Overview

This alert examines the growing impact of the Foreign Subsidies Regulation (FSR) on corporate transactions, against a backdrop of calls for increased EU competitiveness and significant geopolitical risk. As highlighted in the Draghi report on EU competitiveness and Mission Letter to Teresa Ribera (see further the first alert in the Merger Control Summer Series), the European Commission (Commission) considers the proactive enforcement of FSR rules to be of fundamental importance for the future of European competitiveness. It is the key instrument for addressing economic and competitive threats from companies receiving subsidies from non-European countries, ensuring a level playing field in the EU.

Background to the adoption of the FSR

Despite the EU's extensive regulatory framework for state aid – which aims to prevent countries in the EU from granting aids that distort competition and affect trade – foreign subsidies granted to companies engaged in an economic activity in the EU have historically escaped scrutiny.

The FSR, which has been in place since 12 July 2023, fills this enforcement gap and a notification obligation for transactions (and public procurements) above certain thresholds has been in place since 12 October 2023. Under the FSR, the analysis of a distortion of competition involves showing cumulatively that: (i) the subsidy is likely to enhance the company's competitive position within the internal market; and (ii) that it has an actual or potential adverse effect on competition in the internal market.

The FSR's mechanisms to prevent distortions of competition

The FSR provides for two different mechanisms to protect the EU internal market from distortions of competition resulting from foreign subsidies:

• an ex-ante notification obligation for transactions (including call-in power – see further below); and
• an ex officio power allowing the Commission to conduct investigations on its own initiative. This applies to any other economic activity, such as greenfield investments.

The notification obligation for transactions applies where: (i) at least one of the merging parties, the target or the joint venture is established in the EU and generates an aggregate EU turnover of at least €500 million; and (ii) the parties to the transaction were granted combined aggregate foreign financial contributions (FFCs) of more than €50 million in the three years preceding the transaction.

The notion of FFC is broad and includes a wide range of direct and indirect benefits provided by third countries, such as capital injections, grants, loans, loan guarantees, fiscal incentives, tax exemptions, provision of goods or services, or the purchase of goods or services etc.

The Commission also has the authority to "call in" transactions that fall below the thresholds. This power allows the Commission to require the prior notification of a transaction even if it does not meet the notification criteria set out in the FSR.

In addition, the FSR gives the Commission the right to open ex officio investigations into potentially distortive subsidies, including into M&A transactions. This means that the Commission may examine foreign subsidies on its own initiative, even after a transaction has been completed.

The Commission has significant powers to carry out investigations and may, inter alia, conduct dawn raids, request information, or seal business premises and books or records.

The Commission's review process

The Commission conducts a review of foreign subsidies in two phases:

• it initiates a preliminary review to establish whether the FFC constitutes a foreign subsidy and whether it distorts the internal market; and
• if, following the preliminary review, the Commission has sufficient indication that a company has been granted a foreign subsidy that distorts the internal market, it opens an in-depth phase II investigation. This allows the Commission to explore the effects of the foreign subsidy on the internal market in more detail. To this end, the Commission may request information from the companies under investigation and conduct inspections (inside or outside the EU). A key part of the Commission's analysis will be the so-called "balancing test" (i.e. how the positive effects in the internal market can outweigh the potential distortive effects). If the positive effects of the subsidy outweigh the negative effects, then no redressive measures will be taken. Otherwise, any positive effects will be taken into account when establishing the redressive measures or commitments.

Following the application of the balancing test, the Commission may adopt three different types of decision:

• a decision with redressive measures, such as obliging the company to refrain from certain investments, to divest certain assets or to repay the foreign subsidy, including an appropriate interest rate;
• a decision with commitments; or
• a no-objection decision.

Early impact of the FSR

So far, more than 170 transactions have been notified to the Commission under the FSR. The Commission has processed the vast majority of notifications at the preliminary review phase. This implies that the Commission either found no foreign subsidies relevant to the transaction under the FSR, or that there was insufficient evidence suggesting the relevant foreign subsidy could distort competition.

A small number of transactions have given rise to phase II review, one of which has so far resulted in a commitment decision. This involved the acquisition of sole control of PPF Telecom Group B.V. (PPF) by Emirates Telecoms Group Company PJSC (e&), a telecoms operator based in the United Arab Emirates, controlled by a sovereign wealth fund, the Emirates Investment Authority (EIA), in turn controlled and fully owned by the federal government of the UAE. The Commission found that the foreign subsidies received by e& and the EIA (in particular, in the form of an unlimited state guarantee) could have led to a distortion of competition in the EU internal market post-transaction.

The decision provides helpful insight into the Commission's application of the distortion test (see above). It also confirms that, for the purposes of the balancing test, the obligation is on the notifying parties to put forward any positive effects resulting from the foreign subsidies. The Commission cleared the transaction subject to a tailored package of behavioural commitments designed to "ringfence" the activities of EU entities from the effects of subsidies granted outside the EU for a 10-year period. This included the removal of the unlimited state guarantee via amendments to e&'s articles of association.

