Key takeaways
On 9 January 2026, the European Commission adopted its Guidelines on the application of certain provisions of the EU Foreign Subsidies Regulation (“FSR”). The Commission emphasises that the Guidelines are not a mechanical checklist: assessments remain case-by-case, and the Guidelines will continue to evolve as case practice develops. The Guidelines provide helpful clarifications for companies grappling with FSR issues, but many areas remain broadly framed. This uncertainty may continue to deter certain investments or collaborations, and increases the compliance burden on companies active in the EU market.
The new FSR Guidelines address four areas intended to improve predictability: (i) how the Commission will assess whether a foreign subsidy distorts the internal market; (ii) how it will assess the existence of distortions in public procurement procedures; (iii) how it will apply the balancing test; and (iv) how it will use its powers to request prior notification (the “call-in” power) for otherwise non-notifiable cases. A draft of the Guidelines was subject to consultation last year. The final FSR Guidelines build on that draft and are more extensive, though not radically different.
Two cumulative conditions and a pragmatic use of indicators
The Commission reiterates that a distortion exists where a foreign subsidy:
- is liable to improve the beneficiary’s competitive position in the EU; and
- actually or potentially negatively affects competition in the EU as a result.
Because foreign subsidies are often opaque and impact can be hard to quantify, the Commission expects to rely on a non-exhaustive set of indicators (amount, nature, situation of the undertaking, level/evolution of EU activity, purpose/conditions/use of the subsidy).
The Guidelines also highlight that subsidies listed in Article 5(1) FSR as being “most likely to distort” (e.g., unlimited guarantees, non-OECD export financing, subsidies directly facilitating a concentration, subsidies enabling an unduly advantageous tender) generally do not require a detailed indicator-based assessment. However, parties can still argue, on the facts, that no distortion exists.
“Engaging in an economic activity in the Union” is defined broadly, including future entry
The Commission interprets “economic activity” in the EU broadly, and notes this can be done from outside the EU (no establishment required). The Commission further clarifies that an undertaking is considered to engage in economic activities in the internal market in the following scenarios: (i) offering goods and services in the internal market regardless of where the undertaking is based or its nationality (but the Guidelines do refer in this context to the limitation, under the FSR, against taking action that would amount to a specific action against a subsidy under the WTO rules); (ii) purchasing goods or services within the internal market and using them to offer goods or services to customers, irrespective of whether these are offered inside or outside the internal market; (iii) acquiring control of, or merging with, an undertaking established in the Union; or (iv) participating in a public procurement procedure in the Union.
Importantly, according to the Guidelines, it also covers preparatory/forward-looking scenarios, including when an undertaking contemplates entering the internal market.
“Liable to improve competitive position”: targeted vs non-targeted subsidies
A major clarification is how the Commission will link a subsidy to EU competitive effects. The Guidelines distinguish three categories:
- Targeted subsidies. A subsidy is “targeted” where its purpose/nature/scope, or other relevant elements, indicate it is directed at (or designed to support) a specific EU economic activity, making the link to improved competitive position more straightforward. The same applies if the Commission finds evidence that the undertaking intends to use the foreign subsidy for its activities in the internal market, relying for instance on analysis of the undertaking’s accounts or internal documents. Once categorised as a “targeted subsidy”, it appears that the Commission intends to rely on a presumption that such subsidies are “considered to improve the competitive position” of the beneficiary.
- Non-targeted subsidies and cross-subsidisation. The Commission provides a detailed framework for how it will assess whether non-targeted foreign subsidies can nonetheless improve EU competitive position, notably through cross-subsidisation (i.e., resources received for other activities can indirectly support EU activity). Again, it appears that a presumption of cross-subsidization can be established, “if no credible legal or economic factors exist which prevent or render unlikely” such activity. The Guidelines list practical factors the Commission may examine, including: shareholding structure; links between entities; design and conditions of the subsidy; agreements with third parties; applicable laws’ and the economic situation of the beneficiary.
