The FSR Guidelines are out: what business needs to know

On 9 January 2026, the European Commission ("EC") published its Guidelines on the application of the EU Foreign Subsidies Regulation ("FSR") (the "Guidelines"), setting out how the EC will carry out its substantive assessment under the FSR. The Guidelines clarify the EC's framework for assessing: 

i.    distortion to the EU internal market; 
ii.    the balancing test (weighing negative against positive effects); and 
iii.    the EC call-in powers for below-threshold M&A transactions and EU public tenders.

The FSR has applied since 12 July 2023, with mandatory notification obligations in force since October 2023. Its aim is to address distortions caused by foreign subsidies from non-EU governments or entrusted entities to companies active in the EU, including in M&A transactions and public tenders in the EU.

The FSR is wide-ranging and has proven to be controversial, attracting significant criticism from business and foreign investors. Following two high-profile M&A cases requiring remedies under the FSR (e& / PPF and ADNOC / Covestro), the Guidelines have been keenly anticipated.

The draft Guidelines, consulted on over the summer, received substantial feedback from a range of stakeholders, including several EU Member States. While the final text includes some helpful clarifications (notably an explicit distinction between "targeted" and "non-targeted" foreign subsidies), the EC largely retains a broad, fact-specific analytical framework with only a few safe harbours. In practice, the Guidelines do not materially narrow the areas of uncertainty for companies planning transactions or bidding in EU public tenders.

Below is a concise, practice-focused summary of the main implications with the key takeaways for businesses.

1. The distortion test: broad, fact-specific, with limited safe harbour exemptions

Under Article 4(1) FSR, a non-EU subsidy is considered distortive where it (i) improves a company's competitive position in the EU; and (ii) negatively affects competition in the EU market. The Guidelines reiterate this two-step framework, but adopt a broad interpretation − particularly, on cross-subsidisation − which leaves significant uncertainty for businesses.

Targeted v non-targeted subsidies: Under Step 1 of the distortion test, the Guidelines distinguish between "targeted" and "non-targeted" subsidies.

i.    Targeted subsidies with a clear EU link, (e.g., support for manufacturing or distribution in the EU (including via technology licensing), investments or acquisitions in the EU or R&D with an EU benefit); and 

ii.    Non-targeted subsidies, with no explicit EU link, but which may still improve a company's competitive position in the EU. The Guidelines take a broad approach here: general-purpose subsidies (with no restrictions on use) may still be deployed in the EU, and subsidies for non-EU projects may also be seen as distortive through cross-subsidisation (i.e., by freeing up company's resources which could be used to improve the company's competitive position in the EU). For example, subsidies for building a manufacturing plant outside the EU could allow EU subsidiaries to operate at a loss or on very low margins. This aligns with the EC's enforcement practice to date, but it expands (rather than narrows) the scope of potential call-in powers and scope of intervention. 

Cross-subsidisation is assessed on the facts. The Guidelines provide useful (but limited) guidance to help businesses mitigate cross-subsidisation risk:

• Shareholding structure: Single-shareholder structures are viewed as more susceptible to cross-subsidisation than joint or more diverse control structures. A more diverse shareholder base can deter cross-subsidisation. Minority shareholders (even without veto rights) may help deter such conduct because shareholders would not benefit equally. This has been a decisive factor in several FSR cases.
• Functional, economic and organic links: The closer the links between the subsidised entity and the entity active in the EU, the greater the cross-subsidisation risk. Relevant factors include joint or overlapping management, veto rights, coordinated strategies, prior approval requirements (e.g., for budgets or key decisions), group-wide financial synergies, centralised financing, economic interdependence and vertical integration.
• Design of the subsidy: The subsidy's design (including restrictions on use) may prevent or discourage cross-subsidisation.
• Third-party agreements and internal policies: Internal policies alone are unlikely to prevent cross-subsidisation, as they can be changed unilaterally. Where safeguards require third-party consent under binding agreements (e.g., JV agreements), the EC may take them into account. Fiduciary duties in partnerships and obligations in shareholders' agreements may also help limit cross-subsidisation.
• Applicable laws: The EC will also consider the applicable legal framework, including rules requiring accounting or functional separation and capital requirements. Bankruptcy laws may also constrain cross-subsidisation, particularly where an entity is under court or insolvency supervision.
• Economic situation of the business: Entities in financial distress are less likely to cross-subsidise, as profit shifting could further worsen their economic situation. 

