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The European Commission has now adopted their final guidelines on the application of the application of the EU Foreign Subsidies Regulation ("FSR"), setting out in detail how the Commission intends to assess the existence of competitive distortions and the so-called "balancing" test and how they will exercise their discretionary call-in powers.
The adoption of the Guidelines is timely. The FSR has now been in force for nearly two and a half years and it has become an important part of the EU competition law landscape, in particular, in the context of major M&A and public contract tenders, where the FSR imposes new notification and approval requirements.
However, while the Guidelines provide a helpful guide to the Commission's thinking at this point in time, as well as limited safe harbours or principles that notifying parties can seek to draw on in arguing that their non-EU subsidies should not be of concern to the Commission, the Guidelines position the threshold for intervention at a relatively low level and effectively preserve significant freedom of action for the Commission.
It remains to be seen how the Commission will draw on the Guidelines in its formal decision-practice, which remains limited to-date. But given the degree of discretion they appear to reserve for the Commission, it will be important for notifying parties to continue focusing arguments on the logically prior issue in FSR analysis – that the foreign financial contributions they have received do not qualify as "foreign subsidies" in the first place because they do not confer a selective economic advantage, which is not addressed by the Guidelines.
Assessing distortions of competition
The Guidelines explain that the Commission will assess whether a foreign subsidy distorts competition in two separate conceptual stages: (i) whether the subsidy is liable to improve the competitive position of the beneficiary in the EU's internal market; and (ii) whether the subsidy negatively affects competition in the market.
Subsidies that are liable to improve a business' competitive position
With respect to the first issue, the Guidelines draw a key distinction between so-called "targeted" and "non‑targeted" subsidies. Targeted subsidies are those that directly or indirectly support economic activities within the EU internal market — for example, a grant for building a production plant in the EU. These are presumed to improve the beneficiary's competitive position in the EU.
Non‑targeted subsidies, by contrast, do not clearly support activities within the EU – such as a reduced tax rate for start-ups in a third country. When it comes to these subsidies, the Commission will examine whether the company could use the subsidy, or the resources freed up by it, to cross‑subsidise activities in the EU.
In principle, this means that subsidies that appear entirely unrelated to the EU market could still be considered distortive, representing a broad approach. The Guidelines do, however, highlight certain factors that businesses can draw on in order to argue that there should not be a significant risk of cross-subsidisation. Notably, this includes where there are specific conditions attached to the subsidy, for example, in relation to how and where the subsidy must be used; where the entity receiving the subsidy and the entity active in the EU do not share the same shareholders (making the transfer of economic resources less likely); and where applicable law imposes requirements that prevent or disincentive cross-subsidisation, for example, accounting or functional unbundling requirements.
The Guidelines also put forward certain "safe harbours", or specific types of subsidy / situations where there should be no distortion. In addition to the safe harbours already set out in the FSR itself, in particular, relating to the low amount of the subsidy, the Guidelines explain that subsidies: (i) which address market failures outside the EU and are exclusive for activities outside the EU; (ii) are granted for purely non-economic or social objectives; or (iii) are insignificant in relation to the extent of the business' EU activities, should not be considered as distortive.
Subsidies that negatively affect competition
The Guidelines explain that the relevant assessment standard is whether the subsidy is liable to have a negative impact on the "level playing field" and therefore, whether there is an interference with competitive dynamics to the detriment of other operators. As to the level of detriment that would qualify under this standard, the Guidelines strikingly take a low threshold. In particular, it is not necessary that a subsidy actually has a negative impact, only that it is capable of having such an impact (so a potential impact) and while the possible impact must be appreciable, there is no de minimis threshold and no need to prove that the distortion of competition is of a serious nature.
The Guidelines go on to explain that the Commission will first assess whether the foreign subsidy affects the behaviour of the beneficiary and second, then assess the resulting interference with competitive dynamics to the detriment of other operators. In particular, the Guidelines flesh out in further detail how the Commission will apply the specific indicators set out in the FSR itself for assessing distortion, including the scope, purpose and conditions of the subsidy; the amount of the subsidy; the type of the subsidy; the position of the beneficiary and the characteristics of the relevant sector.
The Guidelines also provide further detail on how the Commission will assess specific types of distortions and theories of harm. These include, notably, distortions of competition in the acquisition of other undertakings and distortions in public contract tenders through foreign subsidies enabling a bidder to submit an unduly advantageous, which are among the main potential distortions addressed by the Commission in the context of the concentration notification tool and the public procurement notification tool, respectively.
