Balancing the Unknown: The Commission’s Approach to the Balancing Test in the FSR Draft Guidelines

On 18 July 2025, the European Commission launched a public consultation on its draft guidelines on the implementation of the Foreign Subsidies Regulation (Draft Guidelines). The Draft Guidelines are the second official guiding document from the Commission after the Staff Working Document issued last summer (blog post here) and the FSR brief (blog post here). They follow a Call for Evidence launched in March 2025, inviting input from interested parties. On the Draft Guidelines now, consultation is possible until 11 September 2025. The final version of the guidelines is expected in 2026.  

With the final Guidelines, the Commission seeks to clarify the application of three main legal concepts: (1) the distortion of the internal market (art. 4(1)), (2) the balancing test (art. 6) and (3) the Commission’s power to request the prior notification (art. 21(5) and 29(8)).  

While the Commission had the chance to detail how to apply the distortion test in the e&/PPF decision (blog post here), the balancing test has never been carried out extensively – although some preliminary considerations have been made in the above-mentioned case. Hence, this document was long awaited to shed light on an obscure topic.  

This blog post will focus on the balancing test. It will try to explain and to highlight the virtues and shortcomings of the Draft Guidelines following its structure and give input of a possible further.  

Takeaways on positive effects 

The Draft Guidelines reaffirm the two types of positive effects introduced by the FSR: (1) positive effects on the development of the relevant subsidised economic activity on the internal market and (2) positive effects on other policy objectives. 

Positive effects on the development of the relevant subsidised economy 

The Draft Guidelines require the subsidies to allow “the subsidised economic activity to exist at all or trigger a change in the development of that subsidised economic activity” (para. 104). This can be the case “when the subsidy remedies a market failure in the internal market” (para. 105). The positive effects must relate to the economic activity “in respect of which a distortion is established” (para. 106). Positive effects on other companies or other markets can be considered as positive effects on other policy objectives (para. 106)

The reasoning of the Commission is sound. It is based on decades of experience in State Aid, where a market failure is usually considered a prerequisite for the aid. However, it is not an exclusive condition, and there may be instances where positive outcomes will arise even in the absence of market failure.  

The necessity to belong to the same economic activity is also sensible. It filters out positive effects produced too far from the harm. In any case, these latter positive effects will not be lost since they can still fall within the second category.  

Positive effects on other policy objectives

The Draft Guidelines consider that positive effects pertaining to “policy objectives which are recognised in Union law (…) [and] reflected in non-binding acts of the EU” should be taken into account, and these include acts in the State Aid framework. They can also relate to “policy objectives other than those of the Union, to the extent that they are nevertheless relevant to the Union. (…) The Commission may assess, (…) whether and how they have an impact on the EU” (para. 108-112).  

These considerations are to be expected. The wording of Article 6 and Recital 21 is broad enough to consider all types of positive effects. Specifically, because third countries granting subsidies will have some policy reasons that are not, by definition, the Union’s ones, the Commission cannot, in principle, set them aside; otherwise, virtually no subsidy will lead to positive effects. However, they must favour the EU: the internal market cannot be worse off after having applied the balancing test. Hence, the sweet spot will be achieved when a third country’s policy objective matches the EU interests.

In any case, the Commission adds a little caveat a few paragraphs above: “the positive effects may be different from those initially intended by the third country providing the subsidy” (para. 103). This consideration is crucial. Virtually no third country will solely act for the well-being of the Union.1 And there can be cases where the sweet spot mentioned above is not achieved. However, the subsidy can prompt some positive effects that were not initially considered by the providing country.  

Accordingly, the FSR spreads out a vast land of positive effects: when a third country seeks to achieve positive effects that match with the Union’s objectives, the ideal outcome is attained. However, even if this alignment is unintentional—if the subsidy produces positive effects not initially foreseen by the third country—those effects should still be welcomed.