The Guidelines also list a narrow set of subsidies that the EC considers unlikely to improve a company's competitive position in the EU (and therefore less likely to be distortive). In practice, this list may be of limited use. It includes:

• addressing a market failure outside the EU and exclusively for non-EU activities;
• granted in line with the EU State aid principles, or pursuing non-economic or social objectives;
• compensating for natural disasters or exceptional occurrences; and
• below €4 million in aggregate / €200,000 per non-EU country. Even above these thresholds, a subsidy may still not improve a company's competitive position where it is insignificant compared to the company's EU economic activities. However, Article 5 subsidies (presumed distortive under the FSR) are less likely to be considered insignificant.

Under Step 2 of the distortion test, the Guidelines state that negative effects must be 'appreciable', i.e., materially affect competitive dynamics to the detriment of other market participants. Such effects may arise, for example, where businesses make greenfield investments in the EU, acquire EU targets, provide services in the EU or sell products in the EU.

Key takeaways for business:

The distortion test remains broad and highly fact-specific. In practice, the Guidelines do not materially reduce uncertainty for companies planning transactions or bidding in public tenders in the EU. Targeted subsidies are more likely to raise concerns than non-targeted subsidies. Businesses should nonetheless consider cross-subsidisation risk early and, where possible, implement the mitigating measures identified in the Guidelines.

2. Distortion in M&A transactions

The Guidelines include a section to the distortion test in M&A transactions subject to review under the FSR, particularly where the transaction is facilitated by non-EU subsidies. The EC applies a two-step test (as in e& / PPF), to identify distortions in the acquisition process:

• Step 1. The EC examines whether the subsidy was instrumental in enabling the transaction (i.e., the deal would not occur, or would occur on different terms, absent the subsidy). If so, the EC presumes that it strengthens the buyer's competitive position in the EU.
• Step 2. The EC then assesses whether the subsidy is likely to adversely affect competition within the EU. The key concern is that the subsidy allows the acquirer to offer better terms (e.g., a higher price or more favourable financing) than would be possible under normal market conditions. This is particularly relevant where acquisition financing is provided by state-linked lenders (including state-owned banks), as preferential lending terms may be viewed as a subsidy. The EC considers this can 'crowd out' other investors by outbidding them or discouraging their participation. This may lead to inefficient outcomes. In practice, the EC looks at indicators such as the proportion of the purchase price covered by the subsidy, comparisons with competing offers and similar transactions and internal documents (including valuation models) to assess whether the price could be sustained absent the subsidy. 

Interestingly, the Guidelines do not refer to Article 19 FSR, which provides that, in the context of a notified concentration, the EC's substantive assessment of a foreign subsidy should be limited to the 'concentration concerned'. While this limitation remains part of the FSR's legal framework, its absence from the Guidelines is notable and may signal that the EC intends to revisit (or seek to clarify) the scope of Article 19 or the prior FSR notification obligation in the upcoming review of the FSR.¹

Key takeaways for business: 

When considering an M&A transaction, subject to FSR review:

• assess early whether non-EU subsidies (targeted and non-targeted) could materially affect deal terms and disadvantage competing bidders;
• valuation materials play an important role in the EC's assessment and are typically requested;
• where acquisition financing involves non-EU state-linked lenders, consider early whether the terms can be presented as on market terms/pari passu and maintain a robust evidentiary record.

3. Distortion in public tenders

The Guidelines explain how the distortion test is applied in public tenders reviewed under the FSR. The EC applies a two-step test: 

• Is the tender offer advantageous? This may involve lower prices, higher quality or better terms assessed against comparable tenders and the contracting authority's estimates; and
• Is the advantage undue? The advantage will be undue if it cannot be explained by factors other than a subsidy. Where the advantage is attributable to a subsidy, it is likely to be distortive, even if the subsidy is not the sole contributing factor. The Guidelines add that subsidies covering a substantial portion of the estimated contract value are particularly likely to influence the bid terms.

In public procurement, the disclosure of foreign financial contributions in FSR notifications is generally limited to the "linear" ownership chain (i.e., the bidder, its direct subsidiaries and its direct/indirect parent entities), excluding sister companies unless they act as main suppliers or subcontractors. However, the Guidelines note that subsidies granted outside this structure may still result in an unduly advantageous tender, for example where support granted to another entity within the bidder's wider group (i.e., outside the linear ownership structure) indirectly benefits the bidder (including through cross-subsidisation). In such cases, the EC may issue RFIs to assess whether the contribution constitutes a foreign subsidy and whether it indirectly benefits the economic operator.

