The Guidelines on the Foreign Subsidies Regulation: Condensing the Commission’s First Experience

On 9 January 2026, the Commission adopted its Guidelines on the application of certain provisions of the Foreign Subsidies Regulation (FSR). This publication follows the publication of the Draft Guidelines in July 2025 and increasing enforcement action at the end of 2025, including the opening of an in-depth investigation into Nuctech and a dawn raid at Temu’s headquarters. Just after the ‘third anniversary’ of the FSR and prior to the Review of the Regulation (due by July 2026 according to Article 52(2) FSR), the Guidelines provide an insight in the Commission’s thinking on the application of the regime for the review of foreign subsidies. We will discuss each of the three main chapters of the Guidelines in turn.

Existence of a distortion in the internal market

Article 4(1) of the FSR provides that foreign subsidies create distortions in the internal market if they are (i) liable to improve the competitive position of an undertaking in the internal market and (ii) they actually or potentially negatively affects competition in the internal market.  The guidelines discuss each of these two cumulative conditions in turn and contain a specific section covering their application to public procurement procedures (see Hornkohl and Mattiolo for a broader overview on the distortion test).

Targeted and non-targeted subsidies

As regards the first criteria, an important innovation compared to the Draft is that the Guidelines now clearly categorise foreign subsidies as ‘targeted’ or ‘non-targeted’ (para 18). Targeted subsidies directly or indirectly support the beneficiary’s activities in the EU Single Market, and are assumed to be liable to improve the undertaking’s competitive position. Non-targeted subsidies are all the other subsidies – they do not support activities in the EU or do not have a clear destination – and are relevant if they enable the undertaking to free up resources to be used for its EU activities, viz. cross-subsidisation. The Guidelines provide examples for both categories.

The Draft Guidelines already featured some indicators (shareholding structure, agreements with third parties, applicable laws, etc.) to assess the likelihood that non-targeted subsidies may improve the undertaking’s competitive position in the internal market, and potentially produce a distortion. In the final version, the Commission added “other functional, economic and organic links” as a possible factor: e.g., joint or overlapping management, coordination of strategies, financial synergies, economic interdependence and industrial integration (paras 25-26). This type of links may be more frequent when a third country’s economy or a specific industry is coordinated to some degree by the government or a ruling clique.

The category of non-targeted subsidies remains open and potentially very broad. The Commission nevertheless seems to have taken into account the request by stakeholders to clarify what foreign subsidies may not fall under the scrutiny of the FSR, since the Guidelines now contains instances of subsidies that are considered not liable to improve the competitive position. These include subsidies that are ‘granted for addressing a market failure outside the Union’ and those that ‘would materially comply with the Union rules on compatibility with the internal market had they been granted by a (EU) Member State’, that pursue purely non-economic or social objectives, or that are insignificant in relation to EU economic activities of the beneficiary (para 33).

Negative impact on competition

The Guidelines continue by illustrating how the Commission checks the second condition of the distortion test, i.e. that the subsidy negatively affects competition in the internal market – actually or potentially. This ‘alteration of (…) competitive dynamics to the detriment of other economic actors’ can relate to future activities and all markets connected to the one where the subsidy beneficiary is active – downstream, upstream or affected in any way (paras 36-39). A subsidy may be incompatible with the FSR if it contributes to the negative impact, even if it is not the sole cause of the alteration (para 41). Any distortion is relevant under the FSR if ‘appreciable’ and the Regulation does not require them to be of ‘serious nature’: only subsidies falling below the de minimis thresholds of Article 4 are considered not distortive and, therefore, outside the scope of the tool (para 43). The Guidelines also clarify that, for undertakings not yet active in the internal market, any assessment of the effect of foreign subsidies they receive can only be performed at the moment when these undertakings contemplate engaging in an economic activity in the internal market (para 45).

The Guidelines illustrates these principles through a series of examples of the main categories of distortions. These include subsidies used in the acquisition process of other undertakings (offering a sort of summary of the e&-PPF Telecom Group decision at paras 60-64); subsidies enabling aggressive pricing and commercial practices (paras 65-69); subsidies that allow for higher‑risk investments by negating the risk, e.g., unlimited guarantees (paras 70-73); and subsidies that disrupt the value chain (paras 74-77).

