I. Introduction
The EU Foreign Subsidies Regulation (Regulation (EU) 2022/2560 (the “FSR“)) notification obligations became applicable on 12 July 2023 (after a six-month transitional period), filling a long-standing gap in the Union’s regulatory toolkit for foreign investment. While EU State aid rules discipline subsidies granted by Member States, no horizontal mechanism previously existed to tackle distortions caused by financial support provided by third-country governments to undertakings active in the EU single market. The FSR addresses this gap by empowering the European Commission (the “Commission“) to investigate, and where necessary remedies, such distortions across all economic sectors.
Almost three years on, the regime has entered a fully operational enforcement phase. On 9 January 2026, the Commission published its final Guidelines on the application of certain provisions of the FSR (the “Guidelines“), providing long-awaited clarity on the distortion criteria, the balancing test, and the Commission’s call-in powers. The same period has seen the Commission’s first final decision under the FSR’s concentration instrument (e&/PPF Telecom, September 2024), a second conditional clearance in an M&A context (Covestro/ADNOC, November 2025), and the Commission’s first final decision under the FSR’s public procurement instrument (CRRC/Lisbon, April 2026).
This article provides an overview of the FSR’s key mechanisms, examines the principal clarifications brought by the Guidelines, and draws practical lessons from the Commission’s emerging enforcement practice.
II. The FSR at a glance
a) General Framework
The FSR lays down rules and procedures for investigating foreign subsidies that distort the internal market and for redressing such distortions, with a view to ensuring a level playing field. The Regulation applies to foreign subsidies granted to undertakings — including public undertakings directly or indirectly controlled by a State — carrying out an economic activity in the internal market. An undertaking acquiring control of or merging with an undertaking established in the Union is expressly considered to be carrying out an economic activity in the internal market for these purposes. The Commission is the sole authority competent to apply the Regulation across all economic sectors. It acts through two mechanisms: mandatory prior notification for large concentrations and public procurement procedures above certain thresholds, and ex officio investigations on its own initiative.
b) What is a foreign subsidy?
A foreign subsidy exists where three cumulative conditions are met.
- First, a financial contribution must be provided directly or indirectly by a third country. The concept is deliberately broad, encompassing transfers of funds or liabilities (grants, loans, capital injections, guarantees, debt forgiveness), the foregoing of amounts otherwise due (tax exemptions, special rights without adequate remuneration), and the provision or purchase of goods or services. The contribution may originate from a central government, any public authority at any level, a public entity whose actions are attributable to the third country, or a private entity acting at the direction of the State.
- Second, the contribution must confer a benefit that the recipient could not have obtained under normal market conditions.
- Third, the contribution must be discriminatory in its scope, i.e. limited in law or in fact to one or more undertakings or industries.
The mere existence of a foreign subsidy does not trigger any remedy. Unlike State aid granted by a Member State, foreign subsidies are not generally prohibited. The Commission must further establish that the subsidy distorts the internal market — a finding that requires a case-by-case assessment based on a non-exhaustive set of indicators, including the amount and nature of the subsidy, the situation of the undertaking, and the purpose and conditions attached to the contribution.
c) The three pillars
The FSR’s notification regime covers two specific situations: concentrations, defined as transactions resulting in a lasting change of control through a merger, an acquisition of control, or the creation of a full-function joint venture, and public procurement procedures, understood as procedures in which foreign subsidies may enable an economic operator to submit a tender that is unduly advantageous in relation to the works, supplies or services concerned, above certain thresholds.
1. Mandatory notification — Concentrations
A concentration must be notified to the Commission prior to its implementation where (i) at least one of the merging undertakings, the acquired undertaking or the joint venture is established in the EU and generates an aggregate EU turnover of at least €500 million; and (ii) the undertakings concerned received combined aggregate financial contributions from third countries exceeding €50 million in the three years preceding the transaction.
2. Mandatory notification — Public procurement
An economic operator must notify its foreign financial contributions where (i) the estimated contract value is at least €250 million; and (ii) the operator received aggregate financial contributions of at least €4 million per third country in the three years prior to notification. Where the thresholds are not met, the operator must still submit a declaration confirming that no notifiable contributions were received.
3. Ex officio investigations and call-in powers
Independently of the notification regime, the Commission may on its own initiative examine any foreign subsidy in any sector, relying on information from any available source. It may also exercise its call-in power to require prior notification of below-threshold concentrations or procurement bids at any time prior to implementation, where it suspects that distortive foreign subsidies have been granted within the three preceding years.
d) Possible outcomes
Following its preliminary review, the Commission may close the procedure where it finds insufficient indications of a distortion. Where sufficient indications exist, it will open an in-depth investigation, at the conclusion of which it may (i) accept commitments proposed by the undertaking if they fully and effectively remedy the distortion; (ii) prohibit the concentration or, in the context of public procurement, the award of the contract to the subsidised bidder; or (iii) issue a no-objection decision where no distortion is found or where the positive effects of the subsidy outweigh its negative effects.
III. The Guidelines: Key clarifications
Published on 9 January 2026 following extensive consultation with Member States and stakeholders, the Guidelines provide interpretative guidance on four points: the distortion criteria, the balancing test, the call-in powers, and the assessment of distortions in public procurement. The Commission emphasises that the Guidelines do not constitute a checklist to be applied mechanically — each case must be assessed on its own facts and circumstances.
a) Criteria for determining the existence of a distortion
A distortion in the internal market is deemed to exist where two cumulative conditions are met:
- the foreign subsidy must be liable to improve the competitive position of the undertaking in the internal market; and
- in doing so, the foreign subsidy must actually or potentially negatively affect competition.
