Foreign subsidies under the microscope: From dawn raids to deal approvals – what the new FSR guidelines reveal

On 9 January 2026, the European Commission published its Guidelines on the application of the Foreign Subsidies Regulation (“FSR”)[1], offering long-awaited clarity on key enforcement areas while leaving certain questions still unanswered. 

This article provides a general overview of the FSR framework, it analyses the highlights of the FSR Guidelines and offers key takeaways for companies operating in the EU or that are concerned about the increasing regulatory scrutiny surrounding certain corporate transactions.

1. Background on the FSR 

1.1 Notions of foreign subsidies and financial contributions 

The FSR entered into force in January 2023 and started to apply from 12 July 2023, with its notification obligations becoming applicable from 12 October 2023. The FSR is designed to curb distortions in the EU internal market caused by foreign (non-EU) subsidies, mandating companies to disclose certain foreign financial contributions received during merger or public procurement activities that meet certain criteria (see below). 

To clarify, a foreign subsidy is, in essence, a foreign financial contribution (“FFC”) granted, directly or indirectly, by a third country that confers an advantage and is limited to one or more companies/sectors of the economy. A FFC is any (i) transfer of funds (e.g., capital injections, grants, loans, fiscal incentives etc); (ii) foregoing of liability (e.g., tax exemption, granting special or exclusive rights without adequate remuneration); or (iii) provision or purchase of goods or services to/by a foreign country to a company. 

A subsidy will be considered “foreign” when it is granted by a third country (i.e., outside the EU), including public authorities of all levels. Moreover, the notion of public entities (publicly controlled companies) refers not only to companies whose capital is owned by the public sector, but also to companies over which the State exerts direct or indirect dominant influence. The action of a private entity can also be attributed to the State when acting as an intermediate (indirect aid) or when a stringent regulatory framework regulates certain transfers between private companies. 

1.2 Notification thresholds: M&A and public procurement 

Companies entering M&A deals resulting in a ‘concentration’ (similar to merger control) and/or bidding in public procurement contracts in the EU are obliged to submit a notification to the Commission (for concentrations) or the contracting authority (for public procurement) provided the following thresholds are met[2]:

For concentrations (M&A): 

• One of the merging companies, the acquired company or the joint venture (“JV”) is established in the EU and has an EU turnover exceeding €500 million; and
• Any of the merging companies, the acquirer(s), the acquired, the JV parents or the JV, received FFCs of at least €50 million in the last three years.  

For public procurement: 

• The value of the public procurement is at least €250 million; and
• The bidder, including its subsidiaries and its holding companies as well as its main contractors / suppliers where applicable, were granted FFCs of at least €4 million in the last three years. 

1.3 Enforcement in practice: key cases 

Since its entry into force, the Commission has been active in enforcing the FSR across both public procurement and concentration scenarios by opening in-depth investigations following notifications, as well as through ex officio investigations. 

• Public procurement investigations: In 2024, the Commission opened three in-depth investigations[3] following notifications by Chinese state-owned companies in the train manufacturing and solar photovoltaic sectors participating in tenders launched by Bulgarian and Romanian authorities. All these companies ultimately withdrew their bid, underscoring the deterrent effect of the FSR review even in the absence of formal prohibition decisions.
• Concentrations approved under conditions: In September 2024, the Commission conditionally approved the acquisition of PPF Telecom Group by e&, an Emirati telecommunications operator controlled by a sovereign wealth fund (EIA) controlled by the United Arab Emirates. More recently, in November 2025, the Commission also conditionally approved the acquisition by Abu Dhabi National Oil Company (ADNOC) of the German company Covestro.
• Ex officio inquiry and dawn raids: In April 2024, the Commission launched its first ex officio FSR investigation targeting Chinese suppliers of wind turbines to examine whether foreign subsidies distorted the wind farm market in several EU countries. Following this investigation, the Commission opened an in-depth investigation into Chinese manufacturer Goldwind in February 2026. Also in April 2024, the Commission used its investigation powers under the FSR to carry out a dawn raid on the Dutch and Polish offices of Nuctech, a Chinese manufacturer (partially state-owned) of security equipment. Following the dawn raid, the Commission announced in December 2025 the opening of an in-depth investigation into Nuctech’s activities over concerns that it may have received foreign subsidies that could distort the EU internal market. That same month, it was reported that the Commission had conducted a dawn raid of the Irish offices of Temu, a Chinese e-commerce platform, over concerns about potential Chinese state subsidies. 

These cases demonstrate the Commission’s willingness to use its full range of FSR powers, whilst revealing the practical complexities of FSR enforcement: defining what constitutes a distortive subsidy, assessing cross-subsidisation risks, and designing credible remedies among others. Against this backdrop, the recently published Guidelines aim to support companies navigating these complexities and provide greater legal certainty.

