European Commission Publishes Guidelines on Foreign Subsidies Regulation: What Businesses Need to Know

On 9 January 2026, the European Commission published its Guidelines on the application of Regulation (EU) 2022/2560, also known as the Foreign Subsidies Regulation (FSR).

As a reminder, the FSR relates to foreign subsidies granted by non-EU countries, and it establishes three tools: two notification-based tools for high-value mergers and acquisitions (M&A) and public bids, and an ex-officio investigation tool (see our previous alert). Foreign subsidies, such as grants, capital transfers, loans, guarantees, tax advantages and beneficial government contracts, are not prohibited outright. Once a foreign subsidy has been identified, the Commission will assess whether it distorts the internal market.

The new Guidelines clarify how the Commission will determine whether competition in the internal market is distorted by such subsidies. They cover (i) the criteria for determining distortions, (ii) the balancing test, and (iii) the Commission's call-in powers to request prior notification in M&A and public procurement contexts. The Commission's guidance is essential for businesses and legal practitioners seeking to navigate their obligations in this evolving regulatory landscape.

I. Assessment of Distortive Effects

In the Guidelines, the Commission recalls the two cumulative conditions for distortion set out in Article 4(1) of the FSR: the foreign subsidy must be liable to improve the competitive position of the undertaking in the internal market (first condition), and then, as a result, must actually or potentially negatively affect competition in the internal market (second condition).

1. First Condition: Improvement of Competitive Position

The Commission will use a non-exhaustive set of indicators to determine whether a foreign subsidy is liable to improve a company’s competitive position. These indicators will include the amount and nature of the subsidy, the situation of the undertaking, the level and evolution of its economic activity on the internal market, and the purpose and conditions of the subsidy as well as its use on the internal market.

For foreign subsidies that are most likely to distort the internal market under Article 5(1) of the FSR, a detailed assessment based on indicators is unnecessary.

The Commission distinguishes between targeted subsidies and non-targeted subsidies. Targeted subsidies directly or indirectly support a company’s EU activities and are presumed to confer a competitive advantage, so they do not require further assessment. Non-targeted subsidies are those that can be used for all activities (EU and non-EU). Non-targeted subsidies require further analysis to assess the likelihood of cross-subsidization. The Commission defines 'cross-subsidization' as any situation in which an undertaking transfers resources to its economic activities in the internal market or uses them in any way beneficial for those activities. In order to assesses the likelihood of cross-subsidization, the Commission considers several factors, such as shareholding structures, functional, economic and organic links, the design and conditions of the subsidy, agreements with third parties, applicable laws, and the undertaking’s economic situation.

If there are no credible legal or economic factors preventing or making it unlikely that resources will be transferred or used for EU activities, the Commission may consider the foreign subsidy liable to improve the undertaking's competitive position. For instance, although bankruptcy laws may pose legal obstacles to profit shifting, transfer pricing rules generally do not suffice to prevent cross-subsidization, as they exclusively concern profit allocation for tax purposes.

Nonetheless, the Commission considers that certain foreign subsidies are not liable to improve a company’s competitive position, for example (i) subsidies addressing market failures outside the EU (to the extent that they are designed to crowd-in private investment), (ii) subsidies pursuing purely non-economic or social objectives, (iii) subsidies to recover damage from natural disasters or exceptional occurrences, (iv) de minimis subsidies, and (v) those foreign subsidies that are insignificant in relation to the undertaking's actual or potential economic activities in the internal market.

According to Articles 4(2) and (3) of the FSR, de minimis subsidies are foreign subsidies of up to EUR 4 million over a period of three years, which are deemed unlikely to be distortive, and foreign subsidies not exceeding EUR 200,000 (per third country) over a period of three years which are considered not to be distortive.

2. Second Condition: Negative Effect on Competition

When assessing whether a foreign subsidy, actually or potentially, negatively affects competition, the Commission applies a two-step analysis. First, it evaluates how the subsidy affects the beneficiary’s behavior in the EU. Second, it determines whether this behavior alters or interferes with competitive dynamics to the detriment of other economic actors.

A foreign subsidy negatively affects competition when it is liable to have a negative impact on the level playing field. Importantly, it is not necessary for the foreign subsidy to be the sole reason for the negative impact on competition; it is sufficient for it to contribute to it. Furthermore, the Commission need not demonstrate an actual negative impact; a potential negative effect is sufficient. The negative impact needs only to be ‘appreciable’; beyond the thresholds of Articles 4(2) and (3) of the FSR, there is no de minimis threshold and no need to prove the serious nature of a distortion.

Key indicators to assess the extent to which changes in the competitive strength of the subsidized undertaking may negatively affect other economic actors include: the scope, purpose and conditions of the subsidy; the amount of the subsidy (both absolute and relative); the type of subsidy; the size and market position of the undertaking; and the characteristics of the sector, including competitive dynamics, barriers to entry, and capacity constraints.

Examples of distortions include subsidized acquisitions that enable outbidding or deterring rival investors, aggressive pricing strategies, crowding out competitors, and facilitating investments that alter competitive dynamics.

In public procurement, the focus is on whether a subsidy enables an economic operator to submit an unduly advantageous tender for the works, supplies or services in question. It is not necessary for the foreign subsidy to be the sole contributing factor; it is sufficient for the Commission to establish that it could potentially have impacted the terms of the tender to an appreciable extent. The Commission's guidance on cross-subsidization also applies to non-targeted subsidies in the context of public bids.

