you are being redirected

You will be redirected to the website of our parent company, Schönherr Rechtsanwälte GmbH :

30 November 2022

Foreign Subsidies Regulation: The new kid on the block

On 28 November 2022, the Council of the European Union gave its final approval to the Regulation on Foreign Subsidies distorting the Internal Market (FSR) following the adoption of the regulation by the European Parliament on 10 November 2022.

In a ground-breaking attempt to protect the level playing field in the EU and tackle distortions caused by foreign subsidies in the internal market, an unprecedented legislative tool for the control of foreign subsidies has made landfall. After being published in the Official Journal, which is expected later this year or at the beginning of next year, the FSR is bound to apply as of mid-2023. 

The FSR as a means to level the playing field

The FSR will play an important role in mergers, acquisitions and public tenders within the EU. It will act in parallel to pre-existing EU and national merger control regimes, as well as EU state aid regulation and national foreign direct investment (FDI) screening rules. The enforcement of the FSR will be centralised at the European Commission (EC) level, while foreseeing an advisory function for the national governments of the Member States. The impact of the FSR is difficult to gauge. However, the EC's ambitious plan of staffing about 145 people for FSR enforcement (amounting to almost twice the expected headcount for DMA enforcement) indicates that the FSR will all but dwindle into a paper tiger.

Substantively, the FSR combines elements of EU merger control, state aid and public procurement rules. It aims to close a gap in the EU's regulatory toolbox to tackle subsidies granted by third countries, which distort the internal market. Whilst the EU has already been screening state aid granted by Member States, third-country subsidies have so far remained mostly outside effective control. Hence, the tool's proclaimed goal is to level the playing field in the internal market between those entities which are subsidised by third countries and those which are not.

A closer look at the EC's new tool

At its core, the FSR tries to identify whether a distortion of the internal market has occurred or may occur as a result of a foreign subsidy being granted. It captures all economic operators (including public undertakings) active in the internal market, receiving subsidies from third countries. As such, the scope of the regulation is agnostic to the nationality of the business, which means that EU businesses are captured by the FSR if subsidised by third countries.

The central constitutive concepts of the regulation comprise the following:

  • Foreign subsidies

As its name suggests, the FSR targets foreign subsidies. A foreign subsidy in the context of the FSR is essentially understood as a selective financial contribution by a third country which confers a benefit to an undertaking engaging in economic activities in the internal market.

Its first defining element – financial contribution – is broadly construed. A financial contribution can include

  • the transfer of funds or liabilities, such as capital injections, grants, loans, loan guarantees, fiscal incentives, the setting off of operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness, debt to equity swaps or rescheduling;
  • the foregoing of revenue that is otherwise due, such as tax exemptions or the granting of special or exclusive rights without adequate remuneration; or
  • the provision or purchase of goods or services.

The contribution must confer a benefit, e.g. a loan by a third country with interest rates below market standards. The existence of such a benefit should be determined based on comparative benchmarks, such as the investment practice of private investors, financing rates obtainable on the market, a comparable tax treatment, or the adequate remuneration for a given good or service.

The financial contribution can be granted by public authorities/entities but also private entities if attributable to the third country.

  • Distortion of competition

Once the existence of a foreign subsidy is established, the EC will assess whether it distorts competition on the internal market. Such a distortion is deemed to exist where a foreign subsidy is liable to improve the competitive position of an undertaking in the internal market and, in so doing, actually or potentially negatively affects competition on the internal market.

Certain foreign subsidies are presumed to distort competition, including:

  • subsidies granted to an ailing undertaking without a viable restructuring plan that foresees a significant own contribution by the undertaking;
  • unlimited guarantee for the debts or liabilities of the undertaking;
  • export financing measures that are not in line with the OECD Arrangement on officially supported export credits;
  • a foreign subsidy directly facilitating a concentration;
  • a foreign subsidy enabling an undertaking to submit an unduly advantageous tender.

The FSR mandates the EC to provide further guidance via soft law instruments on the concept of a distortion of competition.