The Commission's decision makes it clear that the parties' cooperation via timely and accurate responses to information requests will be key to navigating the process as efficiently as possible, not least because the Commission was able to "infer" a benefit to EIA since incomplete information had been provided.

A second phase II decision is expected by the end of the year and will cast further light on the direction of travel for the FSR.

Overall, the actual number of notified operations has significantly exceeded expectations, since the Commission's impact assessment initially estimated only 33 notifications per year. Private equity investors and portfolio investments have been particularly impacted by the FSR, accounting for over a third of all notifications to date.

In March 2024, the Commission established a brand new FSR Directorate in DG Competition.

What next for the FSR?

The Commission has recently launched two significant consultations which are likely to determine the future direction of travel of the FSR. The public consultation on the draft guidelines on the implementation of the FSR was opened on 18 July and closed on 11 September 2025 (the Draft Guidelines).

The Draft Guidelines aim to clarify how the Commission determines whether foreign subsidies distort competition and also provide guidance on how the Commission applies the balancing test between positive and negative effects of foreign subsidies.

The Commission considers that a foreign subsidy is liable to improve the competitive position of a recipient when it is likely to benefit its economic activities in the internal market in a non-insignificant way. However, the Draft Guidelines provide that, beyond the de minimis amounts,¹ it is not possible to set general quantitative or qualitative rules covering all categories of foreign subsidies to determine when their impact on a company's competitive position in the internal market is likely to be insignificant. Instead, the assessment is made on a case-by-case basis.

Further, the Draft Guidelines address how the Commission will exercise its "call-in" powers for transactions. In this regard, the Commission will consider, among other things, the "impact in the Union" of the transaction concerned. While the Draft Guidelines provide a number of factors that the Commission will consider when assessing whether to exercise its call-in power for an ex-ante review, the precise meaning of "impact in the Union" remains unclear.

The guidelines are expected to be published by January 2026 and, once adopted, will be updated regularly to take account of recent developments and case law. In addition, on 12 August 2025, the Commission opened a consultation on its first review of the FSR, in order to receive feedback on how the regime is being implemented and enforced.

It reflects some of the key elements of the consultation on the Draft Guidelines, such as the assessment of foreign subsidies that distort the internal market and the application of the balancing test, but also focuses on the Commission's authority to review foreign subsidies with a possible distortive effect in the internal market on the Commission's own initiative (i.e. the "call-in" and ex officio investigation powers) and the notification thresholds. Further, the review explores the general impact on businesses of the complexity of the rules and the costs incurred. It may result in legislative changes to the new regime, including a revision of the notification thresholds.

This consultation will run until 18 November 2025.

Comment

It is essential for companies to consider the impact of the FSR on major corporate transactions. In particular, the FSR may impact future acquisition strategies and companies need to prepare for information requests and notifications in relation to recent FFCs. As the scope of reporting obligation is broad (the parties must provide the Commission with information on FFCs received in the three years prior to the conclusion of the agreement by all controlled subsidiaries, including portfolio companies), companies may need to disclose information not directly related to a transaction, although there are exemptions in place to limit the scope of these obligations in certain circumstances. In practice, this requires ensuring that internal procedures are in place to continuously collect and track FFCs – a process that can be complex and time-consuming.

Moreover, the number of transactions subject to review by the Commission is likely to increase progressively in the future for two main reasons:

• building on the Draft Guidelines, we may see the Commission starting to use its call-in power to examine transactions that fall below notification thresholds, but which may still present competitive risks; and
• the Commission has broad powers to conduct ex officio investigations, meaning that it may carry out investigations on its own initiative and examine the impact of foreign subsidies on the internal market, even after an M&A transaction has been completed.

Key takeaways for dealmakers

• The FSR tool has been used significantly more than initially anticipated and its importance will continue to increase given its broad scope, the Commission's call-in power to review transactions below notification thresholds and its power to carry out ex officio investigations.
• The notification obligations under the FSR can apply even where a company has its headquarters outside the EU.
• Companies should closely monitor and track internally all sources of FFCs, as the notion of financial contribution is broad and includes a wide range of direct and indirect benefits provided by non-EEA countries.
• Early and proactive engagement with the Commission case team will be key, in order to minimise the scope of information requests as far as possible.
• Given the risk of call-in, all major transactions should be reviewed for potential application of the FSR, even if technically falling below the thresholds.

Please see other alerts in the Dentons Summer Series:

A “pivotal moment” for Europe: the drive for competitiveness and growth in practice

Jurisdictional issues in merger control: the path to legal certainty?

Efficiency and innovation "defences" in merger reviews: a new dawn?

1. i.e. €4 million and €200,000 per third country to a single undertaking over any consecutive period of three years.↩