To operationalise this framework, the Guidelines draw a fundamental distinction between targeted and non-targeted foreign subsidies:
- Targeted subsidies: those directly intended to support an undertaking’s EU economic activities — are typically considered liable to improve the competitive position of the undertaking without further analysis;
- Non-targeted subsidies: the Commission assesses the risk of cross-subsidisation: whether resources provided by the foreign subsidy could be transferred to benefit the undertaking’s EU activities. Several factors may reduce this risk, including differences in shareholding structure, binding third-party agreements, and applicable laws imposing functional unbundling. Importantly, internal group policies alone are not considered sufficient.
In this regard, it is worth noting that the threshold for establishing a distortion is relatively low: a foreign subsidy only needs to risk contributing to a negative effect on competition in the internal market. It does not have to be its sole or even main cause and a potential impact on competition is sufficient (proof of actual harm is not required).
b) The balancing test
The FSR already provides that the Commission may weigh the negative effects of a foreign subsidy against its positive effects, including broader positive effects in relation to EU policy objectives. The Guidelines build on this framework by clarifying the methodology for conducting this assessment and, most notably, by confirming that the Commission may aggregate the positive effects of several foreign subsidies, mirroring its existing practice for negative effects.
Positive effects may include the development of the subsidised activity on the internal market — for instance by remedying a market failure — or contributions to EU policy objectives such as environmental protection, or economic development in disadvantaged regions. The burden of proof lies with the person invoking them, and vague or commercially self-serving claims will not suffice. Where negative effects prevail, the balancing test informs the appropriate nature and level of commitment or remedies.
c) Call-in powers
The Guidelines confirm that the Commission’s call-in powers are exercised based on an assessment of the impact in the Union, considering factors such as the strategic nature of the sector or underlying assets, patterns of acquisitions by the same subsidised group, and past FSR decisions involving the same or related businesses.
The Guidelines also introduce specific safe harbours: low-value public procurement procedures, subsidies below €4 million, and subsidies addressing certain extraordinary circumstances are exempt from a call-in request. However, proposals for a fast-track screening process were not adopted, leaving called-in cases subject to the full FSR review procedure and creating genuine uncertainty for companies engaging in transactions or procurement bids involving potentially subsidised counterparties.
IV. Enforcement in practice
The FSR has now generated some enforcement practice that gives concrete meaning to its provisions.
In September 2024, the Commission adopted its first final decision under the FSR’s concentration instrument, conditionally approving the acquisition by Emirates Telecommunications Group Company (e&), a UAE-based telecommunications operator controlled by a sovereign wealth fund, of parts of PPF Telecom Group. The Commission found that e& had received foreign subsidies from the UAE, including an unlimited State guarantee, liable to distort competition in the EU internal market post-transaction. To address these concerns, e& agreed to remove the unlimited State guarantee, to prohibit any financing from the UAE to PPF’s EU activities, and to inform the Commission of future acquisitions not notifiable under the FSR.
In November 2025, the Commission adopted its second final decision under the FSR’s concentration instrument, conditionally approving the acquisition of Covestro AG by ADNOC, a State-owned oil and gas company headquartered in the UAE. The Commission found that the foreign subsidies received — again including an unlimited State guarantee — would have artificially improved the merged entity’s capacity to finance its EU activities and potentially deterred other investors. To address these concerns, ADNOC agreed to remove the unlimited State guarantee and to share Covestro’s sustainability patents with market participants at transparent, predefined terms during a certain period. These conditions illustrate the Commission’s willingness to accept creative IP licensing arrangements as remedies.
Most recently, on 21 April 2026, the Commission adopted its first final decision under the FSR’s public procurement instrument, conditionally approving the participation of a consortium led by Mota-Engil in a €600 million Lisbon metro tender, subject to the replacement of its Chinese subcontractor CRRC Portugal with PESA, a Polish rolling stock manufacturer that had not received distortive foreign subsidies. The case confirms that the FSR’s reach extends to subcontractors playing an essential role in a tender — not only to direct bidders.
Taken together, these cases confirm that the FSR has entered a fully operational enforcement phase, with the Commission prepared to use the full range of instruments at its disposal across all pillars of the Regulation.
V. Conclusion
The FSR has moved decisively from text to practice. The final Guidelines provide a structured analytical framework for both the Commission and market participants, clarifying how distortions will be assessed, how positive effects will be weighed, and under what circumstances the Commission will exercise its call-in powers. That said, the Guidelines exclusively address substantive assessment issues — companies and their advisors seeking guidance on practical procedural questions in nonissue cases will find limited answers.
The Commission’s enforcement record — from e&/PPF Telecom to CRRC/Lisbon — demonstrates that it is prepared to act. Several features of the regime deserve particular attention: the threshold for demonstrating market distortion is low, the cross-subsidisation analysis can catch indirect recipients of foreign subsidies, and the burden of proof in the balancing test is demanding.
For companies active in the EU, proactive preparation is essential: maintaining accurate records of foreign financial contributions, assessing FSR exposure from the outset of any transaction or procurement process, and managing FSR risk across all consortium members and subcontractors. By 13 July 2026, the Commission must publish its first periodic review of the Regulation, which may then lead to adjustments to notification thresholds and broader changes to the framework.
If you have any questions regarding the implications for your business, feel free to contact the authors, Maïka Bernaerts or Elsa Plamont.
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This newsletter does not constitute legal advice or a legal opinion. Please consult with a legal counsel of your choice before taking any action based on the information provided.