  • Balancing test

Once a distortion has been identified, the negative and positive effects of the foreign subsidy will need to be balanced (balancing test). Given the relatively vague elaboration on the EC's balancing test in the legislative provisions, the EC is obligated under the FSR to publish and update appropriate guidelines on its application of the balancing test.

If the negative impact outweighs the positive effects, the EC has the power to apply redressive measures aiming to remedy the distortion. These remedies include the repayment of subsidies, the sale of certain assets, the waiver of certain investments, the dissolution of mergers of participating companies, the granting of access to infrastructure or the licensing of assets acquired through the distortive subsidies, the publication of research and development results, the prohibition of certain market behaviour or, as a last resort, the prohibition of the transactions concerned.

  • Commission tools

The FSR rests on three building blocks (or tools).

M&A notification tool

The first FSR tool will apply to mergers, acquisitions and the formation of joint ventures. Transactions must be notified for prior approval by the EC where either the target company, at least one of the merging parties or the joint venture generate an EU turnover exceeding EUR 500m, and where the undertakings involved received combined aggregate financial contributions from third countries that exceed EUR 50m in the preceding three years.

In addition, the EC can call-in transactions that remain below the applicable thresholds. The parties cannot proceed with the transaction until the EC's approval has been obtained. The process envisaged by the FSR mirrors the EU Merger Regulation (EUMR) by dividing the proceedings into two phases, with Phase 1 taking up to 25 working days and Phase 2 being initiated only if an in-depth investigation is required.

Public procurement notification tool

The second tool under the FSR focuses on public procurement procedures. If the estimated total value of procurement exceeds EUR 250m, the supplier and its main subcontractors competing in the tender must review – and notify – any financial contributions received from third countries exceeding EUR 4m per third country in the preceding three years. The procurement contract can only be awarded to the subsidised bidder once approved by the EC.

Where the aforementioned thresholds in a tender procedure are met, the recipients are required to notify all foreign financial contributions received. In all other cases, tender participants must confirm via a declaration submitted together with the tender that all foreign financial contributions received are not notifiable under the FSR. Like the M&A notification tool, the proceedings will again be divided into two phases. Again, the FSR enables the EC to call-in tenders that are below the EUR 250m threshold.

General investigation tool

Finally, the FSR also includes a general "catch all" market investigation tool, covering all other market situations. The EC may initiate proceedings ex officio to review ex post mergers and acquisitions, investments or any other form of market activity where it suspects a distortive effect caused by a foreign subsidy (including completed transactions or public procurements). There is a soft safe harbour for subsidies below EUR 4m (presumption of non-distortion) and a hard safe harbour for subsidies below EUR 200,000 (cannot be distortive).

The EC can preliminarily review the subsidy (without a time limit) and initiate in-depth investigations, which should not take longer than 18 months. It may then adopt a decision imposing redressive measures on the recipient of the subsidy.

Member States, undertakings and other interested parties will be encouraged to provide the EC with information on alleged foreign subsidies distorting the internal market, which can prove a valuable source of potential ex officio proceedings.

Far-reaching investigative and enforcement powers

The EC will dispose of a wide range of powers well known to competition lawyers, including interviews, information requests and dawn raids both within and outside the EU. These measures are complemented by fines, which the EC can impose in cases of gun jumping or failure to notify, and which might amount to up to 10 % of the annual turnover in the preceding business year. 


The FSR is the new kid on the block in a series of instruments that seek to protect the "Open Strategic Autonomy" of the EU. The thrust of the FSR is to protect the internal market. It is a potent instrument but adds red tape for businesses. Monitoring of financial contributions by third countries will be vital for companies to assess whether they fall within one of the FSR tools. This becomes relevant immediately, as the review of foreign subsidies in investigations will apply retrospectively. In fact (and with exceptions), the tool empowers the EC to investigate foreign subsidies up to five years prior to the entry into force of the regulation, where such subsidies distort the internal market after the FSR's entry into force.

The EC's enthusiasm about the FSR, and the expected staffing intended for the FSR agenda, both hint at the fact that FSR enforcement will be strong from the get-go. Implementing robust internal practices regarding financial contributions and subsidies will therefore be all the more essential for effective compliance.

authors: Volker Weiss, Jan Kupčík


Office Managing Partner

belgium / EU