Distortions in public procurement tenders : ‘unduly advantageous’ tenders

The Guidelines are particularly interesting as they elaborate on the distortion test carried out by DG GROW in public procurement procedures – on which we lacked the initial clarity shed by the first in-depth decision of DG COMP in the concentration procedure in the e&-PPF Telecom Group case. The distortion here is limited to the public procurement procedure in question and the improvement of the competitive position is composed of two elements: the foreign subsidy makes a tender (i) advantageous and that advantage is (ii) undue (paras 78-82). The advantage may consist in a lower price, higher quality, better terms, but also improved social and sustainability values. To detect the distortion, the Commission looks at the counterfactual: how would the tender process have unfolded without the benefit of the subsidy. The Guidelines state that this can be done by comparing it with other bids or the estimates of the contracting authority, or relying on information from competitors or the market (paras 83-86).

The advantage is ‘undue’ when it is produced ‘to an appreciable extent’ by the subsidy (and not necessarily as its sole cause, para 92), whereas it is ‘due’ when other factors may have ‘plausibly’ justified it (para 87). Finally, the Commission assesses if the unduly advantageous tender has, or may have, a negative effects on competition, such as the award of the contract to the subsidised economic operator, or it influenced the results of a negotiated procedure, or deterred other potential bidders (paras 93-94). The issue is intertwined with the question of abnormally low tenders in EU procurement law, and the Guidelines refer to the Public Procurement Directives and the case law on the matter (paras 88-91). On the procedural side, the Guidelines clarify that the Commission is solely responsible for determining the unduly advantageous nature of the tender, while contracting authorities are responsible for assessing its abnormally low nature (para 95).

Balancing test: the Commission keeps its hands free

Next, the Guidelines discuss the balancing test under Article 6 of the FSR. This provision allows the Commission to balance the negative, distortive effects of a foreign subsidy against the positive effects it may have, in particular, on the development of the relevant subsidised economic activity on the internal market or broader policy objectives. This balancing is ‘a comparison of the respective significance’ of negative and positive effects and includes assessing the ‘extent to which the distortion identified exceeds’ what ‘is necessary to achieve the positive effects’ (paras 122-126).

While the Draft Guidelines – and Article 6(2) FSR – seemed to impose a clear obligation on the Commission to conduct such a balancing test before adopting redressive measures or accepting commitments, albeit granting broad discretion under Article 6(1) as to how the test is carried out, the wording in the final version has become less strict. This issue is relevant and deserves consideration (see Hornkohl and Mattiolo for a detailed analysis of the balancing test), as undertakings have an interest in the Commission conducting the balancing test, and carefully considering the positive effects of the subsidy. At the same time, the Commission understandably does not want to be pushed to consider all possible positive effects of subsidies under a Regulation which primarily aims to avoid their negative, distortive effects.

Additionally, the Commission removed the explicit mention that the balancing test can only result in a “more favourable” outcome for the undertaking. This consideration in the Draft Guidelines was perhaps redundant, as the balancing test is the moment to draw out the potential positive effects of the subsidy. The negative ones are considered in the distortion test, so the balancing will naturally lead to a more favourable decision or it will not have any impact.

Private parties will welcome other changes to the Guidelines. First, the wording on the burden of proof on the undertaking under scrutiny has become softer: the undertaking is still expected to provide information on the positive effects, but other stakeholders can also argue in favour of the subsidy and its merits, and in a determinant way. Second, the Commission clarified that, in case of multiple subsidies, it is possible to conduct a ‘cumulative assessment’ of the positive effects, and not just the negative ones, when the effects of the different subsidies are too intertwined (para 134).

The positive effects to be balanced

The Guidelines provide some examples on the possible positive effects to be balanced and clarify the weight that different types of positive effects may have in the Commission’s balancing (section 3.2). First of all, the Commission considers the ‘positive effects on the ‘relevant subsidised economic activity’, i.e. how the subsidy ‘enables’ the activity as a whole or a change in its growth (para 106), for example by addressing a market failure. The Guidelines clarify that this refers only to the specific economic activity under scrutiny, the same that is producing the distortion, not to other activities or the broader industry or market. In fact, these other economic activities can be examined by the Commission as part of the ‘other positive effects’ (para 108).

