EU Foreign Subsidies Regulation & M&A: Latest Developments And Implications For Deal Strategy

The European Union's Foreign Subsidies Regulation ("FSR") has now been in force for over a year, introducing a new layer of regulatory oversight for companies engaging in M&A transactions within the EU. Designed to address the potentially distortive effects of subsidies granted by non-EU governments, the FSR gives the European Commission ("Commission") sweeping investigatory and enforcement powers, capturing a wide array of transactions from mergers and acquisitions to joint ventures and certain acquisitions of minority stakes, where parties to the transaction have received broadly defined "foreign financial contributions" ("FFCs").

With over 160 merger notifications already submitted under the FSR, and the first in-depth investigation concluded in 2024, the impact of the FSR – particularly on dealmaking, investment strategies and compliance planning – is real and growing. Additionally, a set of Guidelines is expected to be adopted by January 2026, which aspires to provide guidance on the criteria for the assessment of FSR merger control notifications, as well as on the Commission's powers to review below-threshold transactions.

This FSR regime sits alongside the Commission's merger control regulation which is focused on the impact of the proposed transaction on competition in the EU. Transactions notified under the FSR will frequently be subject to parallel separate review by the Commission under the EU Merger Regulation and/or review under national merger control regulations of EU Member States, as well as national Foreign Direct Investment regimes, resulting in a myriad of regulatory reviews to factor into deal planning.

1. Implications of the FSR regime for M&A

Scope and Tools

The FSR adds the following tools to the Commission's regulatory arsenal for scrutiny of M&A:

• Mandatory pre-merger notification and approval regime for qualifying M&A transactions based on turnover and foreign financial contribution thresholds;
• Powers to investigate suspected distortive subsidies even where no notification is required.

These tools are accompanied by extensive powers enabling the Commission to request information, sanction companies for non-compliance, impose redressive measures and prohibit transactions.

The regime hinges on the broad and flexible concept of FFCs, which captures a wide range of state support measures – from direct grants and loans to tax exemptions and even the provision of goods or services to and from state connected entities, even when conducted at market terms in the ordinary course of business. This deliberately expansive definition is designed to capture a broad spectrum of commercial and economic relationships with foreign governments or their affiliated entities.

The concept of FFCs is key to determining whether, as a first step, M&A transactions trigger mandatory notification to the Commission under the FSR. Following notification (or on its own initiative, for transactions which do not trigger a mandatory notification), the Commission determines whether the FFC amounts to a subsidy and whether it distorts the market. Only certain types of FFCs – specifically those that confer a selective advantage to entities engaging in economic activity within the EU – qualify as foreign subsidies subject to potential enforcement action if deemed distortive.

M&A Notifications: When is FSR approval required?

Companies must notify the Commission before completing certain mergers, acquisitions, and JVs if:

(i) the target in an acquisition, one of the merging parties in a merger or the JV is established in the EU and generates turnover of at least EUR 500 million; and

(ii) the parties involved received more than EUR 50 million in aggregate FFCs over the past three years. The relevant parties ("undertakings concerned") vary depending on the deal structure and must be clearly identified, as this determines which financial contributions are assessed.

Significantly, transactions where parties reach these revenue and FFC thresholds, are subject to prior approval by the Commission, regardless of whether the support actually amounts to a "subsidy" that distorts the market. Whether such a subsidy exists is assessed as part of the Commission's substantive review, which determines whether to approve the transaction (with or without conditions), or prohibit the deal.

Transactions meeting the thresholds must be notified to, and approved by, the Commission before implementation, similar to the EU merger control process. Notably, the Commission also has the power to call in transactions below the thresholds if it suspects the presence of distortive foreign subsidies.

Substantive Assessment: When Is a Foreign Subsidy Problematic?

In conducting its substantive assessment, the Commission first determines if an FFC constitutes a foreign subsidy by conferring a selective advantage, and then it assesses whether the foreign subsidy is liable to improve the beneficiary's competitive position in the internal market – and, in doing so, actually or potentially distorts competition. To assess distortion, the Commission uses a range of indicators – amount, nature, purpose, and conditions of the subsidy, as well as the beneficiary's market position. Its analysis focuses on two key questions: (i) whether an FFC influenced the acquisition process itself; and (ii) the risk of market impact post-transaction. This assessment may include a balancing test in which the Commission weighs the negative effects of a subsidy against any positive impacts, such as contributions to EU policy objectives (e.g., environmental or social benefits). However, subsidies deemed most likely to distort (see below) are unlikely to be justified by positive effects.

2. Early enforcement trends and key findings from the first M&A case

The Commission's early enforcement efforts in relation to notified transactions have particularly scrutinized the sources of deal financing, including support from state-linked financial institutions and other entities. This underscores the importance for companies to assess carefully their exposure to foreign financial support, even in the absence of a direct subsidy from a non-EU state. In addition, private equity and investment funds are facing heightened scrutiny under the FSR, particularly regarding the identity and role of limited partners with links to non-EU states. These must be able to demonstrate that such investors participate on purely arms-length commercial terms to avoid triggering concerns over state influence or hidden subsidies.

