On November 28, 2022, the Council of the European Union adopted the Foreign Subsidies Regulation (FSR or the "Regulation"), a new legislative tool designed to prevent foreign subsidies from distorting competition in the internal market. The FSR entered into force on January 12, 2023.1 The bulk of the FSR will only apply from mid-2023, but companies already need to start preparing for an additional layer of complexity in future deals. The regime creates a new regulatory burden – beyond EU merger control and state aid – and adds to the powers of the European Commission ("Commission"). It introduces an obligation for companies to notify the Commission when M&A transactions and bids are submitted in large public procurement tenders if the parties have benefited from material foreign financial contributions.

Background and overview of the FSR

The FSR marks the last step of a legislative process first announced in May 20212, following the Commission's publication of a white paper "on levelling the playing field as regards foreign subsidies" in June 2020, as part of the EU's new industrial strategy for Europe.3

The new regulatory regime addresses perceived gaps in the existing EU regulatory framework (which includes EU state aid rules (dealing with distortions caused by EU Member States' subsidies) and trade defense instruments (dealing with imports of subsidized goods).

By addressing distortions in the EU internal market caused by subsidies granted by non-EU governments to companies operating in the EU ("foreign subsidies"), the FSR is intended to ensure a level playing field for all companies operating in the EU. It requires certain transactions and public procurement contracts benefiting from foreign subsidies to be notified to the Commission and approved before implementation, with the possibility of remedies (including in extreme cases, prohibition, where subsidies are found to have a distortive effect). This requirement is backed up by penalties, with significant fines for failure to file. In addition, the Commission will have the discretion to carry out investigations on a case-by-case basis.

For the purposes of the FSR, foreign subsidy is defined as a direct or indirect financial contribution from a non-EU government or a public or private entity whose actions can be attributed to a non-EU government, which confers a benefit on an undertaking engaging in an economic activity in the EU internal market. Consistent with the approach under the EU state aid rules, the benefit should not be generally available under normal market conditions and should be limited, in law or in fact, to one or more undertakings or industries. The scope of the concept of foreign subsidy is wide, covering a broad spectrum of "financial contributions," including the transfer of funds or liabilities,4 the foregoing of revenue that is otherwise due,5 and the provision or purchase of goods or services.

Moreover, a distortion will be deemed to exist where a foreign subsidy is liable to improve the competitive position of an undertaking in the EU internal market and where, in doing so, that foreign subsidy may have an actual or potential negative effect on competition in the internal market. The FSR states that the existence of distortions shall be determined based on certain indicators and provides some guidance on examples that typically would not be a cause for concern6 and examples that would most likely be considered distortive.7

Another notification requirement for certain M&A transactions

The FSR introduces a new mandatory, ex ante filing obligation for concentrations where a change of control on a lasting basis occurs, particularly for mergers and acquisitions that meet the following cumulative thresholds:

  • Turnover: At least one of the merging undertakings, the target or the planned full-function joint venture, is established in the EU and generates an aggregate turnover in the EU of at least EUR 500 million; and
  • Financial contribution: The combined aggregate financial contributions received by the concerned undertakings from non-EU governments exceeds EUR 50 million in the three financial years preceding the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest.

Similar to the standstill obligation under the EU Merger Regulation, M&A transactions that meet these thresholds need to be notified to and approved by the Commission prior to implementation. In addition, the Commission can request the prior notification of any concentration ex officio, upon suspicion that foreign subsidies may have been granted to the concerned undertakings in the three years prior to the concentration.

The Commission has 25 working days from receipt of a notification to either allow the concentration or open an in-depth review. If an in-depth review is opened, the Commission has 90 working days from the date of opening the investigation to complete the investigation (although this may be extended by 15 working days if commitments are offered).

The Commission can fine companies of up to 10% of turnover for non-compliance. The Commission may also require that the transaction be dissolved, shares or assets acquired be divested, or impose other redressive measures. The Commission can also fine companies up to 1% of turnover for negligent or intentional supply of incorrect or misleading information.