II. Balancing Test: Distortive vs. Positive Effects

The Commission Guidelines clarify the balancing test under Article 6 of the FSR. This test requires the negative, i.e., distortive, effects to be weighed against the positive effects relating to the development of the relevant subsidized economic activity on the internal market, as well as the broader positive effects relating to relevant policy objectives, particularly those of the EU. The test is a qualitative, case-by-case assessment that takes into account specific circumstances, rather than being a numerical calculation. The Commission considers the nature, amount and conditions of the subsidy; the severity of the distortion; and the nature, intensity and timing of the positive effects. Positive effects may occur, for instance, where a subsidy remedies a market failure and enables an economic activity to exist.

Relevant policy objectives to be considered include those recognized in EU law, such as environmental protection, social standards, and the promotion of research and development, as well as economic security and defense policy. When performing the balancing test in public procurement, the Commission will consider the availability of alternative sources of supply, bearing in mind that contracting authorities acquire works, products or services to fulfil public objectives.

The party invoking positive effects has the burden of proof, which may include the undertaking under investigation, Member States, or any natural or legal person. These parties must provide cogent and verifiable evidence based on case-specific, solid, empirical data, rather than vague or theoretical claims. The Commission will assess whether the positive effects are specific to the subsidy and would not occur in its absence, which, in practice, will often require a counterfactual analysis. If the positive effects outweigh the negative effects, the Commission may refrain from imposing remedial measures. If not, the balancing test can help determine the appropriate scope and nature of the remedies. Given their particularly distortive nature or effect, the categories of foreign subsidies deemed most likely to distort the internal market are less likely to have their negative effects outweighed by positive effects.

Article 7 of the FSR provides a non-exhaustive list of potential remedial measures, which may include reducing capacity or market presence, refraining from specific investments or divesting certain assets.

III. Use of Call-in Powers

Pursuant to Articles 21(5) and 29(8) of the FSR, the Commission may request prior notification of any concentration or public procurement procedure at any time prior to implementation or contract award, even if it is below the standard notification thresholds, if it suspects that potentially distortive foreign subsidies have been granted within the three years preceding the transaction or tender.

When evaluating whether a concentration or a tender bid merits ex ante review, the Commission will consider several factors, including (i) whether the target's turnover does not reflect its actual or future economic significance (e.g., 'killer acquisitions' of start-ups), (ii) whether the relevant sector or underlying assets (e.g., critical infrastructure or innovative technologies) are of strategic importance, (iii) patterns of investments or acquisitions, (iv) past decisions establishing distortive subsidies, and (v) contextual information indicating possible distortions including whether the suspected subsidies fall within the categories set out in Article 5.

Notification will not be required where the Commission can determine with sufficient certainty that the suspected subsidies do not exceed the de minimis subsidy thresholds or meet the conditions for a natural disaster. In public procurement, the Commission should endeavor to limit interference with procedures by taking the proximity of the contract award into account when deciding whether to request notification.

When the Commission requests notification, the transaction or public procurement procedure becomes subject to the FSR's provisions, including suspension obligations for concentrations and notification requirements for procurement participants. This mechanism is designed to allow the Commission to assess and, if necessary, remedy the impact of foreign subsidies, while striking a balance between the effective protection of the internal market and minimizing the administrative burden.

IV. Conclusion

• The Commission's new FSR Guidelines provide useful guidance on the assessment framework for potentially distortive foreign subsidies in the EU, enhancing legal certainty whilst recognizing that each case should be assessed based on its own facts and circumstances.
• However, for many companies, the FSR remains primarily an administrative burden, adding red tape to M&A transactions and public procurement procedures. While the new Guidelines are very welcome, they exclusively address substantive assessment issues and the Commission’s call-in powers. Consequently, companies and their legal advisors seeking answers to the numerous practical questions relating to submissions in non-issue cases will be disappointed.
• The Commission applies a low threshold for demonstrating market distortion: subsidies need only contribute to a negative effect on competition, they do not have to be the sole cause. Furthermore, potential impact is sufficient, without proof of actual harm or serious distortion being required. For non-targeted subsidies, in the absence of credible legal or economic factors that would prevent or render unlikely cross-subsidization, the Commission may presume that resources can be transferred to EU activities.
• In the balancing test, parties must provide cogent and verifiable evidence of positive effects specific to the subsidy that outweigh the distortion, and this can be challenging in many cases.
• The Commission may use its call-in powers to require notification of below-threshold transactions and tender bids that merit ex ante review, given their impact in the EU, particularly in strategically important sectors or where there are patterns suggesting possible distortions.
• It remains to be seen how the Commission will apply these Guidelines in practice going forward. So far, the Commission has only adopted two decisions following in-depth investigations in merger cases, e&/PPF Telecom Group and Adnoc/Covestro. Both of these transactions were cleared with commitments. Regarding public procurement, the Commission’s three in-depth investigations thus far have resulted in bid withdrawals in all cases, preventing the Commission from reaching final conclusions and adopting decisions. Under its ex officio powers, the Commission has opened two in-depth investigations (into Nuctech and Goldwind) that are still ongoing. Therefore, the Commission’s practical experience with any substantive analysis of foreign subsidies remains limited.