On the public procurement side, the Draft Guidelines further elaborate on the express requirement set forth in Recital 21: consider the availability of alternative sources of supply. The Commission has interpreted that as having to take into account whether “alternative sources of supply are not available” (para. 115). This is not a positive effect by itself; the positive effect is “the possibility of the contracting authority to effectively fulfil its functions” (para. 115). Yet, the tender has to be designed “so that non-subsidised tenders can realistically meet its terms as well” (para. 116).  

Takeaways on principles 

Specificity and performance of the balancing

The Commission identifies two key aspects when assessing the relevance of positive effects

1. The specificity of positive effects to the foreign subsidy. In practice, that would entail establishing that the foreign subsidies are linked to a “change in behaviour of the undertaking benefitting from the foreign subsidy” (para. 118).

2. The extent to which the positive effects could have been achieved with less distortion to the internal market (para. 121).  

These two aspects together appear to correspond mutatis mutandis to the condition of necessity in State Aid. This is clear and logical. No positive effect should be considered if it can be equally achieved without any negative effects. Why should we allow harm without corresponding benefit? It is a matter of causality.  

The second aspect raises some uncertainties. Does it mean that there must not be a less distortive way to achieve the same positive effects? Or does it imply that the existence of such an alternative is one factor of the assessment among others? The broad wording seems to point towards the latter option, though the former cannot be excluded a priori. 

Furthermore, it remains to be seen how the Commission will verify whether a less distortive alternative exists. Probably, it will be more important to verify whether another operation — carried out by either the same or a different company — would have brought the same positive effects. Conversely, it will be less relevant to verify whether the third country could have awarded a less distortive subsidy, because the latter has already been granted.

Paragraph 123 deepens the ambiguity further. Indeed, one the one hand, the Draft Guidelines entrust the Commission to consider that “the extent to which the distortion identified exceeds that which is necessary to achieve the positive effects will influence the weight that can be attributed to the positive effects in the balancing exercise”. On the other hand, they refer to State Aid practice, introducing the distinction between avoidable and unavoidable negative effects. They further reaffirm that “positive effects are less likely to outweigh [unnecessary or avoidable negative effects]” (para. 123).  

This raises further questions. From one side, it could be interpreted as simply reaffirming common sense. The more unnecessary the distortion is, the more numerous the negative effects tend to be overall. It is then obvious that in the presence of a plethora of avoidable negative effects, it will be unlikely that the positive effects will outweigh them.  

From the other, by introducing the State aid-like distinction between avoidable and unavoidable effects, the Commission may be implicitly setting out a proportionality test. Yet, in the FSR the proportionality test should play a less meaningful role than in State Aid. This is because of two main reasons:

1. In State Aid, at the moment of the Commission assessment, usually the aid has not yet been deployed and could be recalibrated to ensure proportionality.  In the FSR, the subsidy has already been granted. Therefore, applying a strict proportionality test — implying that the Commission will block the operation because the subsidy is intrinsically disproportionate, even if positive effects outweigh the negative ones — would lead the internal market to be worse off after applying the test. That is an undesirable outcome.  

2. State Aid regime applies directly to Member States; this is not the case for the FSR. It could be delicate for the Commission to call a subsidy from a third country disproportionate in the light of a regulation that does not even apply to them directly.  

Of course, if the subsidies fall within the category of “most likely to distort the internal market” under art. 5(1), positive effects are less likely to outweigh negative effects (para. 122).  

Finally, the Draft Guidelines inform that negative and positive effects do not have to be quantified precisely, because “the balancing test does not constitute a numerical computation” (para. 125).  This approach is, in principle, reasonable, as it allows for more flexibility both for the Commission and for the companies. But for the sake of legal security, quantifiable positive effects should be preferred to ensure better and more reasoned decisions. Of course, this would not be possible for some effects related to broader policies such as environmental protection.

Outcome of the balancing test 

The balancing test can lead to various outcomes (para. 126-132):

1. If the positive effects outweigh the negative: no further action is needed.

2. If the negative effects outweigh the positive:  

                    i.        The Commission may issue a decision with commitments/ redressive measures 

                   ii.        No positive outcome is possible

In some cases, if the company receives several subsidies, these can be evaluated together (para. 132).  