The Commission can only impose fines or periodic penalty payments under this review for up to three years from the infringement.

A notification requirement for certain public procurement procedures

To ensure that companies that have received non-EU government's subsidies do not submit unduly advantageous bids in public procurement procedures, the FSR requires companies to notify the Commission when foreign financial contributions in a public procurement procedure meet the following cumulative thresholds:

  • The estimated value of the public procurement or framework agreement net of VAT amounts to at least EUR 250 million; and
  • If the tender is divided into lots, the aggregate value of the lots applied for amounts to at least EUR 125 million; and
  • The bidding party and its main subcontractors and suppliers received aggregate foreign financial contributions in the three financial years prior to notification of at least EUR 4 million from a non-EU government.

Even if the thresholds above are not fulfilled, the FSR still requires companies to submit a declaration listing all foreign financial contributions received and confirm that they are not notifiable amounts.

Procedures for the award of certain works contracts, supply contracts, and service contracts by contracting authorities or entities in the fields of defense and security are outside the scope of this tool.

The Commission will have 20 working days for the preliminary examination of subsidies, extendable by up to 10 working days. If an in-depth investigation is required, the Commission must complete it within 110 working days from the notification, extendable by up to 20 working days. The public tender procedure can continue during the notification period, but the contracting authority cannot award the contract. If the Commission opens an in-depth investigation, the contract cannot be awarded to the notifying company until the Commission provides its decision. However, if the Commission does not adopt a decision within the applicable time limit, the contract may be awarded to any company, including the notifying company.

Failing to notify the Commission or circumventing the notification requirements may also result in fines of up to 10% of turnover. Negligent or intentional supply of incorrect or misleading information may also result in a fine of up to 1% of turnover. The Commission can impose fines or periodic penalty payments under this review for up to three years from the infringement.

Discretionary investigations on a case-by-case basis

The Commission can also, on its own initiative, examine information from any source (e.g., EU Member States or entities) regarding alleged foreign subsidies which may be distorting the EU internal market. Under this prerogative, the Commission could investigate financial contributions in the context of defense projects excluded from the public procurement review tool, as well as concentrations and public contracts under the thresholds of the notification-based tools.

Ex officio reviews into public procurement are limited to awarded contracts and will not result in the cancellation of the decision awarding a contract or in a termination of a contract. Importantly, ex officio investigations do not trigger a standstill obligation.

The Commission's ex officio review powers are subject to a limitation period of 10 years from the foreign subsidy grant. However, the Commission can only impose fines or periodic penalty payments for three years from the infringement.

Balancing test, commitments, and redressive measures

The FSR provides for a balancing test, under which the Commission may approve a foreign subsidy if any negative or distortive effects are outweighed by the positive effects on the development of the relevant subsidized economic activity on the EU internal market.

If the Commission concludes that a foreign subsidy distorts the internal market, it may impose remedies or accept commitments from companies. These may include structural remedies (e.g., divesting certain assets, imposing an acquisition ban, or reducing production capacity or market presence), behavioral remedies (e.g., offering access to infrastructure under fair, reasonable, and nondiscriminatory or FRAND conditions, licensing assets acquired or developed with the help of foreign subsidies on FRAND terms, or publishing R&D results), as well as the repayment of the foreign subsidy. The Commission may also require that companies refrain from making certain investments and adapt their governance structure.

Key dates to keep in mind

The FSR will apply as of July 12, 2023, although the notification obligations to the Commission will only apply from October 12, 2023.

The FSR will apply to foreign subsidies granted in the five years prior to July 12, 2023, if they distort the EU internal market after that date. By way of derogation, the FSR will apply to foreign financial contributions granted in the three years prior to July 12, 2023, if they were granted to an undertaking that notified the Commission about a concentration or financial contributions in the context of a public procurement procedure pursuant to the FSR.

