The European Commission (EC) has issued new guidelines under the Foreign Subsidies Regulation (FSR).  The guidelines explain how the EC assesses whether foreign subsidies are liable to distort competition in the EU, whether the positive effects of such subsidies outweigh such distortions and how it intends to exercise its powers to call in M&A transactions and public tender bids that fall below the thresholds for mandatory notification.

The guidelines provide several clarifications, granting to the EC a wide margin of discretion to determine that foreign subsidies are distortive.

Distortion of competition

Once the EC has demonstrated that an undertaking is benefitting from a foreign subsidy (an assessment that is not covered by the guidelines), it must assess whether such subsidy is liable to distort the EU market.

The guidelines introduce a two-step assessment of the distortion: (i) how does the subsidy affect the behaviour of the subsidised business and (ii) how does this interfere with competitive dynamics to the detriment of other market players?

For the purposes of this assessment, the guidelines distinguish between targeted and non-targeted foreign subsidies.

Targeted subsidies such as subsidies directly supporting or benefitting the undertaking's economic activities in the EU will typically be considered as improving the undertaking's position in the EU market.

As for non-targeted subsidies – such as foreign subsidies of general scope or related to activities outside of the EU – the EC may still treat them as distortive if they could be used to cross-subsidise EU activities, including through intra-group transfers.

This has been key to the EC's reasoning in the review of several transactions. The guidelines list several factors that the EC uses to assess the likelihood of such a transfer/cross-subsidy, including:

• the undertaking's shareholding structure (such as the existence of several controlling shareholders);
• the design and conditions of the subsidy;
• any agreements with third parties; or
• any applicable legal constraints (such as accounting or functional unbundling provisions).

For example, the guidelines recognise that fiduciary duties in partnerships between limited partners and fund managers can act to prevent transfers of value between different funds with different investors. This has been helpful to limit the scope of disclosure in FSR filings triggered by private equity transactions.

No actual impact of the subsidy is required. In contrast to the consultation draft of the guidelines, which indicated that the Commission would assess whether potential effects were "likely" to arise, the final guidance states that they must only be "liable" to arise, or "capable of" arising.

The guidelines recognise that any actual or potential negative impact on competition "needs to be appreciable.

While they do not define "appreciable", they do give some guidance on when subsidies should generally not be liable to improve the competitive position of a subsidised business. In addition to the safe harbours provided for in the FSR itself (i.e., de minimis subsidies up to €300,000 over a three-year period from a non-EU country and subsidies to compensate damage caused by natural disasters or exceptional occurrences) the guidelines set out the following safe harbours:

• subsidies granted for activities taking place outside of the EU (without supporting the EU activities of the business) in view of mobilising private resources for projects that would otherwise not be undertaken;
• subsidies pursuing purely non-economic or social objectives; and
• subsidies with an insignificant amount in relation to the actual or potential activities of the undertaking in the EU market.

Based on our experience, demonstrating that subsidies are insignificant compared to the business' turnover or investments in the EU market has been helpful to persuade the EC of the lack of distortion within the context of the FSR review of several transactions.

In the context of M&A transactions, the guidelines confirm that the theories of harm considered by the EC are: (i) whether subsidies could distort the market for acquiring corporate control of the target; and (ii) whether they are liable to distort the future operating or investment decisions of the target - with references to the EC's recent decisional practice, in particular the e&/PPF Telecom case.

As regards public tenders, the guidelines state that the EC will focus on whether foreign subsidies to a bidder or main subcontractor, enable them, actually or potentially, to submit an unduly advantageous tender. They clarify that the EC may identify and follow-up on a distortive subsidy even if it is not granted to the bidding entity or to the entities in its linear ownership structure (i.e., the entities to which the disclosure scope of an FSR filing is typically limited), but is instead granted to another company within their corporate group.

Balancing test

Once a distortion of competition by a foreign subsidy has been determined by the EC, it must still assess whether any positive effects of this subsidy outweigh its negative effect. However, the burden of proving such positive effects sits with the subsidised business. In contrast to the standard to which the EC holds itself when establishing negative effects (i.e., that they are "capable of" arising – see above), the guidelines state that subsidised businesses must prove that the positive effects of their subsidies are "likely" to arise.

Where multiple foreign subsidies have been granted, the EC may carry out a cumulative assessment of their aggregate positive effects.

The guidelines provide insights on the evidence to be presented by the party claiming positive effects. In particular, they must demonstrate that the positive effects are unlikely to occur without the subsidy, e.g., by conducting a counterfactual analysis of scenarios with and without it. They also need to demonstrate that these positive effects cannot be achieved with less distortion of competition, in line with the test applied for the assessment of State aid granted by EU member states.

Even if the balancing test indicates that the positive effects of a subsidy do not fully outweigh its negative effects, the guidelines explain that this can nevertheless inform the scope and nature of any commitments or redressive measures - as happened in the recent conditional clearance of the ADNOC/Covestro transaction - and, in any event, will not lead to a worse outcome than if this test had not been applied.

Use of call-in powers

The EC can request the prior notification of M&A transactions or participations in public procurement procedures that fall below the thresholds for a mandatory filing, if it suspects that foreign subsidies have been granted to the relevant businesses and this has "an impact on the EU". It can do so any time before closing of the transaction or award of the tender, in which case such closing/award is prohibited until the EC issues its decision. In November 2025, the EC is reported to have exercised these "call-in" powers for the first time, in relation to a public tender below the notification threshold (the name of the company involved has not been disclosed).

The guidelines grant the EC a wide margin of discretion to exercise its call-in powers, setting out various factors that the EC will consider. These include the strategic nature of the target's sector (such as critical infrastructure or innovative technologies), patterns in investments (such as various transactions by the same investor in the same or related sectors) or the likely existence of most likely distortive subsidies (such as subsidies facilitating the transaction).

Certain subsidies are afforded safe harbours from the EC's call-in powers, including very low-value public procurement procedures, subsidies below an aggregate amount of EUR 4 million during the last three years, and subsidies compensating the damage caused by natural disasters or exceptional occurrences. Given the narrow scope of these safe harbours, the EUR 4 million subsidies exposure category will likely be the most relevant in practice.

The guidelines also note that the EC can review transactions that have already been implemented and public contracts that have already been rewarded under its ex officio procedure, but do not cover the circumstances in which it may do that.

How will these guidelines affect investors?

The EC has sought to provide insight on some of the key aspects of its FSR reviews. In doing so, it has given itself a substantial margin of discretion to find that a foreign subsidy is at least capable of affecting competition in the EU and to call-in for review transactions / public tenders below the notification thresholds. That is not surprising. The EC is, in general, legally required to follow its own guidelines and is wary of fettering the ability that the FSR grants it to pursue foreign subsidies that it considers harmful. However, investors should not assume that the EC will inflexibly apply the expansive interpretation of potentially distortive subsidies that the guidelines invoke. Our experience of advising on notified FSR transactions and public tenders is that the EC is pragmatic and is, in particular, open to arguments that foreign subsidies are insignificant compared to the undertaking's size in the EU and cannot thus distort the EU market.

Future developments may also reduce the burdens for investors that have been imposed by the FSR. The EC is due to report on its implementation and enforcement of the FSR in July 2026, which could lead to discussions on any reforms that minimise the scope of notifiable transactions and the associated disclosure obligations. In advance of this report, Germany, in particular, has advocated for the abolition of mandatory FSR filings and called for the EC to instead rely on its call-in powers to address problematic M&A transactions and public tenders. Any such reform would require amendments to the FSR itself, though an often-lengthy legislative process by the European Parliament and Council.