The FSR two years in: filings surge; substantive enforcement and guidance lag
03 October 2025As we approach the second anniversary of the Foreign Subsidies Regulation (FSR) entering into full force1, the European Commission is running parallel processes that, between them, aim at both clarifying and reflecting upon its application of its new powers.
Firstly, in July the Commission published for consultation draft guidelines on the application of certain provisions of the FSR (the “draft Guidelines”). Subsequently, in August the Commission launched its first comprehensive review of the FSR (the “Review”).
Whilst these developments could, on their face, be seen as signalling a need for change, it is important to remember that both processes were “baked in” to the Regulation itself: Article 46 FSR requires the Commission to consult upon and publish the Guidelines by no later than 12 January 2026; Article 52 requires the Commission to review and prepare a report on its enforcement of the Regulation by 13 July 2026 (and every three years thereafter). Whilst the latter process in particular could result in legislative reform, such an outcome is not a foregone conclusion.
That said, there are some questions to be asked around the proportionality and effectiveness of the new regime. In our previous article on the first full year of FSR enforcement, we examined the Commission’s early caseload and identified practical pain points encountered by notifying parties in an M&A context, including burdensome information-gathering obligations and uneven timelines. We also looked at the status of the Commission’s first in-depth investigations: into public procurement processes and concentrations, and on an ex officio basis.
At the time, it was reasonable to assume that (increasingly) vigorous enforcement of the FSR would be a core pillar of the new Commission’s competition policy, in the face of growing calls to strengthen the position of EU companies vis-à-vis their global competitors. As we explore below, however, the anticipated increase in substantive enforcement is yet to emerge (with only two in-depth merger investigations to date), whilst compliance with the FSR’s notification and information requirements continues to pose a challenge for businesses investing in or tendering for large contracts in the EU.
The draft Guidelines: some welcome signposts, but limited relief
The draft Guidelines focus on the three main FSR elements mandated by Article 46 – attempting to add texture to the legal tests and the procedures set out in the Implementing Regulation:
1. Identifying distortions of competition
The Commission reiterates and elaborates upon the two cumulative conditions of Article 4 FSR, namely that the subsidy must (i) improve the beneficiary’s competitive position, and (ii) actually or potentially negatively affect competition in the EU. It also provides some pointers on the process of identifying “unduly advantageous” tenders under Article 27.
i. Improvement of competitive position
Here the draft Guidelines stress that a subsidy need not be used in connection with or directed at activities in the EU: subsidies granted and used in third countries may free up resources and therefore be deemed to improve the recipient’s competitive position in the EU. To guard against such an assessment, parties will need to point to “credible legal or economic factors” (such as ownership structures involving external shareholders) preventing the transfer of resources to entities active in the EU.
A welcome development, even if the guidance is still vague, is that the draft Guidelines introduce a materiality threshold similar to the €4m de minimis threshold under FSR Article 3(2): an improvement in the recipient’s competitive position is only likely where a subsidy benefits its EU activities in a “non-insignificant” way. However, the usefulness in practice of this materiality threshold remains to be seen, as the Commission is yet to elaborate on the quantitative and qualitative tests underlying it.
ii. Negative impact on competition
The draft Guidelines explain that this involves establishing (i) a likely effect on the behaviour of recipient, and (ii) a resultant impact on competitive dynamics in the internal market, potentially to the detriment of other undertakings in the EU. The first element covers some of the same ground as identifying an improvement in competitive position – with more of a focus on the undertaking’s activities, rather than its resources and organisational structure. When considering the second element, the Commission may look to a number of factors (e.g. the amount and type of subsidy, and the nature of the recipient and sector(s) in which it is active), before focusing on how subsidies may distort competition, for instance during the acquisition process, by altering the operating or investment decisions of the subsidised undertaking, or at other levels of the value chain.
iii. Unduly advantageous tenders
Article 27 FSR provides that subsidies that distort competition in public procurement processes are those that enable the submission of an unduly advantageous tender. The draft Guidelines discuss this concept, explaining how the Commission will assess whether a tender is advantageous (by benchmarking it against rival bids, the contracting authority’s estimates, and the operator’s likely bid in the absence of the subsidy) and whether any such advantage is “undue”, in particular, by asking whether it can be justified by factors other than the subsidy.
2. Application of the balancing test
Pursuant to Article 6 FSR, the Commission may decide not to act in respect of a foreign subsidy, or may adjust the commitments required to address it, where its positive effects wholly or partially offset its negative impact on competition. The draft Guidelines elaborate on the types of positive effects the Commission may consider (namely the development of the EU economic activity in respect of which a distortion has been identified, and alignment with other policy objectives such as a high level of environmental protection and social standards), and stress that they must be specific to the subsidy at issue.
However, other than discussing the concept, the draft Guidelines offer little concrete guidance. No weighting methodology or hierarchy of benefits is set out. Nor is there any indication of the sorts of subsidy whose positive effects might outweigh a distortion of competition, as a case-by-case assessment is always necessary. Unsurprisingly, the draft Guidelines do suggest that subsidies whose negative impacts go beyond what is necessary to achieve their positive effects are unlikely to benefit from the application of the balancing test.