Takeaways on procedural considerations 

Burden and standard of proof 

On the procedural side, the Draft Guidelines require the interested entity to prove the positive effects, thus bearing the burden of proof (para. 133). It implies that in the absence of this voluntary act, the Commission is not required ex officio to look for positive effects. Other parties than the interested one can submit positive effects (para. 134). This is the logical consequence of using the wording “might” and “on the basis of information received” in Article 6.  

The claimant of positive effects should prove them specifically with supporting documents at any point in the investigation. Vague claims would not be sufficient “to establish with a certain degree of likelihood positive effects” (para. 136-137). But, if the evidence is submitted at a late stage, the Commission is not obliged to take it into account “to ensure its ability to adopt its decision is not unduly delayed” (para. 138).  

However, no real standard of proof is brought forward. Simply stating that more precise evidence is convincing does not offer sufficient guidance. While the Draft Guidelines outline the evidentiary requirements, they fall short of articulating a precise standard. The reference to a “certain degree of likelihood” (para. 136) is somewhat fuzzy. Does this wording imply a “more likely than not” threshold, or something closer to “beyond reasonable doubt”? At this stage, it is difficult to say.

Critical assessment of the Draft Guidelines 

The Commission was tasked with the impossible. Providing guidance to companies without having almost any real experience.  

Despite probably not being fully poised for the challenge, the Commission sketched a flexible framework. This resulted in the affirmation of general principles, such as specificity, that are already well known by companies and their legal advisors. The Commission also maintained a certain leeway in the types of acceptable positive effects. While not providing a complete list of examples, the Draft Guidelines furnished some useful explanations and indicated where to find the relevant policy objectives.  

Yet, some shortcomings, albeit almost inevitable, exist.  

First, the Draft Guidelines do not completely clarify the relationship between the FSR and State Aid. Recital 9 considers State Aid as a source of inspiration, but the Draft Guidelines fail to develop on this. They quote State Aid directly or they draw inspiration from some of its concepts, e.g., specificity resembles necessity in State aid, and there is a direct reference to the distinction between avoidable and unavoidable negative effects. Yet, they also hint at some of its principles, e.g., incentive effect or proportionality, without acknowledging them entirely.

Most importantly, the Draft Guidelines do not clarify if State Aid compatibility could play a role (e.g., it could stand as a presumption or at least as a guide) for the balancing test. The omission is regrettable. Companies, practitioners, but most importantly, the Commission have already extended practice in dealing with State Aid compatibility, and giving it a formal or even informal role could have been helpful.  

Second, the Commission does not make a clear distinction between the public procurement and concentration tools. Conversely, the Draft Guidelines outline some distinctions in the section on distortion. While the general principles apply to both, some specificities are proper to a tool and not to the other.  For instance, in the e&/PPF decision, the Commission asserted that the positive effects were not to be considered because they stemmed from the concentration and not from the subsidy— i.e., the criteria of specificity would not have been met. In that case, the distortion was not found in the bidding process but in the future activities of the merged entity. However, should the outcome be the same if a subsidy distorts the acquisition process? Probably not, but a confirmation from the Commission would have helped clear the doubts. This example is one of many others demonstrating that each tool might raise specific questions, and that the Commission fails to take into account these differences.  

Finally, some elements lack precision. As mentioned, it is unclear whether the Draft Guidelines embrace a fully-fledged proportionality test, and the standard of proof is not well defined.  

In any case, one should start somewhere, and the Draft Guidelines set this encouraging beginning of shaping the balancing test. As the Commission showed openness in explaining how it intends to enforce the FSR, it is now time to exchange the favour by submitting its consultation before 11 September 2025, 17:00 (CEST). 

• 1Lena Hornkohl, Protecting the Internal Market From Subsidisation With the EU State Aid Regime and the Foreign Subsidies Regulation: Two Sides of the Same Coin?, Journal of European Competition Law & Practice, 2023, vol. 14, no. 3, p. 146.