The FSR will not apply to deals for which an agreement was concluded, a public bid was announced, or a controlling interest was acquired before July 12, 2023. The FSR will also not apply to public procurement contracts that have been awarded or procedures initiated before July 12, 2023.

The Commission will publish additional guidelines within three years after the entry into force of the Regulation. The Commission is also currently working on an implementing regulation that will contain procedural specifications.

Practical considerations and way forward

Given the broad scope of the FSR, companies should start to prepare for its impact on their EU activities. This is particularly important given the current widespread use of subsidies around the world to foster growth in strategic sectors.

Since notification obligations for M&A transactions and public procurement procedures will only apply as of October 12, 2023, we recommend that companies keep a clear record of any financial contributions they have received or anticipate receiving from non-EU governments since at least July 2020 (which corresponds to the three-year review period). This will help them prepare for assessment of potential notification obligations or investigations.

We recommend that companies that from time to time benefit from non-EU government subsidies put in place a system to monitor and quantify, on a group-wide basis, all financial contributions received or to be received. Companies will need to consider whether a non-EU government financial contribution could be considered a foreign subsidy for the purposes of the FSR and, if so, assess the potential impact under the FSR. Recording additional information beyond the minimum required to identify and quantify a potential financial contribution (namely, any positive effects related to that financial contribution) at the time it may be made can be helpful if the Commission subsequently opens an investigation. The Commission can seek information by way of information requests and on-site inspections, both within and outside the EU.

In addition to merger control and foreign direct investment analysis, deals will now have to undergo FSR analysis. For example, acquiring companies should consider whether potential targets have received foreign financial contributions and assess the implications for the deal, including whether there is a filing obligation. The need to obtain FSR clearances should be part of the due diligence process and accounted for in transaction documents – namely, via regulatory conditions precedent, representations and warranties, disclosure schedules, and, where commercially relevant, possible break fees. Likewise, when considering participation in large public tenders, bidders need to be prepared to make accurate declarations about the level of foreign subsidies obtained, and to notify the public tender authority if the relevant thresholds are met. If public tender authorities or other bidders do not comply with the FSR, the directly binding provisions of the FSR may serve as basis for challenging a bid or a public procurement procedure.


1. Regulation (EU) 2022/2560 of the European Parliament and of the Council of December 14, 2022 on foreign subsidies distorting the internal market; see also the European Commission's press release and Q&A on the application of the FSR, and https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_1984.

2. Proposal for a Regulation of the European Parliament and of the Council on foreign subsidies distorting the internal market of May 5, 2021.

3. White Paper on levelling the playing field as regards foreign subsidies, published the European Commission on June 17, 2020.

4. The transfer of funds or liabilities may include 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. In light of EU state aid rules and case-law, cross-subsidies may also be caught (see recital 16 of the FSR).

5. The foregoing of revenue may include tax exemptions or the granting of special or exclusive rights without adequate remuneration.

6. The following examples would typically not be a cause for concern: (i) a foreign subsidy that does not exceed EUR 200,000 per a non-EU government over any consecutive period of three years; (ii) a foreign subsidy that does not exceed EUR 4 million per undertaking over any consecutive period of three years; and (iii) a foreign subsidy aimed at making good the damage caused by natural disasters or exceptional occurrences.

7. According to the FSR, a foreign subsidy is most likely to distort the internal market when: (i) granted to an ailing undertaking (i.e., an undertaking which will likely go out of business in the short or medium term in the absence of any subsidy), unless there is a restructuring plan that is capable of leading to the long-term viability of that undertaking and that plan includes the undertaking's own significant contribution; (ii) in the form of an unlimited guarantee for the debts or liabilities of the undertaking, namely without any limitation as to the amount or the duration of such guarantee; (iii) not in line with the OECD Arrangement on officially supported export credits; (iv) directly facilitating a concentration; (v) enabling an undertaking to submit an unduly advantageous tender on the basis of which the undertaking could be awarded the relevant contract.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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