EU Foreign Subsidies: Key Takeaways from the New Commission Guidelines

On 9 January 2026, the European Commission (EC) adopted its first set of Guidelines under the Foreign Subsidies Regulation (FSR), the EU's main piece of legislation that addresses the impact of foreign subsidies in the EU internal market (including in M&A and in public procurement).

The Guidelines provide some clarity for businesses operating in the EU internal market on the substantive application of the FSR, affecting all of its three modules (investigations, merger control and public procurement). They aim to enhance legal certainty and transparency, setting out how the EC will assess the existence of distortions caused by foreign subsidies, apply the balancing test, and exercise its powers to request notifications in below-threshold cases.

1. Clarification of "distortion" and the assessment process: Practical indicators and examples

• Economic activity in the Union: The Guidelines clarify that an undertaking is considered to engage in economic activity in the EU not only if it offers goods/services in the internal market, but also if it purchases goods/services in the EU for use elsewhere, acquires control of an EU entity, or participates in EU public procurement procedures. Even undertakings not yet active in the EU may be caught if there is objective evidence of real and concrete possibilities to enter the market.
• When is a foreign subsidy liable to improve the competitive position of its recipient? Targeted vs. non-targeted subsidies: The EC distinguishes between “targeted” and “non-targeted” subsidies. Targeted subsidies are those directly supporting the recipient’s activities in the EU and therefore considered to improve its competitive position in the internal market. Non-targeted subsidies are defined negatively as those not supporting the recipient’s activities in the EU and include subsidies of general scope and those intended to support activities outside the EU. When it comes to non-targeted subsidies, the EC will assess the risk of “cross-subsidisation” (i.e., whether resources obtained for extra-EU activities are likely to be transferred to EU activities). This assessment, for which the Guidelines provide substantive guidance, will consider shareholding structures, group management, economic links, legal constraints, and past behaviour.
• Substantive assessment of distortion: The Guidelines provide guidance on how to assess the criteria to determine whether a foreign subsidy is liable to actually distort competition in the internal market. For instance, the assessment will be based on the actual or potential impact of the subsidy, does not require proof of actual effects, and may take into account the combined effect of multiple subsidies, the economic and legal context, and a range of qualitative indicators such as the amount, type, and purpose of the subsidy, as well as sector characteristics and the beneficiary's position in the market.
• Illustrative scenarios: The Guidelines provide practical examples of distortions, including cases where foreign subsidies facilitate acquisitions by enabling the recipient to outbid actual or potential rivals, cases where subsidies influence the operating decisions of the beneficiary (such as encouraging aggressive pricing or expansion strategies), or alter investment decisions by making possible investments that would not otherwise occur. These examples help clarify how the EC will assess the real-world impact of foreign subsidies on competition in the internal market.

2. Public Procurement: Detailed guidance on "unduly advantageous" tenders

• Assessment process: The EC will first determine if a foreign subsidy enabled an economic operator to submit a more attractive tender. It will then compare the tender to others and to the contracting authority's estimates, using only non-subsidised tenders as benchmarks.
• Attribution of advantage: The Guidelines clarify that the advantage is "undue" if it stems to an appreciable extent from a foreign subsidy, and "due" if it can be plausibly justified by other factors (e.g., cost efficiencies, innovation). The EC will apply principles from EU case law on abnormally low tenders, but with a focus on the role of foreign subsidies.

3. The Balancing Test: How positive effects are weighed

• Specificity of positive effects: Only positive effects that are specific to the foreign subsidy (i.e., would not occur otherwise) are considered. The party invoking positive effects must provide evidence, including counterfactual analysis.
• Types of positive effects: These may include the development of the subsidised activity in the EU, or broader policy objectives (e.g., environmental, social, innovation, security of supply). The Guidelines clarify that positive effects on other undertakings or the value chain are only considered if they relate to relevant policy objectives.
• Assessment methodology: The EC will assess the nature, intensity, and timing of positive effects, and whether the distortion exceeds what is necessary to achieve them. The balancing is not a numerical calculation, but requires a cogent and consistent body of evidence.
• Public procurement context: The availability of alternative sources of supply is a relevant positive effect in procurement cases, especially where the subsidised tender is the only viable option.

4. Call-In Mechanism: The European Commission's power to require below-threshold notifications

• Scope and triggers: The EC may "call in" concentrations or public procurement procedures that do not meet standard notification thresholds if it suspects foreign subsidies have been granted in the past three years. This includes subsidies to main subcontractors or suppliers, not just the main economic operator.
• Assessment of "impact in the Union": The Guidelines clarify that the EC will interpret "impact in the Union" broadly, considering both actual and potential effects. This includes not only the production of goods or provision of services in the EU, but also access to technology, intellectual property, and the availability of services. The EC will weigh the need to protect the internal market against the administrative burden on businesses, aiming for a proportionate approach.
• Factors for ex ante review: The EC will look beyond simple turnover or transaction value. It will consider contextual factors such as the strategic importance of the sector or assets involved (e.g., critical infrastructure, innovative technology), patterns of repeated investments or tenders by the same or related undertakings, and whether the activity is likely to have a broader competitive impact. The Guidelines also clarify that the EC may take into account whether the parties or related undertakings have previously received distortive foreign subsidies or have been subject to in-depth investigations.
• Safe harbours: The Guidelines introduce practical safe harbours: the EC will not request notification if it can determine with sufficient certainty that the aggregate amount of suspended foreign subsidies is below €4 million in the relevant three-year period, or if the subsidies meet the conditions for certain exemptions (such as those addressing natural disasters). Public procurement procedures below the EU value thresholds (see Article 4 of Directive 2014/24/EU on Public Procurement) are also generally excluded from ex ante review.
• Procedural details: The Guidelines clarify the evidence required for a call-in, the timing of notifications, and the interaction with ongoing procurement or M&A processes.

Implications for Businesses

• The Guidelines provide a more predictable and transparent framework for FSR enforcement, but also confirm the EC's broad discretion and the need for detailed, case-specific evidence.
• Companies receiving financial support from non-EU countries that are active in the EU market or are involved in M&A or public procurement in the EU are advised to review their group structures, financial flows, and compliance processes in light of the clarified approach to cross-subsidisation and notification requirements.
• Businesses involved in activities or projects that are relevant under the FSR (e.g., notifiable M&A and public procurement procedures, or companies being investigated by the EC) are expected to justify the source and use of any foreign financial contributions, and to provide robust evidence if seeking to rely on positive effects in the balancing test.
• Early engagement and proactive compliance will be key in time-sensitive procedures, especially for complex group structures or innovative sectors.

For further information or to discuss how the FSR Guidelines may affect your business, please contact our team.