Key Takeaways from the European Commission’s New Foreign Subsidies Regulation Guidelines

Designed to safeguard a level playing field in the EU, the Foreign Subsidies Regulation (FSR) grants the European Commission (EC) broad powers to investigate and, where appropriate, remedy distortive foreign subsidies and imposes mandatory notification and approval requirements for certain merger-and-acquisition (M&A) transactions and public tenders (for additional background, see Sidley Update December 2022 and Sidley Update July 2023). Since FSR began applying in mid-2023, the EC has gradually increased enforcement. The EC has launched several preliminary reviews under its general investigative powers (two following dawn raids) and has opened its first in-depth ex officio investigation. The EC has reviewed hundreds of M&A and procurement notifications and has carried out two in-depth reviews of notified M&A transactions resulting in the imposition of significant remedial measures. FSR has also had a chilling effect — several high-profile public tenders have been withdrawn, and M&A transactions have been affected as companies try to navigate the potential impact of FSR.

The EC has now adopted formal Guidelines setting out how it intends to apply FSR in practice. Drawing on early enforcement experience and emerging decisional practice, the Guidelines offer insights into how the EC is likely to approach future cases. As expected, the Guidelines reaffirm that the EC construes its powers broadly and intends to use them flexibly when enforcing FSR. The Guidelines do not address the critical question of how the EC will assess the existence of subsidies. As discussed in prior Sidley Updates, the concept of a foreign subsidy is not novel, but there is relevant precedent from the EU’s decades of experience in antisubsidy investigations and in the application of the concept of State aid that may provide helpful guidance (see Sidley Update July 2022 and Sidley Update December 2022).

Key Takeaways

1. Distortion analysis is structured but flexible. When determining the existence of a distortion, the EC will follow a two-step assessment. First, it will ascertain whether the subsidy improves the beneficiary’s competitive position. Then, it will consider whether it actually or potentially negatively affects competition in the EU internal market. Both elements must be present. The Guidelines confirm that the EC will rely on a nonexhaustive set of factors and apply them flexibly to reflect the specifics of each case, leaving the EC with significant discretion. From a practical perspective, companies should proactively identify and assess the foreign subsidies they receive, not only to respond effectively to EC inquiries but also, where applicable, to shape the narrative around the absence of distortive effects.
2. The burden for showing positive effects under the balancing test is on the party claiming it. Where a distortion is established, the EC may weigh the negative effects against any positive effects of the subsidy to assess whether to accept commitments or to impose remedial measures. The Guidelines make clear that it is for the party claiming positive effects to prove concrete, credible, and subsidy-specific positive effects. General claims of economic benefit or private commercial advantage will not suffice. Companies seeking to rely on the balancing test should develop an evidentiary strategy early on, including identifying and quantifying positive effects and preparing robust counterfactual economic analyses.
3. Call‑in powers materially expand the reach of FSR. Although FSR sets mandatory notification thresholds for M&A transactions and public procurement exceeding certain materiality thresholds, it also allows the EC to “call in” transactions and tenders falling below those thresholds where it suspects distortive foreign subsidies. The Guidelines confirm that the EC intends to use these powers actively, with a particular focus on cases involving strategic assets or sensitive sectors. This materially increases execution and timing risks and requires companies to integrate call-in risk into deal planning and bid strategies.
4. Process and evidence matter. The Guidelines provide detailed guidance on documentation, timing, and coordination with authorities. This underscores the importance of building a robust evidentiary record early on — often before any formal investigation is launched — to manage FSR exposure efficiently and avoid unnecessary disruption.

The Guidelines in more detail

The Guidelines focus on three aspects: (1) the analysis of distortions, (2) the balancing test, and (3) the EC’s call-in powers for M&A transactions and public tenders.

Analysis of distortions to the EU internal market. For remedial measures to be imposed, a foreign subsidy must distort the EU’s internal market. Distortion exists where the subsidy (1) improves the beneficiary’s competitive position and, as a result, (2) actually or potentially negatively affects competition in the EU’s internal market. The Guidelines clarify the key factors that the EC will consider when carrying out this analysis:

• The undertaking benefitting from the subsidy must engage in economic activities in the EU. Relevant activities include, for instance, supplying goods or services to customers in the EU, including cross-border, holding interests in companies established in the EU, and participating in public procurements processes in the EU.
• The subsidy must be liable to benefit the undertaking’s activities in the EU, directly or indirectly, actually or potentially. Subsidies targeted at EU activities are assumed to confer such a benefit (e.g., subsidies financing an acquisition in the EU, subsidies conditional to an investment in the EU, research subsidies for a technology destined for export to the EU). Nontargeted subsidies may confer such a benefit where resources provided or freed up by the subsidy can be used, in whole or in part, for its EU activities. This includes subsidies (e.g., a generic loan to support daily operations) that are not legally or contractually conditional to a use related to the EU market and thus may be available for use to cross-subsidize EU economic activities. The Guidelines provide useful examples of cross-subsidization, such as through shareholding structure or other functional, economic, and organic links or through design. The Guidelines also identify subsidies that are unlikely to improve a competitive position in the EU and hence are unlikely to be distortive, including subsidies pursuing purely social objectives, disaster relief, certain low‑value subsidies, and subsidies addressing market failures outside the EU.
• The subsidy must actually or potentially negatively affect competition in the EU internal market by altering or interfering with competitive dynamics to the detriment of other economic actors. Although the Guidelines provide that the negative impact on competition should be “appreciable,” there is no de minimis threshold. The subsidy does not need to be the sole or decisive cause, but it is sufficient that it contributes to the negative impact on competition. It is also not necessary that the negative impact has materialized; it is sufficient that the negative impact is potential. Nonetheless, the Guidelines identify factors relevant to the assessment, which include the nature and purpose of the subsidy, its frequency, the beneficiary’s market position, and sector dynamics. For instance, subsidized inputs, liquidity, or guarantees may enable aggressive pricing or expansion that competitors cannot match.
• In the context of public procurement, distortion focuses on whether a foreign subsidy enables the submission of an unduly advantageous tender. The advantage is “undue” (and thus distortive) where it cannot be plausibly explained by factors other than the foreign subsidy. The Guidelines confirm that the EC will coordinate with the contracting authorities, including in relation to the parallel assessment of abnormally low tenders that contracting authorities conduct under ordinary public procurement rules.

The balancing test. In assessing subsidies, the EC must conduct a balancing test to weigh potential distortive effects against possible positive effects when deciding whether to impose remedial measures and what form they should take. The Guidelines explain the EC’s approach to this assessment:

• Relevant positive effects are effects that positively impact the development of the subsidized activity in the EU or on broader policy objectives, in particular those of the EU, including environmental protection, innovation, or security of supply. In the context of public procurement, the possibility to conclude a public contract with a subsidized bidder may be considered a positive effect where alternative sources of supply are not available.
• Positive effects should be specific to the foreign subsidy found to be distortive. This requires evidence that the subsidy has led, leads, or is likely to lead to a change in behavior, resulting in those positive effects, based, for example, on a counterfactual analysis. Positive effects should be proven separately for each contested distortive subsidy. A cumulative assessment can be carried out if the negative impact of various subsidies is intertwined.
• The significance of the positive effects is compared to the severity of the alleged distortion, taking into account their nature, the materiality of their impact, and how soon the positive effects are expected to materialize. The Guidelines differentiate negative effects that are unavoidable if the positive impact is to be achieved from the negative effects that go beyond what is necessary to achieve the positive effects. Subsidies that entail unnecessary or avoidable negative effects are more likely to lead to greater distortions.
• The balancing test is conducted on a case‑by‑case basis and will be based on the information and evidence that the EC receives from interested parties. The EC will not investigate positive effects on its own initiative, and interested parties bear the burden of proof to show positive effects. Positive effects must be substantiated with credible evidence and shown to be likely, specific, and sufficiently linked to the subsidy at stake. Purely private benefits or vague claims of efficiency or competitiveness will not be sufficient. Interested parties that may submit evidence include the undertaking subject to investigation, companies active in the same market or part to the same transaction, trade associations, EU Member States, and third countries.

Exercise of call-in powers. M&A transactions (not yet implemented) and public tenders (not yet awarded) that do not otherwise meet the thresholds for mandatory notification under FSR may be called in where the EC suspects the existence of foreign subsidies granted in the preceding three years. The EC also retains powers to review on its own initiative, as part of its general investigation tool, M&A transactions already implemented, and public contracts already awarded. The Guidelines focus on when and how the EC intends to exercise call-in (ex ante) powers:

• While the EC enjoys a margin of discretion in deciding to request prior notification, it will focus on transactions and tenders that merit an ex ante review due to their impact in the EU. The Guidelines clarify that “impact in the EU” is interpreted broadly and may relate to effects on production, services, access to technology or intellectual property, or the availability of goods and services in the EU. To balance the FSR objective with the need to minimize any administrative burden on parties, the EC will consider factors such as the importance of the activity or procurement, the involvement of strategic assets or sectors, and indicators of likely distortion.
• Call-in decisions must be based on evidence supporting a reasonable suspicion of subsidisation and potential distortion. The EC may collect such evidence on its own initiative or rely on evidence submitted by EU Member States or other interested parties, including competitors. While FSR does not provide for a formal complaint mechanism, the EC thus creates room for interested parties to engage and submit information that may trigger enforcement action.

The Guidelines provide some welcome clarity on how the EC will assess distortions, apply the balancing test, and use its call-in powers where mandatory M&A and procurement notification thresholds are not met. At the same time, the Guidelines reinforce the importance of early planning, robust evidence, and disciplined internal processes.

Sidley has been closely involved in advising on FSR compliance and enforcement since the inception of FSR. We regularly assist clients with risk assessment, compliance programs, investigations, notifications, transaction structuring, and public procurement strategies across sectors. Our FSR capabilities build on Sidley’s market-recognized leadership in EU antisubsidy investigations, World Trade Organization antisubsidy law, EU state aid, merger control, and investment screening, making us highly qualified to assist businesses managing the burden and risk of FSR.