Foreign subsidies regulation: key takeaways from the Commission’s new guidelines

On 9 January 2026, the European Commission (the “Commission”) adopted new guidelines (the “Guidelines”) explaining how it intends to apply and enforce the Foreign Subsidies Regulation (the “FSR”), a regime designed to address distortions of competition in the EU internal market caused by subsidies granted by non-EU states. The FSR entered into force in January 2023 and, inter alia, introduced notification obligations for certain large concentrations and public procurement procedures. The Guidelines are intended to clarify the Commission’s enforcement approach in light of its initial enforcement experience and the FSR’s requirement to develop and update guidance over time. This blog post provides a high-level overview of the new Guidelines. For a comprehensive explanation of the FSR itself, including its scope, objectives and procedural framework, see Delphi’s detailed article here.

Background and legal framework

The FSR entered into force in January 2023 and aims to address distortions of competition resulting from foreign subsidies in the EU. As the EU State aid control regime applies only to subsidies granted by EU Member States, foreign subsidies previously fell outside of EU scrutiny. This created an enforcement gap that the FSR is intended to close.

The FSR introduced notification obligations for certain M&A transactions and bids in public procurements above specified thresholds, while also empowering the Commission to initiate ex officio investigations in relation to all other market situations, including transactions and bids below those thresholds.

Under the FSR, M&A transactions must be notified to the Commission if the acquired company, the joint venture or at least one of the merging parties generates an EU turnover of at least EUR 500 million and the parties to the transaction have been granted financial contributions from non-EU countries of at least EUR 50 million in the last three years. Bids in public procurements must be notified where the contract value exceeds EUR 250 million and the bidding party (including its subcontractors or suppliers) has been granted financial contributions of at least EUR 4 million from a third country in the last three years.

If the Commission considers that a foreign subsidy distorts competition in the internal market, it may adopt measures to remedy that distortion. These may include accepting commitments, imposing redressive measures, prohibiting an M&A transaction or excluding an undertaking from a public procurement procedure.

The FSR empowers the Commission to issue and update guidelines on its enforcement. Such guidance forms part of a broader set of EU regulatory initiatives, alongside instruments such as the Digital Markets Act and the Digital Services Act, aimed at promoting fair competition and addressing market distortions in an increasingly digitalised and globalised economy. Separately, the Commission is pursuing a broader modernisation of EU competition law. This includes an ongoing review of the EU Merger Guidelines, with revised guidelines currently expected to be published in the second half of the decade, potentially in late 2026 or 2027.

The Guidelines intend to clarify the following main areas: i) the assessment of the distortion test (both for M&A transactions and public procurements), ii) the application of the balancing test, and iii) the Commission’s exercise of call-in powers for below the threshold transactions and bids in public procurements.

The assessment of distortions in general

When the Commission has found that a company has benefitted from a foreign subsidy, it will assess whether that foreign subsidy distorts competition on the internal market using a two-step approach. First, it will consider whether the subsidy is liable to improve the competitive position of the company. Second, it will evaluate whether the foreign subsidy, actually or potentially, negatively affects the competition in the internal market.

The Guidelines distinguish between targeted and non-targeted subsidies. Targeted subsidies, i.e. subsidies directed at a specific economic activity in the EU, are generally more likely to be distortive. Conversely, subsidies are considered non-targeted where they are not directly linked to a specific economic activity in the EU (e.g. foreign subsidies granted for building a manufacturing plant outside the EU). Non-targeted subsidies may nevertheless distort competition indirectly if they enable cross-subsidisation, thereby freeing up resources that can be used for economic activities in the EU. The Guidelines explain that the Commission will assess the likelihood of cross-subsidisation of non-targeted subsidies by taking into account factors such as ownership and organisational links within a corporate group, the design and conditions of the subsidy, and relevant legal or contractual constraints, including agreements with third parties.

Some categories of foreign subsidies are considered unlikely to improve the competitive position of a company. These include:

• subsidies granted to address a market failure outside the EU and exclusively for activities outside the EU, where there is no credible link to the company’s economic activities in the internal market
• subsidies pursuing purely non-economic or social objectives, such as the inclusion of minorities or persons with disabilities
• subsidies aimed at remedying damage caused by natural disasters or exceptional occurrences,
• low-value subsidies that do not exceed EUR 4 million in total per undertaking over the relevant three-year reference period, which the Guidelines treat as a safe harbour threshold and de minimis aid as defined in Regulation 1407/2013 when considered on a per third-country basis over the same three-year period.

The assessment of distortions in M&A transactions

For concentrations subject to FSR review, the Commission applies a two-step distortion test. First, it examines whether a foreign subsidy was instrumental in enabling the transaction or improving its terms. If so, the subsidy is presumed to strengthen the acquirer’s competitive position. Second, the Commission assesses whether the subsidy is likely to adversely affect competition in the EU, in particular by allowing the acquirer to outbid or crowd out competing purchasers through more favourable pricing or financing than would be available under normal market conditions.

The assessment of distortions in public procurement procedures

In public procurement cases, the Commission also applies a two-step test to assess distortion. First, it examines whether the tender is advantageous compared to competing bids or the contracting authority’s estimates. Second, it assesses whether that advantage is undue, meaning that it cannot be explained by factors other than a foreign subsidy. Where the advantage is attributable to a subsidy, it may be considered distortive, including where support granted elsewhere within a corporate group indirectly benefits the bidder.

The balancing test

The balancing test weighs the negative effects of a foreign subsidy in terms of distortion of competition against the positive effects of that subsidy. Positive effects may outweigh the distortion and influence whether redressive measures are required.

According to the Guidelines, positive effects must be attributable to the subsidy and relate either to the development of the relevant subsidised economic activity in the EU (for example by addressing a market failure) or to broader EU policy objectives (such as environmental protection, social standards, fundamental rights or the promotion of R&D). The burden of proof lies with the undertaking claiming such positive effects, which should be substantiated with evidence and linked to the specific subsidy concerned.

Call-in powers

The Guidelines confirm that the Commission may call in M&A transactions and public procurements falling below the FSR thresholds where it reasonably suspects that distortive foreign subsidies were granted in the preceding three years.

Call-ins may take place at any time prior to implementation of a transaction or award of a public contract. In deciding whether to exercise these powers, the Commission will consider factors such as the strategic importance of the transaction or tender (e.g. critical infrastructure or innovative technologies), patterns of acquisitions or tender participation, the market position of the undertakings involved, and the nature and amount of the foreign subsidies concerned.

Concluding remarks

The Guidelines provide useful insight into the Commission’s analytical framework and enforcement priorities under the FSR, but they do not materially constrain the Commission’s discretion as to how it applies the distortion test and the balancing test.

Companies engaged in large M&A transactions/public procurements and receiving foreign subsidies should therefore be prepared for potential notification obligations and call-ins. In this context, robust and centralised record-keeping of foreign financial contributions has become increasingly critical, both for M&A transactions and for participation in EU public procurement procedures.

Corporate groups that have received non-targeted subsidies should also consider whether internal structures and arrangements can mitigate cross-subsidisation risks and be prepared to demonstrate that foreign subsidies do not benefit EU activities. Managing compliance with the FSR can be very resource-intensive for companies, especially given the broad scope of what constitutes a financial contribution. For advice on managing foreign subsidy exposure and navigating FSR notifications and investigations, please contact Delphi.