2. What is new in the FSR Guidelines? 

Pursuant to the FSR, the Guidelines address the following topics: (i) the distortion criteria under Article 4(1); (ii) the balancing test under Article 6; and (iii) the Commission’s call-in powers to request prior notification of concentrations and FFC in public procurement. 

2.1. Cross-subsidisation: when intention matters 

One of the most contentious aspects of the FSR has been its potential application to cross-subsidisation scenarios, where foreign subsidies received for one activity (outside the EU) might indirectly support another, unrelated activity in the EU. The Guidelines distinguish between targeted and non-targeted foreign subsidies: 

• Targeted foreign subsidies are those that support, directly or indirectly, the company’s economic activities in the internal market, and will typically be considered liable to improve the company’s competitive position in the EU. This includes, for example, foreign subsidies granted to back manufacturing or distribution activities in the internal market, subsidies conditional to investments or acquisitions in the internal market, or subsidies acting as a financial insurance.
• By contrast, non-targeted foreign subsidies include general measures not linked to specific activities, such as foreign subsidies of general scope or objective, or those supporting activities taking place outside the EU, but which free up resources that the company could use for economic activities in the internal market. In this scenario, the Commission will consider whether there is a credible risk of cross-subsidisation by assessing several factors, such as:
  • Overlaps in the shareholding structure: direct or common controlling shareholding between various entities active in the EU could facilitate cross-subsidisation.
  • Functional, economic and organic ties: the existence of common or coordinated strategies, veto rights, or financial interdependence between various entities increases the likelihood of cross-subsidisation.
  • Agreements with third parties: binding agreements with third parties (e.g., fiduciary duties or obligations in shareholder agreements) may prevent or disincentivise cross-subsidisation.
  • Applicable laws: regulatory provisions imposing accounting or functional unbundling obligations between entities of the same group, or bankruptcy or insolvency laws which protect creditors may be a credible obstacle for cross-subsidisation.
  • Economic situation of the recipient company: cross-subsidisation from entities in a distressed economic situation may be disincentivised in some situations. 

Moreover, the Guidelines introduce types of subsidies that are considered not liable to improve the competitive position of the company in the EU, the so-called “safe harbours”. These safe harbours cover subsidies that: (i) address market failures for activities taking place exclusively outside the EU; (ii) pursue purely non-economic or social objectives; (iii) are granted for natural disasters or exceptional occurrences; (iv) do not exceed de minimis amounts set out in the FSR (i.e., €4 million collectively or €200,000 from a single non-EU country over any consecutive period of three years); or (v) the amount is insignificant relative to the company’s EU activities. These subsidies will not require further investigation under the FSR as their potential effect in the internal market would be insignificant.

Beyond these safe harbours, there is no quantitative thresholds up to which a foreign subsidy is always considered acceptable. Instead, the Commission will assess the extent to which the actual or potential negative impact on competition in the internal market is “appreciable”. Factors considered include (i) nature, purpose and amount of the foreign subsidy; (ii) size of the company; and (iii) characteristics of the sector where the company operates or is likely to operate. 

2.2 The balancing test: in search of a silver lining

Foreign subsidies have an inherent dual nature: whilst such subsidies may distort competition in the EU internal market, they can also bring beneficial effects to the development of the subsidised economic activity. Under the FSR, the Commission must conduct a comprehensive balancing test, weighing these competing effects to prevent the imposition of any sort of restrictions in cases where a foreign subsidy may ultimately prove positive for EU markets. 

The new Guidelines recognise that a case-by-case analysis must be carried out for this balancing test and that, therefore, it is not possible to determine in advance whether a subsidy is beneficial or distorts the market. Within this context, positive effects will be categorised as those related to the subsidised activity, and those more generally relating to the EU policy objectives, which may include contributions such as environmental protection, energy security, digital transformation, or support for disadvantaged regions or SMEs. However, these positive effects must be directly caused by that subsidy and could not have occurred in its absence. 

In assessing positive effects, the Guidelines focus on three key elements: (i) the nature of the positive effects on the subsidised activity; (ii) their intensity and relevance for achieving the stated objectives; and (iii) the expected timing of these effects. 

Equally important, where multiple foreign subsidies are involved, the Commission will aggregate their effects to assess the overall distortion whilst also considering whether individual subsidies contribute distinct positive effects, allowing for potentially tailored remedies. 

The balancing test shows how critical it is to prepare robust economic evidence in support of received subsidies when facing FSR scrutiny. Why? Because even though the Commission is responsible for assessing the distortion, the burden of proof to demonstrate the positive effects of the subsidies and how these outweigh any potential harm lies with the notifying party. 

2.3 Commission discretionary powers 

The FSR grants the Commission a “call-in power” to require prior notification of concentrations or public procurement procedures that fall below the mandatory thresholds. The Commission may use such powers where it has information indicating that a foreign subsidy may be involved, for example based on third-party complaints, media reports, sector monitoring data, or information from ex officio investigations. The Commission has wide powers and surveillance abilities under the FSR. This means that even below-threshold transactions cannot be entirely shielded from scrutiny.

