Foreign Subsidies Regulation: Draft guidelines of the European Commission ‒ more clarity for undertakings concerned?

Following an initial consultation in March, the European Commission (“Commission”) published the long-awaited draft guidelines on the EU regulation on foreign subsidies (Foreign Subsidies Regulation, the “FSR”) on 18 July 2025. Interested parties have until 12 September 2025 to submit their comments on the draft as part of the consultation. The publication of the final guidelines is planned for January 2026.

Background

Subsidies granted by EU Member States are, unlike subsidies from non-EU countries, covered under EU State aid rules. The FSR, which entered fully into force in October 2023, now also allows for the supervision of subsidies granted by non-EU countries and is designed to ensure a level playing field for all undertakings operating in the internal market.

The new framework established by the FSR increases the regulatory requirements for undertakings engaged in international activities, combining established legal concepts from State aid, public procurement and trade law as well as EU merger control with new legal concepts. The EU legislator recognised that this could lead to legal uncertainty for undertakings concerned and accordingly instructed the Commission as the competent authority to clarify the application of the new provisions by issuing guidelines.

Although the guidelines do not have the force of law, i.e. the final interpretation of the FSR rests with the European courts rather than the Commission, they nevertheless constitute a form of “soft law” and provide important parameters for the practical application of the FSR.

Substantive focus

A substantive FSR assessment generally follows a three-step approach:

• Establishing the existence of a foreign financial contribution
• Identifying a distortion of competition in the EU internal market
• Assessing whether any potential positive effects linked to the foreign financial contribution outweigh the identified distortion of competition (the “balancing test”).

The guidelines are intended to provide greater clarity regarding the application of these criteria and to specify when the Commission will require the notification of a concentration that is not subject to a notification obligation or the notification of a foreign financial contribution that is not subject to a notification requirement in the context of a public procurement procedure (“call-in rights”).

Distortion of competition

A distortion of competition in the EU internal market exists if

• the foreign subsidy is likely to improve the competitive position of an undertaking in the internal market, and
• the foreign subsidy thereby actually or potentially negatively affects competition in the internal market.

With regard to the first criterion, namely improving the undertaking’s competitive position in the EU internal market, the draft guidelines distinguish between three categories of subsidies. Subsidies that an undertaking uses for its economic activity in the EU internal market or that are intended to support such activity will generally improve the undertakings’ competitive position. However, this effect is not necessarily excluded in other cases. The Commission argues that subsidies without a specific purpose or those for activities outside the EU can also contribute to the cross-subsidisation of economic activities within the EU, for example by freeing up financial resources that would otherwise be allocated elsewhere.

According to the draft guidelines, the Commission assumes that cross-subsidisation is likely where there are no legal or factual obstacles to this. In the Commission’s view, such special factors may arise, for example, from the conditions attached to the subsidy, the ownership structure, contracts with third parties, regulatory requirements or the undertaking’s economic situation. The draft guidelines fail to recognise that the burden of proof under the FSR rests with the Commission. This is because subsidies from non-EU countries, unlike those from EU Member States which are assessed under EU State aid rules, remain in principle permissible.

The Commission’s proposed catch-all approach appears impractical and unbalanced in relation to typical intra-group cash pooling. While the Commission intends to consider the conduct of the undertaking with regard to internal resource transfers, it also makes clear that the fact that such transfers have not occurred in the past is not sufficient to disprove the probability of cross-subsidisation. Internal company rules are likewise deemed insufficient to refute the existence of cross-subsidisation. In this form, the draft guidelines provide little legal certainty for the undertakings concerned. Overall, it remains unclear how undertakings can position themselves to effectively challenge the Commission’s assumption of cross-subsidisation.

The second criterion, namely the actual or potential negative impact on competition in the internal market caused by the foreign subsidy, requires a causal link according to the wording of the FSR. The draft guidelines apply a very low threshold for proof by the Commission. It will be considered sufficient if the foreign subsidy potentially contributes to a negative impact on competition, even if it is not the sole or principal cause of the distortion. It remains to be seen whether this standard will withstand legal scrutiny. The draft guidelines also contain a non-exhaustive list of common categories of distortions of competition (for example, concerning business acquisitions, adapted business or investment behaviour or effects at other levels of the value chain, such as relocations of business to countries outside the EU) in relation to which the Commission sets out its approach to the assessment.

Furthermore, the draft guidelines provide that the Commission may assess any foreign subsidy granted either individually or on an aggregate basis. This approach grants the Commission broad discretion to prevent circumvention of the FSR rules through the (artificial) splitting of foreign subsidies but lacks specific guardrails for the exercise of such discretion.