- Subsidies considered not liable to improve competitive position. The Commission also describes circumstances where a subsidy will not be considered liable to improve the competitive position of the beneficiary. For instance, the Commission indicates that subsidies granted for activities outside the EU that would largely comply with EU state aid rules (had they been granted by a Member State) are generally not seen as freeing up resources and, therefore, do not improve an undertaking’s competitive position in the EU. Likewise subsidies for purely non-economic or social objectives, subsidies making good damage caused by natural disasters, and de minimis subsidies.
“Actually or potentially negatively affects competition”: level playing field focus
The Commission clarifies that a subsidy “actually or potentially negatively affects competition” where it is liable to have a negative impact on the level playing field, i.e., it causes an actual or potential alteration of, or interference with, competitive dynamics to the detriment of other economic actors.
Key points:
- No need to prove actual harm: potential harm can suffice; lack of observed harm does not necessarily disprove potential harm.
- Harm does not need to be in the same market as the beneficiary, it can take place upstream, downstream, related or otherwise indirectly affected sector.
- The subsidy need not be the sole cause of competitive harm; contribution is enough.
- The negative impact must be appreciable, but there is no general de minimis threshold.
- The Commission may consider combined effects where an undertaking benefits from several subsidies.
“Main categories of distortions”: practical illustrations for enforcement risk
The Guidelines provide illustrations of how distortions can manifest, including in:
- Acquisitions / concentrations (e.g., enabling higher bids or otherwise facilitating acquisitions that may not occur absent subsidisation).
- Operating decisions (including aggressive pricing or commercial strategies funded by subsidies).
- Investment decisions (where subsidisation changes where/when/how the undertaking invests).
- Other levels of the value chain (upstream/downstream effects).
Two-step test: advantage, then “undue” nature
For procurement, the FSR defines distortion as foreign subsidies that enable an operator to submit a tender that is unduly advantageous and thereby could be awarded the contract.
The Commission explains a two-step analytical approach:
1. Is the tender advantageous?
The Commission may compare the tender against contract requirements; other tenders in the procedure; the authority’s estimate and market benchmarks; cost structures; and other information (including public sources, competitor input, and its own investigation).
In some cases, the Commission may compare the submitted tender with a counterfactual tender “with and without” the subsidy (expressly referenced as potentially workable for certain subsidy types such as unlimited guarantees).
2. Is the advantage “undue”?
An advantage is “undue” if it stems to an appreciable extent from a foreign subsidy; it is “due” if it can be plausibly justified by other factors (efficiencies, innovation, legitimate commercial reasons, etc.). In assessing this, the Commission may draw on principles from EU public procurement rules, for example when evaluating abnormally low tenders. This will be assessed case-by-case, but the Commission considers that subsidies that cover a “substantial portion” of the estimated value of a contract are in any event highly likely to affect the terms of the tender.
Competitive effects in procurement: deterrence and outcome distortion
The Commission notes that foreign subsidies can distort procurement not only by winning a given procedure but also by deterring participation (where competitors anticipate facing a subsidised bidder) and by influencing outcomes, including in negotiated procedures.
Coordination with “abnormally low tenders” under EU procurement directives
A particularly practical clarification concerns interaction with contracting authorities’ duties under EU procurement law:
- The Commission is solely responsible for assessing whether a tender is unduly advantageous due to foreign subsidies, but contracting authorities must query abnormally low tenders.
- Where the authority has indications the tender is abnormally low because of foreign subsidies alone (e.g., unlimited guarantee/export financing), it should inform the Commission and refrain from its own review.
What can count as “positive effects”
The Commission will balance negative distortion effects against positive effects on:
- the development of the relevant subsidised economic activity in the EU; and
- broader positive effects linked to relevant policy objectives, in particular EU objectives (environmental protection, social standards, R&D, etc.).
For public procurement, the Commission should also consider availability of alternative sources of supply (to avoid outcomes where essential procurement cannot be fulfilled).
The Commission stresses there is no automatic presumption that a given type of subsidy will yield positive effects outweighing distortions. The more distortive the subsidy, the less likely positive effects will prevail (especially for Article 5 FSR subsidies).
