Now, all eyes are on the outcome of the EC’s wider review of the regime. It is hoped that this review will address (at least some of) the significant administrative burden faced by firms that have needed to grapple with the FSR notification regimes.
The new guidelines cover how the EC intends to:
- identify if a foreign subsidy distorts competition in the EU
- balance any distortion against any benefits of the subsidy (which it is required to do when deciding whether to intervene)
- use its power to call-in transactions below the thresholds for mandatory notification.
The guidelines will not be relevant to the vast majority of transactions that need to be notified under the FSR, as these typically do not involve any material subsidies and are not at risk of being identified as distortive.
However, for transactions that do involve a material foreign subsidy, the guidelines give some clarity on how the substantive test under the FSR is likely to be applied.
When will the EC treat a foreign subsidy as distorting competition?
The guidelines set out the EC’s two-step approach to assessing whether a foreign subsidy is distortive.
First, the EC will consider whether the foreign subsidy improves an undertaking’s competitive position in the EU. Second, it will look at whether it (actually or potentially) negatively affects competition in the EU.
Although the guidelines are useful in partially clarifying these two limbs, they remain extremely broad and create significant uncertainty.
Limb 1: improving a competitive position in the EU
The guidelines distinguish between the following:
- Targeted foreign subsidies, i.e., subsidies targeted at the recipient’s economic activities in the EU, for example to subsidize EU manufacturing or distribution activities, or conditional on investments or acquisitions in the EU. The EU will consider that these automatically satisfy Limb 1.
- Non-targeted foreign subsidies. Here, and more controversially, the EC will still consider if these potentially affect EU competition even if they are not targeted at doing so: it will assess whether the subsidy will allow the recipient to fully or partially cross-subsidize its economic activities in the EU. The EC may take into account factors such as overlaps in the shareholding structure, functional or economic links, the design of the specific subsidy, commitments to third parties such as binding fiduciary duties in partnerships, applicable laws and the overall economic situation of the undertaking.
The guidelines identify safe harbors, i.e., types of foreign subsidy that the EC regards as unlikely to improve the undertaking’s competitive position in the EU.
However, these provisions are narrowly defined and do not substantially extend beyond the existing exceptions set out in the FSR. They seem unlikely to significantly aid commercial certainty: (i) subsidies targeted at a market failure outside the EU; (ii) subsidies with purely non-economic or social objectives; (iii) subsidies addressing natural disasters; (iv) subsidies totaling no more than EUR4 million (or EUR200,000 per non-EU country) over three years; and (v) subsidies of insignificant value in relation to the extent of the economic activities of the undertaking in the EU (e.g., in terms of turnover, profitability, and/or investment).
Limb 2: negatively affecting competition in the EU
Again, the guidelines adopt a broad approach. The mere potential to harm competition is sufficient to satisfy this limb. The foreign subsidy does not have to constitute the sole cause of a competitive harm but merely contribute to it. And, significantly, the negative effects do not have to occur in the same market as where the benefit arises.
The guidelines explain that the EC will assess how the foreign subsidy impacts the undertaking’s behavior in the EU and how that behavior alters (or interferes with) the competitive dynamics to the detriment of other market players.
Examples of possible distortions are set out. The foreign subsidy could, for example, impact an M&A process, affect the undertaking’s operating decisions or investment decisions, or distort activities at other levels of the value chain.
A different test for public procurements
For public procurement procedures, the guidelines say that a foreign subsidy (to any entity within the corporate group of the economic operator or its main subcontractors or suppliers) is only distortive if it lets the recipient submit an unduly advantageous tender.
The EC will first establish whether the tender is advantageous.
To do this, it may establish a comparative benchmark, e.g., comparing the tender’s terms to those of other comparable tenders submitted in the same public procurement procedure. It may compare the tender’s terms with the contracting entity’s own estimates, including on price, quality, and other relevant selection and award criteria. Or it may look at whether the terms are better than those that would likely have been submitted absent the foreign subsidy.
