceedings yet). The uncertainties surrounding the balancing test and the scope of “call-in” have not been resolved.
What’s next?
The Commission started a consultation for an FSR review in July 2025. The call for evidence highlights problem areas including substantive assessment, the application of the balancing test, ex officio procedures, notification thresholds and “the level of complexity of the rules and the costs incurred by businesses”. There has been some criticism from stakeholders and Member States, calling for a comprehensive reform and scale-back of the FSR to reduce unnecessary administrative burden on and uncertainty for companies and to focus the FSR on relevant cases. For example, the German government proposed replacing the comprehensive ex-ante notification system with a call-in mechanism. This general mood seems to be echoed by critical voices from within the Commission itself.
However, any reform of the FSR would not be ‘quick fix’: Amending a Council/Parliament Regulation is a complex process, which means that in the meantime, companies will have to live with the status quo, possibly for years. This can be eased by negotiating workarounds individually with case teams and mitigated through cautious planning, taking the duration of the FSR procedure into account in the timeline of a transaction. While the whole exercise remains very burdensome, experience has also shown that preparing FSR filings and FSR data collection can be done with reasonable effort if kicked off sufficiently in advance.
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