The balancing test
Under the FSR, when the Commission determines that a foreign subsidy distorts competition, the Commission will then assess whether those distortions may nonetheless be outweighed by the subsidy's positive effects – the so-called "balancing test".
The Guidelines set out the types of positive effects that are admissible in this regard, which comprise promoting the development of subsidised economic activity by addressing a market failure, or broader contributions to EU public policy objectives, including those covered by the EU's own State aid guidelines, such as energy security, environmental protection, RD&I, development of disadvantaged areas, broadband and connectivity. The Guidelines further confirm that positive effects that do not specifically relate to the EU, but have a broader positive impact, such as climate change mitigation, biodiversity protection, and improvement in social standards in a third country, will be admissible for these purposes.
The Guidelines explain that the balancing test is not a "numerical calculation", meaning that the distortive effects and the countervailing positive effects do not need to be precisely quantified. However, at the same time, the Commission will require a cogent and consistent body of evidence in relation to claimed positive effects, including quantitative or qualitative analyses grounded in case-specific, robust empirical data.
The Commission's call-in powers
Under the FSR the Commission can request the prior notification of concentrations or public procurement bids falling below the notification thresholds where the Commission suspects that the parties have been granted foreign subsidies. While the Commission has not yet exercised this power to-date, the FSR, in principle, affords it significant discretion in determining when to do so.
The Guidelines explain that it will seek to exercise this power where it considers that the concentration or bid would merit ex ante review given its potential impact in the EU (despite the fact that it falls below the notification thresholds) and the Guidelines set out certain factors that the Commission will consider in making this assessment. These include, in particular, the level of activity of the target and its economic or strategic significance (which may be belied by its turnover), investment / bidding patterns through which economic presence is built up over time, and information indicating the possibility of there being a distortion of concern.
The Guidelines, however, expressly leave it open to the Commission to consider other relevant factors, as part of its case-by-case assessment, preserving a good deal of discretion. Complainants may also play a significant role in this context, including Member States, who may seek to bring concentrations and public contract bids of concern to the Commission's attention, as well as information about potential foreign subsidies.
The significance of the Guidelines and the way forward
As noted above, the actual formal decision-practice of the Commission under the FSR remains relatively limited, with only two final detailed decisions being adopted to-date, in the e& / PPF and ADNOC / Covestro cases, both under the concentration notification tool. The absence of significant decision-practice is ultimately reflected in the nature of the Guidelines, which are somewhat theoretical in parts and essentially set out the kinds of factors and issues that the Commission may consider as part of its analysis, as opposed to a concrete methodological framework that the Commission would follow.
This is compounded by the Guidelines putting forward a low threshold for making a finding of a distortion of competition. As a consequence, rather than constraining the Commission's discretion and increasing predictability, the Guidelines effectively preserve significant freedom of action for the Commission.
That said, and at least to date, the Commission has not been actively exercising this freedom of action to intervene in a great number of cases – in particular, the Commission has only opened two Phase II investigations in out of more than 250 cases under the concentration notification tool (resulting in the two final decisions above). Indeed, in our experience, the Commission adopts a pragmatic approach in practice and is focused on subsidies that may be of particular concern, rather than expecting notifying parties to rule out the potential for any cross-subsidisation.
To their credit, the Guidelines do provide a useful snapshot of the Commission's thinking at this point in time and do set out certain, limited, safe harbours or areas that notifying parties can focus on in seeking to best argue that their non-EU subsidies should not be of concern to the Commission.
Ultimately however, and given the Commission's apparent freedom of action under the Guidelines, it will be important for notifying parties to focus arguments more on the logically prior issue that the foreign financial contributions they have received do not qualify as "foreign subsidies" in the first place because they do not confer a selective economic advantage, e.g. because State financing is consistent with market terms and conditions. This is an area that is not covered by the Guidelines, but where there is significant existing practice and case-law under EU State aid law, which will be more effective in constraining the Commission's discretion.
Finally, and crucially, the Guidelines will do little to assuage concerns raised in many quarters, including by certain EU Member States themselves, that the FSR as currently framed and applied, does not meet its own "balancing test", i.e. that the significant regulatory burdens imposed by the FSR on businesses investing and providing important goods and services in the EU outweigh its benefits in protecting fair competition.
The Commission is due to present its inaugural evaluation report in relation the FSR by mid-July 2026 and, if these criticisms continue to gain traction, may trail areas for potential reform, in particular, to better focus the FSR's scrutiny on areas of genuine concern. Any such reform at this early stage, however, is more likely to be incremental only and businesses should therefore continue to ensure that they are adequately prepared to navigate the challenges of FSR notifications and interventions, including in light of the Guidelines.
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