The Commission also rejects the introduction of further thresholds below which a distortion of competition would be excluded (“safe harbour”). According to the FSR, a distortion of competition is in any event considered unlikely if the total amount of a foreign subsidy does not exceed EUR 4 million or  EUR 200,000 per third country over a period of three consecutive financial years.

Balancing test

The Commission may examine whether an identified distortion of competition is offset, in whole or in part, by the positive effects of the foreign subsidy. In this assessment, the Commission considers both the impact on the development of the relevant subsidised economic activity and the broader positive effects with regard to the relevant policy objectives, in particular those of the EU.

The draft guidelines’ discussion of the Commission’s approach to the balancing test is limited to general principles. This is also due to the nature of the assessment as the purpose of the balancing test is to allow for case-by-case decisions. Further case practice could serve as a benchmark to provide greater clarity in this area.

With respect to the positive effects on the subsidised economic activity, the draft guidelines refer to the concept of market failure already known from EU State aid rules. Market failure is present where a market, for reasons beyond the control of the undertaking concerned, does not achieve an efficient allocation of funds and resources, for example, as reflected in uncompetitive pricing or low levels of innovation. If a foreign subsidy enables the economic activity in such a market, this may qualify as a positive effect.

General policy objectives that may be positively affected by a foreign subsidy can be found in EU primary law (EU Treaties, Charter of Fundamental Rights). The draft guidelines make clear that these may also include policy objectives contained in other non-binding EU rules, particularly Commission communications and guidelines in the field of EU State aid law. Even policy objectives which do not constitute EU objectives but are relevant for the EU may be regarded as positive effects of a foreign subsidy.

According to the draft guidelines, the positive effects must be specifically caused by the foreign subsidy, and the causal link must be demonstrated with sufficient probability. The Commission considers the burden of proof to lie with the Member States and undertakings concerned as the balancing test under the FSR is to be conducted “on the basis of the information received”.

The weighing of the individual effects, whether positive or negative, is based on their nature, likelihood and intensity. The Commission also reserves the right, in exceptional cases, to carry out an overall assessment of all subsidies granted. While the nature of negative effects results from the type of subsidy (for example, an unlimited guarantee), how the positive effects are weighted remains open. However, the conduct of the balancing test cannot result in an adverse outcome for undertakings concerned.

Call-in rights

The FSR provides for notification requirements for concentrations and participation in public procurement procedures where certain thresholds are met. Whether a notification obligation exists can be assessed using the Noerr FSR Checker. However, where the Commission suspects that the parties involved have received foreign subsidies in the three preceding years, it may require notification under the FSR even if the relevant thresholds have not been reached.

The draft guidelines indicate that the Commission will balance the effective protection of the internal market with the administrative burdens on undertakings. In particular, it will be relevant whether

• the turnover of the target undertaking adequately reflects its actual or future economic significance,
• a market position has been established through multiple M&A transactions below the notification thresholds (“roll-up” situations),
• strategic sectors or technologies are involved, or
• the categories of foreign subsidies listed in Article 5 of the FSR are affected, where there is a high probability of distortion of competition.

A criticism is that the draft guidelines only provide indicators for situations in which a transaction is more likely to be called in, but do not further limit the Commission’s broad discretion. In particular, the call-in right is not tied to the existence of a distortion of competition within the meaning of the FSR even though according to the recitals the focus should be on the effects within the EU.

Commentary

The draft guidelines are to be welcomed in light of the legal uncertainty created for undertakings by the FSR, but overall they remain too vague to deliver the desired added value in practice. It must be acknowledged that the Commission’s own experience with the FSR is still limited and in particular there is a lack of case law on the specific application of the FSR. However, the Commission is not operating in a vacuum with the FSR. Many of the legal concepts found in the FSR are already familiar from EU State aid, public procurement and trade law as well as EU merger control and have already been clarified through established decision-making practice. The draft guidelines largely lack such references, presumably also because the Commission, in view of its wide margin of discretion, deliberately wishes to dispense with them.

If your company wishes to participate in the consultation by 12 September 2025, our Noerr expert team would be pleased to assist you in preparing your own statement.

Our Noerr competence team consists of experienced experts in the fields of FSR, EU State aid law and merger control and is available to answer questions and assist you. You can also register here to receive all our FSR news alerts or click here to access our new FSR Checker and find out if your M&A transaction is notifiable.