Burden and standard of proof: “show your work”
A central clarification is that the balancing test is performed on the basis of information received. So the party wanting positive effects considered bears the burden to produce evidence.
The Commission expects substantiation on: nature/likelihood/significance and timing of positive effects; why effects are specific to the subsidy (often via counterfactual); whether distortive effects go beyond what is necessary to generate positives; and why positives mitigate/outweigh distortion. Vague or self-interested assertions are unlikely to suffice.
Of note is the “specificity” requirement, which means that positive effects can only be considered if they are “specific to the foreign subsidy found to be distortive”. The Commission explains that, in practice, this will require demonstrating that the subsidy found to be distortive has led, leads, or is likely to lead to a change in the undertaking’s behaviour resulting in those positive effects, for example through a counterfactual analysis. This could be particularly challenging given the Commission’s broad interpretation of foreign subsidies which could potentially be considered to have effects in the Union market elsewhere in the Guidelines, including “non-targeted” subsidies that are general in nature or granted for activities outside the EU but which may still be found to indirectly affect competition in the internal market (e.g. through cross-subsidisation).
Timing: don’t leave it late
The Commission indicates it will typically perform the balancing test during an in-depth investigation and may disregard late submissions (including after deadlines in the Statement of Grounds).
Legal triggers and timing clarified
The Guidelines set out a structured view of Articles 21(5) and 29(8) FSR:
- Concentrations: the Commission may request notification of any concentration not otherwise notifiable, at any time prior to implementation, where it suspects foreign subsidies were granted to the undertakings concerned in the preceding three years.
- Procurement: the Commission may request notification of foreign financial contributions in a non-notifiable procurement procedure before contract award where it suspects foreign subsidies in the preceding three years.
“Impact in the Union” and what makes a case merit ex ante review
The Commission explains “impact in the Union” covers actual or potential impacts through multiple channels (e.g., production/services in the EU, access to technology/IP, availability of services), while seeking to minimise burdens.
In assessing whether a case merits an ex ante review, the Commission may look at factors such as: targets whose turnover understates strategic significance; strategic sectors and assets (including critical infrastructure and innovative technologies); patterns of acquisitions/bids building presence; prior FSR enforcement history; and contextual indicators suggesting potentially distortive subsidies (including Article 5 FSR-type subsidies).
When the Commission says it is unlikely to call in
The Commission indicates it will not call in where, without a notification, it can determine with sufficient certainty that suspected subsidies do not exceed EUR 4 million over three years (or meet the “unlikely to distort” conditions), and notes below-threshold procurements under the EU directives are unlikely to have sufficient impact to merit ex ante review.
It also notes, for procurement, it will endeavour to limit interference by considering how close the award date is. However, it also states it cannot set a fixed time limit for call-ins in below-threshold procedures.
Evidence and consequences: what to expect procedurally
Any person (including competitors) and Member States/contracting authorities may alert the Commission. Informants should provide sufficient information for a preliminary assessment, and the Commission will check plausibility insofar as possible.
Once a call-in decision is adopted, the concentration or public procurement becomes “notifiable” and the timelines (and rules on suspension) apply.
M&A / investments
- Consider call-in risk even where FSR notification thresholds are not met, particularly for strategic targets/assets or sensitive sectors.
- Build FSR into transaction documents: information covenants, cooperation clauses, risk allocation, and timing buffers (given possible standstill consequences once called in).
Public procurement
- Prepare to substantiate why your tender is advantageous (commercial rationale, efficiencies, cost base, innovation), and be ready to explain why any advantage is not attributable to foreign subsidies (or only to a limited extent).
- Ensure group entities and key subcontractors/suppliers can supply data quickly.
- Expect closer interaction between the Commission and contracting authorities, particularly where “abnormally low tender” issues arise.
Balancing test strategy
- If you may need to rely on positive effects, plan early: the Commission expects timely and verifiable evidence (often with counterfactuals) and may disregard late submissions.
AI tools have been used to support drafting of this publication. All content has been reviewed and approved by Hogan Lovells lawyers.
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