3. Call-in of concentrations/tenders falling below the notification thresholds
Under Article 21(5) FSR the Commission can call in a concentration or tender falling below the notification thresholds, prior to implementation or award of the contract, where it suspects that subsidies have been granted to the relevant undertakings in the last three years.
The draft Guidelines explain that the Commission will only do so where it considers that an ex-ante review is merited, given the impact of the concentration/tender in the EU. They then set out a non-exhaustive list of the factors the Commission will consider in this regard. Notably, these include: indicators that the target’s turnover does not reflect its economic significance; whether the concentration forms part of a pattern involving the acquirer (i.e. via some form of roll-up strategy); and whether the suspected subsidies are listed in Article 5 FSR as those “most likely to distort the internal market”.
Commentary
Response to the draft Guidelines is likely to be mixed. On the one hand, the Commission has provided a lot of detail on the sorts of factors it will consider, and the enquiries it will pursue, when assessing or deciding whether to call in a transaction or tender. This provides a degree of transparency over what drives outcomes under the FSR.
However, by adopting such an inclusive approach – for example as to the numerous ways in which a subsidy could be seen to strengthen an undertaking’s competitive position in the EU or to disadvantage EU rivals – the Commission has provided little in the way of concrete guidance for parties seeking to self-assess their substantive risks under the FSR. This is perhaps unsurprising, reflecting that the Commission itself is still “learning by doing”, and is keeping its powder dry in the absence of any FSR-related judgments and with limited substantive decisional practice to draw upon.
Moreover, the Guidelines do not address the day-to-day compliance burdens faced by merger parties who must notify their transactions simply because the financial thresholds are met - even where no subsidy concerns exist. The Review, however, could prove more fruitful in that regard.
The Review: a broader chance to recalibrate
The Review starts with a public consultation and call for evidence, which will feed into a Commission report to the European Parliament and Council. As provided for under Article 46 FSR, the report could see the Commission tabling legislative proposals, if it considers them appropriate.
The Review is very broad in scope, covering substantive as well as procedural elements. According to the consultation document, the Commission’s report will focus on:
- the identification of distortions, and the categorisation of certain subsidies as “most likely to distort” competition under Article 5 FSR;
- the application of the balancing test;
- the Commission’s ex-officio review powers;
- the notification thresholds and procedures for concentrations;
- relationships with subsidy-control systems in third countries; and
- possible simplifications of the regime, to reduce administrative burdens.
As to the possible outcomes, with most FSR cases closing uneventfully, a shift to a risk‑based, lighter-touch regime would be both credible and desirable. This could be achieved in various ways. For example, a stronger emphasis on issue-scoping in pre-notification, combined with a greater use of waivers, could effectively narrow reporting requirements to focus only on plausibly distortive subsidies – without a need for legislative amendments.
Should that not prove sufficient, a formal simplified procedure – akin to the EUMR Short Form CO process – could be introduced. Other, more substantive improvements could include the introduction of safe harbours, via a block exemption-type approach (as employed in the EU State aid regime), for well‑defined categories of foreign subsidies. However, it remains to be seen whether the Commission will be minded to go down this route, as the regime continues to bed in.
Taking stock, two years in
In-depth investigations
Since the publication of our previous article, no further in-depth investigations into public procurement processes have been opened, beyond those announced in early 2024. All three of those investigations were closed following bidder withdrawals, so we are still to see a final decision in a procurement case. The two publicly disclosed ex officio investigations launched in 2024 – into Chinese suppliers of wind turbines and airport security scanners – also remain unresolved
On the mergers track, one further phase 2 investigation (following e&/PPF, which was conditionally cleared in September 2024) has been opened, into Abu Dhabi National Oil Company’s proposed acquisition of German plastics manufacturer Covestro AG. The Commission opened an in‑depth review on 28 July 2025, focusing in particular on support measures including an unlimited state guarantee (as in e&/PPF) and a committed capital increase linked to the transaction. The probe centres on whether these measures conferred a selective benefit that facilitated the acquisition and/or might potentially enable distortive post‑transaction investments in the EU.
Caseload
Two years in, the FSR is proving administratively heavy. Filing volumes have exceeded expectations: at the time of writing, the Commission’s public case register indicated that 189 merger concentrations have been formally notified, and case teams appear to have been allocated in respect of 248 transactions. Commission officials also recently (informally) revealed that there have been over 3,400 procurement notifications.
Given the limited interventions to date, this caseload suggests that the notification thresholds are set too low and are capturing many no‑issue cases. Much of the burden stems from the expansive definition of “financial contribution,” which captures a wide range of measures and payments that are often unrelated to a specific deal or bid, but still count towards thresholds and reporting requirements, and from the absence of a simplified route (unlike under the EUMR), which weighs especially on investment funds given unavoidable portfolio‑wide data collection requirements, including from state‑linked LPs.
Next steps
The consultation on the Guidelines closed on 12 September 2025, and the call for evidence in connection with the Review runs until 18 November 2025.
As noted above, the final version of the Guidelines must be published by 12 January 2026, and the Commission will present its report on the Review to the European Parliament and Council on or before 13 July 2026.
1 Whilst the FSR itself entered into force on 12 July 2023, the notification obligations therein only took effect on 12 October 2023.
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