Foreign Subsidies Regulation – Recap, Initial Insights, and Outlook

Since 12 October 2023, M&A transactions meeting the relevant thresholds must be notified to the European Commission (“Commission“) under Regulation (EU) 2022/2560 on foreign subsidies distorting the internal market (“FSR“). Over the past year, the Commission, affected companies, and their legal counsel have been busy navigating the FSR framework

Recap – Nearly 1.5 years of FSR enforcement

Since the FSR came into force, the newly established Directorate K, dedicated to the FSR’s enforcement, has reviewed more than 150 M&A transactions, including two ex-officio investigations. Karl Soukup, an economist who also serves as Deputy Director-General for State Aid, was appointed Director of Directorate K. The Commission’s first ex-officio investigation targeted Chinese suppliers of wind turbines for wind farms in certain EU Member States. Another notable development was the first-ever unannounced inspection under the FSR in April 2024, when the Commission raided the premises of the Chinese company Nuctech, a provider of security screening equipment, in the Netherlands and Poland. This case also led to the first court ruling on the FSR. Nuctech challenged the Commission’s authority and the manner in which the inspection was conducted. However, in its decision of 12 August 2024, the General Court of the European Union (“General Court“) dismissed Nuctech’s claims,¹ a ruling recently upheld by the Court of Justice of the European Union (“CJEU“).²

Despite the high number of notifications, the Commission has issued only one decision regarding an M&A transaction notified under the FSR.³ Under the FSR, the Commission is not obliged to issue or publish clearance decisions in Phase 1 proceedings.

In the Emirates Telecommunications / PPF Telecom case⁴, the Commission raised concerns about the unlimited third-country guarantees from the United Arab Emirates. The Commission feared that such guarantees could distort competition in the market in which the merging parties would operate post-transaction. Ultimately, these guarantees were removed as a remedy and condition for clearance.

The approximately 150 M&A transactions notified to the Commission primarily involved target companies operating in the following sectors (NACE codes): manufacturing (approx. 28%), wholesale and retail trade, repair of motor vehicles and motorcycles (approx. 17%), financial and insurance activities (approx. 13%), electricity, gas, steam and air conditioning supply (approx. 11%), and other sectors (approx. 31%).

Initial insights drawn from the previous FSR enforcement practice

Although the Commission consistently asserts that the FSR is both country- and sector-neutral, enforcement efforts have thus far been focused on Chinese subsidies and strategically sensitive sectors such as “clean technologies”, telecommunication, infrastructure, and security.

On the substantive level, many open questions remain, largely due to the lack of published decisions. The substantive assessment under the FSR – intending to prevent distortions in the EU internal market caused by foreign subsidies – appears to diverge from merger control law and, unsurprisingly, aligns more closely with EU state aid law.

The only Phase 2 case to date has highlighted the Commission’s broad interpretation of what constitutes a distortion of competition. While Article 19 FSR states “that assessment shall be limited to the concentration concerned”, the Commission argued in the Emirates Telecommunications / PPF Telecom case that the foreign subsidies at issue could influence the buyer’s market behavior post-transaction. Unlimited third-country guarantees are therefore likely to face heightened scrutiny by Directorate K in the future.

From a procedural perspective, the Commission’s extensive enforcement powers under the FSR are becoming evident. The General Court (confirmed by the CJEU) ruled that the Commission has the authority to request information from the involved parties even if it is stored outside the EU. The implications of this decision for the extraterritorial application of the FSR are yet to be determined.

Outlook – What lies ahead for the FSR?

In her “Mission Letter” to Teresa Ribera Rodríguez, European Commission President Ursula von der Leyen urged the new head of DG Comp, responsible for FSR enforcement in M&A transactions, “to vigorously enforce the Foreign Subsidies Regulation, including by proactively mapping the most problematic.” This sets a clear tone for the Commission’s future enforcement activities. Further tightening of ex-officio investigations can be expected. Against this backdrop, companies should enhance their M&A readiness by preparing the necessary data for FSR notifications (in particular the systematic compilation of financial contributions from third countries) and ensuring they are prepared for dawn raids.

Given the current uncertainties, the Commission’s consultations with Member States, launched in early March, regarding the adoption of guidelines for the application of the FSR are a promising development. A draft of these guidelines is expected to be finalized in the third quarter of 2025, followed by public consultations. The guidelines must be published no later than 12 January 2026.

Additionally, the Commission has announced that it is considering revising the notification thresholds for M&A transactions. Under the current framework, not only substantively relevant foreign subsidies but also financial contributions from third countries must be considered, capturing even behavior that is in line with customary market practice. This means that companies engaging in regular commercial transactions with third countries can quickly meet the formal notification thresholds. There is an urgent need for clear criteria to determine which entities should be attributed to a third country. Revenues drawn from business with such entities and in line with  customary market practice currently needs to be factored into the calculation of financial contributions.