• Introduction
  • Applicability of the FSR
  • Key Implications of the FSR
  • Practical Considerations
  • Final Thoughts


The Regulation of the European Parliament and of the Council on Foreign Subsidies Distorting the Internal Market (the Regulation) aiming to restore fair competition between all companies operating in the internal market received final approval on 28 November 2022 and will enter into force on 12 January 2023. In addition to monitoring how implementation of the Regulation (and complementary legislation and guidance) evolve, potential purchasers and bidders should take steps to set up robust processes to ensure that they can comply with the information collection, processing and reporting regime under the Regulation. The notification obligations described below will apply nine months after the FSR's entry into force.

Applicability of the FSR

The FSR will affect companies engaging in acquisitions and forming JVs or participating in EU public procurement procedures that have received "financial contributions" from non-EU governments or State-owned entities. Financial contributions take a broad range of forms, including public grants and loans, tax incentives, and government contracts, regardless of size, or whether these qualify as "subsidies" or have any nexus to the EU.

The FSR will require regulatory filings for transactions meeting the following thresholds:

  1. Turnover threshold: The turnover of the target (in case of acquisitions), the JV (for a JV creation), or one of the parties (for mergers) in the EU is at least ?500 million in the previous financial year.
  2. Financial contribution threshold: The undertakings concerned (e.g., the acquirer and the target, the merging entities, or the JV and its parent companies) received from non-EU governments or State-owned entities financial contribution of more than ?50 million in the previous three years.

Transactions that meet these thresholds will need to be notified to the European Commission (EC). To assess the notifiability of transactions, companies will need to have identified and quantified financial contributions received since 2020 (because companies will need to provide detailed information concerning financial contributions going back three calendar years as part of the review process). Notifiable transactions must receive EC approval under the FSR before they can close. This creates a standstill obligation, similar in nature to the one under the EU Merger Regulation (EUMR). As a result, companies contemplating acquisitions / joint ventures must plan for FSR reviews alongside merger control and foreign direct investment (FDI) reviews.

Key Implications of the FSR

  • Where the EC suspects that the parties to a concentration received foreign subsidies in the prior three years, it will have powers to investigate and request ad hoc notification prior to deal implementation. This has the potential to delay post-closing implementation (not dissimilarly to the impact of the EC's new approach to Article 22 of the EUMR).
  • The FSR notification process and timetable closely resemble the EUMR process, with an initial 25 working day review period followed by an in-depth 90 working day (which can be extended by 15 working days if commitments are offered) review period starting from the date of formal notification.
  • If the parties breach the standstill obligation or fail to notify a notifiable concentration, the EC may impose a fine of up to 10% of their aggregate turnover in the preceding financial year.
  • The EC will have the power to allow a transaction that would otherwise be prohibited under the FSR based on a balancing of negative and positive effects (an option that is not available under the EU merger control rules).
  • If the EC finds a distortive foreign subsidy, it may impose structural or non-structural measures on, or accept commitments from, the parties.

Practical Considerations

The FSR applies to transactions involving a merger with or acquisition of a target, or creation of a JV (or acquisition of an interest in a JV) that has significant EU turnover. For most companies, such transactions will be relative infrequent.

However, companies that are in receipt of "financial contributions", should begin to design and implement systems for the collection of information on a group-wide basis relating to relevant contracts, grants, tax incentives etc. on a global basis. Given that information going back three calendar years will be required, it is unlikely to be workable for companies simply to wait until the obligation to notify arises.

Any system should be designed to minimize the burden on company business, legal and compliance teams, including by leveraging existing contract management systems, grant tracking and other financial systems. One approach would be to develop a template with basic information that automatically pulls in relevant information already available in existing systems before the partially populated template is sent to relevant business, financial and legal teams for completion.

It may be efficient to collect some information beyond the minimum needed to identify and quantify a potential financial contribution to reduce the risk of duplicate or significant follow-up requests later. For example, a contract identified as generating revenues likely to be a financial contribution would be unlikely to be considered to be a foreign subsidy if the contract was awarded pursuant to a competitive tender. Noting that the contract was awarded by competitive tender in the initial template would reduce the subsequent data collection burden. That template population could be achieved in many cases by developing queries for existing databases, and populating a new database with the input from the various sources.

Final Thoughts

While the FSR is intended to catch state-owned or sponsored entities, the likelihood that at least some such entities will take a minimalist approach to compliance does create the very real prospect that the FSR will become a significant compliance burden for all companies whose businesses entail material supply of products or services to public sector customers outside the EU.

The FSR is a hybrid instrument. While much of the process and timetable resemble the EUMR procedures, the concerns addressed are radically different. The EC will need to develop new methods for gathering and dealing with evidence and theories of harm, and develop new approaches to commitments and redressive measures.

Because identifying and quantifying financial contributions over a rolling three year timeframe will be time-consuming, it would be efficient to begin designing and implementing new systems as soon as possible. We have been working with our legal-tech team to develop approaches to streamlining the information collection process in a manner that minimises the burden. We are also working with the Commission team on specific information that will be required by the implementing regulation and notification forms that are now being drafted.

Finally, FSR clearances will need to be added to the growing list of regulatory conditions precedent, be considered in the context or deal timing and break fees, be built into representations & warranties and disclosure schedules, and become part of the due diligence reviews.


1 The definitions of 'turnover' and 'previous financial year' follow the corresponding definition in the EUMR.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.