4. Balancing it out: what positive effects can outweigh distortion?

The balancing test can be decisive, as positive effects may outweigh the distortion and impact whether remedies are required. While the balancing test will be applied on a case-by-case basis, the Guidelines provide the following methodology for its application:

• Parties (and EU Member States) are encouraged to provide evidence of the positive effects of the subsidy on the EU market early on in the process.
• Positive effects should relate to the development of the subsidised economic activity within the EU market (e.g., addressing a market failure) or support EU policy objectives, (e.g., environmental protection, development of disadvantaged areas, energy security, innovation, competitiveness and resilience, economic security or defence).
• Positive effects on other businesses or economic activities may also be relevant, particularly if the subsidised activity contributes to the security of supply in a strategic EU sector. For public tenders, the EC will also consider the availability of alternative sources of supply.
• The EC will apply a counterfactual analysis (i.e., what would happen absent the subsidy). Positive effects must be linked to each identified distortive subsidy. The EC may also assess the overall balance of positive and negative effects across subsidies.

Key takeaways for business: 

The burden of proof lies with the parties claiming positive effects. Where possible, parties should identify and document these early, supported by robust evidence. While the Guidelines provide helpful indications on the balancing test, the EC has not yet publicly developed a clear decisional practice, and we expect the evidentiary bar to remain high.

5. EC call-in powers for below the threshold transactions and public tenders in the EU

The EC has broad powers to call in M&A transactions and public tenders in the EU that fall below the prescribed FSR thresholds² where it reasonably suspects foreign subsidies within the prior three years and believes the case could impact the EU internal market. In public tenders, this may include situations where the suspected foreign subsidy was granted to a main supplier or subcontractor (rather than the bidder itself).

The EC can call-in transactions at any point before the M&A transaction is implemented, or the contract is awarded. In assessing whether a case merits a call-in, the EC will look at factors such as (but not limited to):

• the importance of the target's economic activity, in particular where turnover may not reflect its value;
• whether the transaction concerns strategic sectors or assets for the EU (e.g., critical infrastructure, innovative technologies).
• patterns of past acquisitions or participation in tenders through suggesting a build-up of presence or influence in the sector. relevant contextual indicators (including subsidies that fall within the categories "most likely to distort" under Article 5 FSR, such as support to a failing business, unlimited guarantees, non-OECD-compliant export financing, subsidies facilitating an acquisition or subsidies enabling an unduly advantageous tender).
• Prior FSR enforcement history may also be relevant.

Key takeaways for business:

• Assess call-in risk as part of the FSR analysis and address it early in the transaction documentation, where relevant.
• Transactions where the target's EU turnover is well below the filing threshold may still be called in, particularly in sensitive sectors.
• Where they have benefited from non-EU state-linked support (e.g., funding, preferential financing, guarantees), parties should proactively document the purpose and scope of that support (including, where relevant, that it had no link to EU economic activities or projects), as this may be critical to address any future questions from the EC.

Conclusion

The Guidelines represent a meaningful step in explaining the FSR's core concepts and substantive tests, but they do not materially reduce the uncertainty companies face in M&A transactions or public tenders in the EU. The EC's broad, fact-specific approach (particularly on cross-subsidisation), and the high evidentiary bar for positive effects mean that careful planning, robust documentation and early engagement with the EC on potential issues remain essential.

_{1 Article 53 FSR requires the EC to review the application of the FSR and prepare a report by July 2026 (three years after the FSR came in force), potentially accompanied by proposals for its amendments. As part of that review, the EC launched a public consultation, which closed on 18 November 2025.
2 For concentrations, the notification obligation applies where (i) the EU target (or the JV) generated aggregate EU turnover of at least EUR 500 million, and (ii) the parties received aggregate foreign financial contributions of more than EUR 50 million in the three years prior to the signing of the SPA. For public tenders, notification applies where (i) the estimated contract value is at least EUR 250 million, and (ii) the main contractor (including its subsidiaries without commercial autonomy), and main subcontractors and suppliers, received aggregate foreign financial contributions of at least EUR 4 million per non-EU country in the three years prior to the submission of the bid.}

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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