Before requiring a notification, the Commission will assess whether the case merits ex ante review given its impact in the Union by considering, amongst other things, the importance of the concentration or public procurement procedure concerned and various contextual elements, inter alia: actual or future economic significance, the strategic or important character of the economic activity or sector concerned or trends in investments or acquisitions. 

Despite the above, the Guidelines confirm that prior notification will not be required when the Commission can determine with sufficient certainty that the aggregate amount of suspected foreign subsidies does not exceed the €4 million threshold. However, this can likely only be determined by issuing a request for information (RFI) to the parties involved.

2.4 Besides the clarifications, uncertainties remain 

The Guidelines represent a modest step forward by providing some further parameters allowing companies to navigate and assess exposure to the FSR obligations and, when applicable, better preparation for notifications. However, despite the improvements, significant uncertainties persist that may challenge effective implementation and compliance planning: 

• Unlike State aid rules, which often employ market share or aid intensity thresholds to provide clear benchmarks, the FSR distortion assessment remains highly fact-specific and qualitative, making outcomes difficult to predict and leaving companies without quantitative guidance on when foreign subsidies are likely to be deemed distortive.
• Moreover, the absence of a fast-track clearance mechanism means that even plainly non-problematic transactions face minimum review periods, creating unnecessary deal risk and costs for parties that could otherwise benefit from expedited treatment. The discretionary nature of the Commission’s call-in powers further compounds this unpredictability. Whilst the Guidelines outline factors the Commission will consider when exercising these powers, below-threshold transactions remain exposed to potential review without clear safe harbours.

• Finally, the Guidelines provide relatively little detail on what types of commitments will be acceptable to address identified distortions. This leaves parties to navigate remedy discussions on a case-by-case basis without the benefit of precedent or structured frameworks that would facilitate more efficient and predictable resolution of concerns. 

   

3. Industry reactions and key takeaways 

3.1 Stakeholder responses

The China Chamber of Commerce to the EU has repeatedly expressed concern that the FSR disproportionately targets Chinese companies, demanding a “more predictable and fair business environment for Chinese companies”[4].

In the same vein, the American Chamber of Commerce to the EU has urged the Commission to “clarify unclear concepts” relating to the application of its powers, including the balancing test. It also asked the Commission to “hone” the FSR’s scope to only target subsidies with “a demonstrable EU nexus”, raising questions about whether the Commission uses the FSR to gather information on transactions involving subsidies that lack clear links to a company’s activities in the EU[5].

3.2 Practical takeaways for businesses 

There is no denying that the FSR is here to stay and will continue to shape cross-border transactions and public procurement for the foreseeable future. With the Commission committed to active enforcement and enhanced scrutiny, companies subject to FSR control must ensure they are adequately prepared for a smooth and results-oriented process, and thus should proactively consider the following practical steps: 

• Conduct comprehensive subsidy audits: companies with potential FSR obligations should map (and continue to update) all foreign financial contributions received across the corporate group over rolling three-year periods, distinguishing between targeted and non-targeted contributions and tracking amounts per third country to assess threshold exposure. Also, proactive preparation and clear documentation will lead to efficient procedures and response times.
• Gather and preserve evidence of positive effects: for transactions likely to trigger notification requirements, assembling evidence of positive effects might be crucial in smoothing FSR proceedings. Focusing and tracking environmental, employment, or innovation benefits will help ease the burden of proof before the Commission.
• Monitor enforcement trends: pay close attention to the Commission’s evolving enforcement priorities, particularly in strategic sectors and critical geographical areas where foreign subsidy concerns are most acute.

• Consider voluntary notifications: in borderline cases or where a call-in risk appears significant, voluntary notification may provide certainty and avoid potential ex officio investigations. 

   

4. What to expect now?

In addition to its usual enforcement practice, the Commission is required to review the FSR by July 2026, paying  particular attention to how it will be implemented and enforced. This upcoming review will provide an opportunity for stakeholders to influence the FSR’s future development based on practical experience to date. 

The new FSR Guidelines mark an important milestone in the regulation’s development, providing practical clarity on cross-subsidisation, balancing tests and call-in powers. While welcome progress has been made, particularly through the safe harbours and targeted subsidy distinctions, meaningful uncertainties remain around the enforcement of this powerful tool. 

As the Commission’s enforcement practice continues to evolve on a case-by-case basis, businesses must remain vigilant in tracking developments, auditing their foreign subsidy exposure, and preparing robust compliance strategies until further guidance or procedural simplification arrives. As part of the EU's expanding regulatory toolkit, the FSR now sits alongside merger control, State aid rules, and foreign direct investment screening. Understanding its nuances has become essential for businesses to navigate this multi-layered compliance landscape while preserving commercial opportunities. 

For more information or further guidance in this area, please contact Morten Nissen, Candela Sotés, Alexander Brøchner, Tialda Beetstra, Pablo Rodríguez Sousa or Álvaro López de Ochoa García. 

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