EU Foreign Subsidies Regulation
Since October 2023, companies receiving financial contributions from non-EU governments must notify the European Commission before closing large M&A deals or bidding for major public contracts in the EU. The Commission can also investigate any foreign subsidy ex officio.
The EU Foreign Subsidies Regulation (Regulation 2022/2560, or FSR) addresses a longstanding gap in EU competition law: subsidies granted by non-EU governments to companies operating in the European single market. While EU State aid rules have long controlled subsidies from EU Member States, foreign government subsidies were previously unregulated -- meaning a state-backed foreign competitor could undercut EU companies with unlimited government support.
The FSR gives the European Commission three tools to address this. First, companies must notify the Commission before closing M&A deals where the target has EU turnover of at least EUR 500 million and the parties received combined foreign financial contributions of at least EUR 50 million over three years. Second, bidders for EU public contracts worth EUR 250 million or more must notify if they received foreign financial contributions of at least EUR 4 million per country over three years. Third, the Commission can investigate any foreign subsidy on its own initiative, without thresholds.
The Commission applies a "balancing test" before taking action: even where a foreign subsidy distorts the internal market, its negative effects are weighed against any positive effects such as job creation, environmental benefits, or alignment with EU policy goals. Remedies range from behavioural commitments and structural divestitures to outright prohibition of deals or contract awards. Non-compliance carries fines of up to 10% of worldwide turnover.
Since the mandatory notification obligations took effect on 12 October 2023, the Commission has moved quickly to establish enforcement practice. Early investigations have focused on Chinese state-backed companies in renewable energy, medical devices, and telecommunications. The FSR is rapidly becoming a standard part of the EU deal-clearance toolkit, alongside merger control and FDI screening.
Applicable since 12 July 2023, the Foreign Subsidies Regulation (FSR) addresses a long-standing gap in EU competition policy: the ability of companies benefiting from foreign government subsidies to distort the EU internal market through acquisitions, public procurement bids, or general commercial activity, without being subject to the state aid rules that apply to subsidies granted by EU Member States. The FSR gives the European Commission new investigative and enforcement powers to scrutinise and, where necessary, address distortive subsidies granted by non-EU governments to companies active in the EU.
The regulation applies to all economic operators active in the EU, regardless of their country of incorporation or ownership, that have received financial contributions from non-EU governments. Financial contributions are broadly defined and include direct grants, tax advantages, loans on preferential terms, guarantees, capital injections, and foregone revenue. The FSR operates through three mechanisms: a mandatory notification requirement for concentrations (M&A) where the acquired entity or at least one of the merging parties has EU turnover of at least 500 million euros and the parties received aggregate foreign financial contributions of at least 50 million euros in the preceding three years; a mandatory notification for public procurement bids where the estimated contract value is at least 250 million euros and the bidder received at least 4 million euros in foreign financial contributions per third country; and a general tool allowing the Commission to investigate any other market situation ex officio.
When assessing whether a foreign subsidy is distortive, the Commission considers factors including the amount and nature of the subsidy, the economic situation of the beneficiary, the level of economic activity in the EU, and the purpose and conditions attached to the subsidy. If a subsidy is found to be distortive, the Commission can accept commitments from the company to remedy the distortion, or can impose redressive measures including the prohibition of the concentration, exclusion from the procurement procedure, or the repayment of the subsidy. Companies that fail to notify when required face fines of up to 10% of their aggregate worldwide turnover.
The FSR complements the Digital Markets Act and traditional EU competition law by extending the scrutiny of economic power to the source of that power: foreign government subsidies. For companies engaging in large-scale M&A activity in Europe or bidding for significant public contracts, the regulation introduces a new compliance dimension that requires tracking and disclosing foreign financial contributions received across their corporate group. Legal and compliance teams must develop processes for identifying reportable contributions, assessing notification obligations, and managing the Commission's investigative process, adding a new layer to cross-border transaction planning in the EU.
The FSR equips the Commission with three distinct instruments to address distortive foreign subsidies in the EU single market.
Prior notification and approval required for concentrations (mergers, acquisitions, full-function JVs) where the target or JV has EU turnover of at least EUR 500 million and the parties received combined foreign financial contributions of at least EUR 50 million in the preceding three years.
Commission has 25 working days for preliminary review (Phase I), extendable to 90 working days for in-depth investigation (Phase II). Standstill obligation: closing prohibited until clearance.
Prohibition of the concentration, acceptance of commitments (structural or behavioural remedies), or unconditional clearance. Fines up to 10% of worldwide turnover for gun-jumping.
The Commission applies a non-exhaustive list of indicators to assess whether a foreign subsidy is most likely to distort the internal market (Article 5 FSR).
Even where a foreign subsidy is found to distort the internal market, the Commission weighs negative effects against positive effects before imposing redressive measures (Article 6 FSR).
The balancing test means that not every distortive subsidy will lead to a prohibition. Subsidies supporting Green Deal objectives, for instance, may be tolerated even if they create some market distortion -- provided the positive effects outweigh the negative.
The Commission has moved rapidly to establish enforcement practice since the notification obligations took effect in October 2023.
The FSR operates alongside -- not instead of -- existing EU competition, trade, and investment screening tools. Multiple instruments can apply to the same transaction.
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