If the EC finds the tender to be advantageous, it will then examine whether the advantage was “undue,” i.e., whether it cannot plausibly be justified by factors other than the foreign subsidy. The authority will draw on factors listed in certain EU procurement directives, EU case law on abnormally low tenders, and other relevant criteria.
How will the balancing test be applied?
The guidelines provide some clarification on how the EC will balance any positive effects of a foreign subsidy against any negative effects from a distortion of competition in the EU.
If the EC concludes that the positive effects outweigh the negative effects, then it cannot require remedies or commitments. If, however, the negative effects are greater, the balancing test will determine the scope and nature of any remedies.
Positive effects can occur when the foreign subsidies enable the development of the economic activity in the EU (e.g., where they remedy market failures). They can also support EU policy objectives such as the promotion of environmental protection, innovation, or contribution to the EU’s competitiveness, resilience, economic security, or defense policy. Contributions to global welfare improvements or the protection of global public goods may also be considered.
When carrying out the balancing test, the EC will assess the nature, intensity and likely timing of the positive effects. It is not relevant whether the positive effects are a deliberate consequence of the subsidy or accidental. Where an undertaking has received several foreign subsidies, the EC may aggregate their negative impact and weigh them against the combined positive effects.
The party claiming the positive effects must provide verifiable evidence to establish them. Effects do not need to be precisely quantified, but should be based on case-specific, solid, empirical data, such as financial data, which the EC can complement with public information. The guidelines say that the EC is not obliged to take into account evidence submitted at a late stage of the investigation.
When can the EC call in non-notifiable cases?
Under the FSR, the EC may require parties to notify their transaction or public tenders—even where notification thresholds are not met—where it suspects that foreign subsidies may have been granted in the three years prior to the deal/submission of the bid.
It will assess whether review is needed given the impact of the transaction or bid in the EU.
The guidelines set out a list of factors that the EC may consider. These are non-exhaustive (and arguably open-ended), confirming the EC’s wide discretion to exercise its call-in powers.
They include whether the deal involves strategic activities, sectors or assets (such as critical infrastructure or innovative technologies). The EC will also look at the competitive impact of the deal, patterns in investments or acquisitions that build up influence or economic presence in a sector, any previous FSR interventions involving the parties, and any other information indicating a distortion.
The only safe harbor in the guidelines is very limited: the EC is unlikely to require notification where it can determine with sufficient certainty that the foreign subsidies do not exceed EUR4m in the previous three years.
There is also a time limit: the EC cannot require prior notification of a transaction once it has completed and, for public procurement procedures, the authority loses the power to call in once the contract is awarded.
However, parties should bear in mind the EC’s broader, general ex officio tool under the FSR (which is becoming increasingly relevant in practice). This allows the EC to examine potentially distortive foreign subsidies outside the notification and call-in context. This broader ex officio tool is not covered by the guidelines.
Key takeaways for businesses
- Early assessment of whether any foreign subsidies may be considered distortive is key. If EC review is anticipated, it can be helpful to prepare arguments to counter any factors that may indicate cross-subsidization or to show that safe harbors apply.
- Collect robust evidence of any positive effects and submit these early in the FSR review process.
- Even where FSR thresholds are not met, it may be sensible to screen in advance for the risk of call in, especially for strategic assets, innovative technologies or other sensitive economic areas. If the risk is considered material, work through potential consequences and how the parties can protect their position if the EC does require notification.
What’s next?
As part of its wider review, the EC is gathering views on notification thresholds, review periods and other key aspects of the FSR. It is set to release a report in July 2026.
Private stakeholders have pushed for the administrative burden of the regime to be alleviated. Germany, among the public stakeholders, has even called for the elimination of mandatory FSR filings altogether, urging the EC to use call-in powers for problematic acquisitions and public tenders only.
It remains to be seen whether the report will be so far-reaching. But the EC has indicated it is open to legislative reforms. Improvements to the notification thresholds or timelines may well be on the table.
