EU Foreign Subsidies Regulation: Commission Publishes FSR Guidelines – Key Implications For M&A

On 9 January 2026, the European Commission ("Commission") published its first set of Guidelines on the application of the Foreign Subsidies Regulation ("FSR"), which requires some M&A deals involving companies that have received support from non-EU governments to be notified to the Commission and reviewed for potential impacts on competition in the EU. For an overview of the FSR framework and early enforcement trends, see our earlier brief available here. The Guidelines seek to enhance legal certainty and transparency by clarifying the analytical framework for FSR merger notifications—while underscoring that enforcement will remain highly fact-specific and grounded in an effects-based assessment, rather than a formalistic, checklist-driven approach.

The Guidelines focus on three core topics:

• determining whether a foreign subsidy distorts the EU's internal market;
• applying the balancing test (weighing negative effects of a foreign subsidy in terms of distortion against the positive effects of the foreign subsidy);
• the exercise of the Commission's call-in power in relation to mergers which are not subject to mandatory notification.

1. Criteria for determining distortion (Articles 4(1) and 27 FSR)

In assessing whether a foreign subsidy distorts the internal market, the Commission will apply the non-exhaustive list of indicators set out in Article 4(1) FSR to determine whether the foreign subsidy:

1. is liable to improve the undertaking's competitive position in the internal market—that is, whether it would benefit its EU economic activities, directly or indirectly, even if the benefit does not ultimately materialise; and
2. gives rise to actual or potential negative effects on competition.

For foreign subsidies falling within the "most likely to distort" category (for example, unlimited guarantees and subsidies directly facilitating a concentration) under Article 5(1) FSR, the Guidelines indicate a rebuttable presumption of distortion, such that a full, indicator-based assessment may not be conducted by the Commission.

i. Improvement of a competitive position

According to the Guidelines, foreign subsidies are categorised as follows in determining whether they are liable to improve a company's competitive position in the EU:

1. Targeted foreign subsidies ("TFS"): Subsidies that support, directly or indirectly, the undertaking's economic activities in the EU internal market. These are generally presumed to improve the undertaking's competitive position and therefore do not require further analysis on that limb of the test; and
2. Non-targeted foreign subsidies ("NTFS"): Subsidies that do not support, directly or indirectly, the undertaking's economic activities in the internal market, and for which there is no clear indication as to how the undertaking uses or intends to use them. Such subsidies may nonetheless be considered distortive where there is a credible risk of full or partial cross-subsidisation into EU activities—i.e., where resources received or freed up by the subsidy could be redeployed to benefit EU operations. In assessing this risk, the Commission may consider a range of factors, including the undertaking's shareholding structure; functional, economic, and organisational links; the design and conditions of the subsidy; relevant third-party agreements; applicable law; and the undertaking's overall economic situation.
3. Foreign subsidies that are generally unlikely to improve competitive position, and therefore unlikely to be distortive, including subsidies that address market failures exclusively outside the EU and are limited to non-EU activities, pursue purely social or non-economic objectives, address natural disasters or compensation for exceptional occurrences, fall below the FSR's quantitative thresholds (Article 4(2) and (3) FSR) or which are insignificant in amount in relation to the undertaking's actual or potential EU activities.

ii. Actual or potential negative effects on competition

In assessing actual or potential negative effects, the Commission will focus on whether, and how, the foreign subsidy influences the undertaking's conduct in the internal market—such as its pricing, output, investment, or acquisition strategy—and whether that conduct alters or interferes with competitive dynamics in a manner capable of producing appreciable negative effects.

In this context, the Guidelines clarify that:

• it is not necessary to demonstrate actual harm; a credible and appreciable risk of harm is sufficient;
• the distortion may arise in upstream, downstream, or related markets, and not only in markets in which the beneficiary is directly active;
• the foreign subsidy need only contribute to the negative effect, even if it is not the sole or decisive cause; and
• once a credible distortion is established, there is no requirement to show that the effect is "serious" or material in magnitude.

2. Balancing test (Article 6 FSR)

In conducting the balancing test, the Commission will weigh the competitive harm caused by the foreign subsidy against any demonstrated benefits, typically by reference to a counterfactual analysis akin to that applied in merger control—namely, an assessment of the likely scenario in the absence of the subsidy.

In practice, this involves comparing the severity of the distortion (including the nature, purpose, conditions, use, and amount of the subsidy, as well as the features and seriousness of the distortion) with the scale and relevance of the claimed benefits (including their nature, likelihood, timing, and intensity, and their alignment with EU policy priorities).

While precise quantification is not required, the Commission may adopt a qualitative and proportionality-based approach, including by taking into account the combined effects of multiple subsidies. Where the benefits prevail, the Commission may refrain from imposing redressive measures; where the harm predominates, the balancing exercise will inform the scope and form of any remedies.

The Guidelines clarify that positive effects may extend beyond the beneficiary's own activities and may arise, for example, where a foreign subsidy addresses a market failure in the internal market (such as underinvestment in innovation). The Commission may also take into account upstream or downstream benefits, including enhanced resilience of supply chains.

The Commission will consider positive effects only where the undertaking under investigation demonstrates that they are substantiated, verifiable, concrete, and causally linked to the foreign subsidy. Information on positive effects may be submitted at any stage of the investigation, although late submissions risk being disregarded.

3. Call-in power (Article 21(5) FSR)

While transactions that meet the FSR thresholds are subject to mandatory pre-merger notification, the Commission may "call in" a transaction which is not subject to a filing obligation, at any time prior to closing. In determining whether to exercise this power, the Commission will have regard, in particular, to the following factors:

• the importance of the economic activity concerned—particularly the level of turnover—and whether this reflects the transaction's actual or prospective economic significance;
• the sectors concerned and their strategic importance;
• patterns in past investments and acquisitions by the undertakings involved;
• the likelihood that foreign subsidies may distort competition in the internal market; and
• the Commission's prior decision-making practice under the FSR.

4. Key takeaways and practical guidance for dealmakers

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.