In the M&A space, the first and only in-depth FSR investigation to date concerned the acquisition by the Emirates Telecommunications Group Company ("e&"), a company owned by the UAE sovereign wealth fund (Emirates Investment Authority or "EIA") of PPF Telecom Group, a telecoms operator headquartered in the Netherlands and active in Bulgaria, Hungary, Serbia and Slovakia. Formally notified to the Commission in April 2024 and approved five months later, on 24 September 2024 subject to binding commitments, this case highlights the Commission's focus on state-linked financing and the risk of post-deal distortions.

In its assessments, the Commission concluded that several identified FFCs constituted foreign subsidies, including (i) an unlimited state guarantee via e&'s exemption from UAE bankruptcy laws, (ii) direct grants, loans and repayable advances to the EIA from the UAE Ministry of Finance, and (iii) a revolving credit facility loan to the EIA by a consortium of UAE banks. Some FFCs were ultimately found not to constitute a foreign subsidy, for example, a term loan from a consortium of banks including UAE controlled banks, which the Commission concluded did not confer a benefit to e&, finding that the loan was on market terms on the basis of extensive economic submissions by the notifying party.

The Commission went on to assess whether the foreign subsidies in question were distortive and concluded that the identified foreign subsidies – particularly the de facto guarantee and state-backed financing – could distort competition post-transaction by enabling e& to out-invest or out-expand rivals in the EU. Specifically, the Commission found that "...foreign subsidies benefiting e& and the EIA would thus have artificially improved the capacity of the merged entity to finance its activities in the EU internal market and increased its indifference to risk. As a result, the merged entity could have engaged in investments, for instance in spectrum auctions or in the deployment of infrastructure, or acquisitions, thus distorting the level-playing field relative to other market players by expanding its activities beyond what an equivalent economic operator would engage in absent the subsidies."

No distortion was found in the acquisition process itself, as no competing bids emerged, the price was consistent with market benchmarks and the Commission concluded that foreign subsidies did not alter the outcome of the acquisition process. Importantly, the Commission found that any benefits of the transaction (e.g. improved service delivery or investment) stemmed from the deal itself rather than the foreign subsidies, and therefore did not outweigh the distortive effects.

To address the Commission's concerns, e& and the EIA offered an extensive remedy package for a duration of at least 10 years, including:

• alignment of e&'s corporate governance with UAE bankruptcy law to remove the effect of the de facto unlimited guarantee;
• restricting financing from the EIA and e& to PPF's activities in the EU internal market, subject to certain exceptions which will be subject to review by the Commission;
• an obligation to conduct all intra-group transactions on market terms; and
• a requirement to inform the Commission of any transactions that are non-notifiable under the FSR;

The Commission's decision in the e&/PPF Telecom Group case provides helpful guidance on the methodological assessment framework for the determination of distortions in the acquisition process and in merged entity's activities in the internal market post-transaction, as well as a helpful indication on the timing of FSR investigations post-notification. At the same time, the Commission's assessment confirms the existence of a significant compliance and cooperation burden placed on companies. The adopted commitments are of behavioural nature and thus a testament to the Commission's flexibility, even though their burdensome implementation and long-lasting effects are undeniable.

3. Upcoming developments: FSR Guidelines

The next key development under the FSR will be the Commission's Guidelines, due by 13 January 2026. These will clarify core technical concepts, including how the Commission assesses market distortions, applies the balancing test (weighing competitive harm against policy benefits), and uses its call-in powers for below-threshold transactions – provided the transaction has not yet been implemented. The Guidelines will not cover procedural aspects (e.g. remedies, commitments, or review process) but are expected to become a key reference point for businesses navigating FSR risks.

First, the Guidelines are expected to elaborate on the types of foreign subsidies most likely to distort competition – such as unlimited guarantees – and offer insight into the distortion indicators listed in the FSR, including the nature, purpose, and conditions of the subsidy, and the market position of the beneficiary. Although the Guidelines are not expected to provide sector-specific distortion thresholds, safe harbours, or a formal failing firm defence, they may offer high-level criteria for assessing whether a foreign subsidy is sufficiently linked to a distortion of competition.

Second, on the balancing test, the Commission is anticipated to distinguish between two categories of positive effects: (i) efficiency-based gains linked to the development of the subsidised activity within the EU; and (ii) broader policy benefits supporting EU objectives, such as environmental protection or digital transformation. While the first category may draw on familiar concepts from competition law, the second introduces a more political and open-ended layer of assessment, akin to State aid review.

Third, on the Commission's power to call in below thresholds transactions, stakeholders expect guidance on the factors to be taken into account by the Commission when calling in a transaction, the types of subsidies more likely to trigger a call-in, as well as the interplay of Article 21(5) FSR establishing the Commission's call-in power with Article 9 FSR allowing the Commission to investigate ex officio transactions post-closing.

Finally, the Guidelines are expected to bring much-needed legal certainty to an evolving and still unfamiliar regime.

4. Overview of key considerations and practical guidance for dealmakers

5. Conclusion

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.