The FSR, which came into force in January 2023 and first began to apply in July 2023, seeks to level the playing field within the EU internal market by empowering the European Commission to address distortions of competition caused by financial contributions from non-EU governments to companies operating in the EU, while remaining open to trade and investment.
Foreign subsidies can reach the internal market through participation in any economic activity and in any sector. This includes mergers and acquisitions (M&A), participation in public procurements, and other forms of direct investments. The FSR does not prohibit foreign subsidies, but it empowers the Commission to investigate and, where necessary, impose remedies where such subsidies are found to distort competition.
Totis Kotsonis, competition law, public procurement and trade expert at Pinsent Masons said: “Since fully coming into force in October 2023, the regime has had a significant impact on EU-connected M&A transactions and public procurement procedures. However, due to the absence of formal guidance, businesses and their legal advisors have had to rely on informal European Commission guidance consisting of question and answer websites, policy briefings, staff working papers, and explanatory notes to FSR template forms, as well as informal interaction with Commission staff to navigate the complex regime.”
Andreas Haak, public procurement and trade expert at Pinsent Masons said: “The Commission aims to explain how it will use its powerful and relatively new toolkit to police foreign subsidies, and companies would be well advised to familiarise themselves with the regime, particularly if they have not yet had experience of it.”
The draft FSR guidelines begin by setting out the legal and economic framework for identifying distortive foreign subsidies, applicable in the context of reviewing M&A transactions – referred to as “concentrations”; reviewing foreign financial contributions in public procurement procedures; or in ‘ex officio’ reviews that are self-initiated by the Commission.
A subsidy is considered distortive under the FSR where it improves the competitive position of an undertaking in the EU internal market and, in doing so, actually or potentially harms competition. This dual condition is central to the Commission’s analysis. The draft guidelines emphasise that the assessment will be case-specific and grounded in a non-exhaustive set of indicators including the amount and nature of the subsidy, the characteristics of the beneficiary, and the conditions attached to the subsidy.
Particular attention is given to categories of subsidies deemed most likely to distort the internal market, such as those granted to ailing firms, unlimited guarantees, and subsidies facilitating ‘concentrations’ (M&A transactions), or enabling unduly advantageous tenders in public procurement. In these cases, the Commission may presume distortion without a detailed indicator-based analysis, although companies retain the right to rebut this presumption with evidence specific to their circumstances.
The draft guidelines also delve into the concept of “economic activity in the internal market”, clarifying that this includes not only direct commercial operations within the EU but also preparatory steps such as acquisitions, investments, or the establishment of subsidiaries. This expansive interpretation seeks to ensure that the FSR captures a broad range of potentially distortive conduct.
Additionally, the draft FSR guidelines address the issue of cross-subsidisation. Even where a foreign subsidy is not directly used in the EU, the Commission may still find distortion if the subsidy frees up resources that are then redeployed to support EU operations. The Commission outlines a range of legal, structural and economic factors it will consider in assessing the likelihood of such resource transfers, including shareholder arrangements, regulatory constraints, and the financial health of the subsidised entity.
In the context of public procurement, the draft guidelines provide a detailed roadmap for assessing under the FSR whether a foreign subsidy enables an economic operator to submit an “unduly advantageous” tender. This assessment hinges on whether the terms of the tender – such as price, quality, or delivery conditions – can be plausibly explained without reference to the subsidy. If not, the Commission may deem the advantage “undue” and potentially distortive. The draft guidelines also clarify that subsidies granted to other entities within the same corporate group may be relevant if they indirectly benefit the tendering entity.
The “balancing test” is another focal point. This test allows the Commission to weigh the negative effects of a foreign subsidy against its positive contributions to the development of the subsidised activity or broader EU policy objectives. This is not a mechanical exercise but a holistic evaluation of the subsidy’s impact. Positive effects must be specific to the subsidy and substantiated with credible evidence. The Commission will consider whether the same benefits could have been achieved with less distortion and whether the subsidy addresses a genuine market failure.
The draft FSR guidelines make clear that the burden of proof lies with the party invoking the positive effects. Vague or speculative claims will not suffice. The Commission expects a cogent and consistent body of evidence demonstrating the nature, likelihood and significance of the claimed benefits.
Finally, the draft guidelines address the Commission’s discretionary power to request prior notification of M&A transactions, and public procurement bids, that fall below the FSR’s formal prior notification thresholds. This power may be exercised where the Commission suspects the presence of foreign subsidies and considers that the transaction or bid could have a significant impact on the EU internal market. The Commission outlines a range of factors it will consider in exercising this discretion under the FSR including the strategic importance of the sector, the presence of critical technologies, and patterns of repeat acquisitions or bids by the same economic operator.
“The draft guidelines reflect a sophisticated and economically grounded approach to enforcing the FSR, build on the Commission’s existing practice to date, and seek to offer greater clarity for businesses and their advisors. They signal the Commission’s intent to apply the regime with rigour while allowing for flexibility and case-by-case nuance. Businesses operating in the EU with links to third-country funding – for example, the UK – should take careful note of the Commission’s analytical framework and be prepared for a potentially intrusive and data-intensive regulatory environment. The draft guidelines also underscore the importance of early engagement with the Commission in the context of the FSR regime, particularly in complex transactions or procurement processes where foreign subsidies may be involved,” said Kotsonis.
Notably, the guidelines do not cover wider aspects of the FSR regime, such as Commission ex offico investigations or the conduct of dawn raids.
Kotsonis said: “For now, at least, guidance on the Commission’s practice under the FSR that goes beyond the determination of competitive distortion, the ‘balancing test’, or calling-in below-threshold transactions or public procurement procedures, will continue to reside in the Commission’s question and answer websites and ad hoc publications, and of course any emerging EU case law.”
Haak said: “Importantly, the draft guidelines acknowledge that application of the FSR will ultimately depend on the specific facts and circumstances of each case and the guidelines are not intended to be a ‘checklist’ to be ‘applied mechanically’ by the Commission. This demonstrates the regulator’s flexibility and willingness to engage with businesses when applying the FSR.”
Tadeusz Gielas, merger control and competition law expert at Pinsent Masons, said: “For dealmakers and their advisors, the draft guidelines provide useful further information on the analytical framework the Commission will apply when reviewing M&A transactions, the practical steps it will follow, and how and when it expects to exercise its power to call-in below threshold M&A transactions under the FSR. Investors may also need to consider merger control rules, as well as relevant national security or foreign investment screening rules, in their transactions. These separate regulatory regimes are also evolving, at the EU level as well as at the national level within EU member states and third-party states such as the UK, creating a complex legal landscape for dealmakers to navigate.”
Interested parties have until 12 September to comment on the draft FSR guidelines. The Commission is required to publish its finalised guidelines by 12 January 2026.