The Guidelines then describe this residual category of ‘other policy effects’ (section 3.2.2), corroborating the impression that the text of Article 6(1) FSR gives them less weight than the development of the subsidised activity. These positive effects relate to ‘relevant policy objectives’, and ‘in particular those of the Union’. The policy objectives may be acknowledged by EU law – especially when enshrined in the Treaties or the Charter of Fundamental Rights – or non-binding acts, such as State aid law communications and guidance. In the public procurement procedure, the Commission may consider the ‘possibility to conclude a public contract (…) where alternative sources of supply are not available’ as a positive effect (para 116). A subsidised contractor may be necessary, for example, ‘where a particular technology is not yet available on the internal market; (…) to ensure critical public services or where (it) is the only tenderer’, on the condition that the contractor ‘does not present a risk to security or public order’ (para 117). Indeed, in comparison to the Draft, the Guidelines now also specifically mention economic security and defence policy among the ‘other policy goals’ to be considered during the balancing test (para 112).

The Guidelines also clarify the (lighter) weight of non-EU policy goals, as the balancing test considers ‘in particular’ the EU ones. Goals of third countries are to be considered ‘to the extent that they are nevertheless relevant to the Union’.  This may happen when foreign policies pursue ‘a global welfare improvement’ or benefit the EU (para 113).

Relation between positive effects, subsidy and distortion

The Guidelines reiterate the point – already made by the Commission in the e&-PPF Telecom Group decision – that only the positive effects specific to the subsidy are considered in the balancing test (section 3.3.1). The positive effects of the subsidised economic activity itself are irrelevant and would be quickly dismissed by the Commission, as happened in the previously mentioned case. The positive effects are specific to the subsidy when ‘absent the foreign subsidies, (they) would not occur, or otherwise not to the same degree’. Parties have to demonstrate how the subsidy leads to the change in behaviour of the beneficiary that yields the positive effects, regardless of the intentions of the foreign country that granted the aid.

The Commission also looks at the negative effects (i.e. the distortion), as it considers to what degree the negative effects are necessary to achieve the positive effects. ‘Unavoidable’ negative effects may remain in place if outweighed by the positive ones, while the Commission can remove the avoidable negative effects through the remedy: the final result of the balancing test should be that all distortions are offset by either a remedy or a positive effect (paras 126-132). In this context, the Guidelines  refer to State aid law, where State intervention is compatible only when kept to the ‘minimum necessary’.

Call-in powers for concentrations and public tenders

The final chapter of the Guidelines discusses the Commission’s call-in powers. The FSR indeed allows the Commission to request the notification of a concentration or public procurement procedure that is not notifiable under the specialised procedures provided for this in the FSR, in particular because the relevant thresholds are not met. By demanding the prior notification, the Commission can nevertheless start the relevant special procedure of ex ante review. Alternatively, the Commission has the power to start an ordinary ex officio investigation later (paras 153-158).

The Commission may prefer to demand the prior notification (rather than start an ordinary ex officio investigation) to prevent the implementation of the concentration or public tender due to ‘its impact in the Union’. The Guidelines explain that the latter notion refers to the impact a concentration or public procurement would have on the flow of goods or services in the EU, or on the access to technology or intellectual property, in light of the FSR’s general objective to pursue the level playing field (paras 171-172). They add that the Commission will seek to strike a balance between the effective protection of the internal market and the need to minimise the administrative burden on undertakings. The Guidelines further detail the factors the Commission will consider in assessing whether an ex ante review is necessary (such as the significance of the economic activity concerned), and the procedure the Commission will follow.

Conclusions

Overall, the Guidelines provide a significant amount of additional information for undertakings, their advisors and third party stakeholders on how the Commission interprets certain provisions of the FSR. They reflect the experience the Commission has obtained with the practical implementation of the FSR during the first three years of its application. The final version of the Guidelines presents a clearer text compared to the Draft and addresses several comments raised by stakeholders during the consultation.

At the same time, the Guidelines do of course not alter the fundamentals of the FSR itself. During the consultations on the Draft and the FSR Review, some stakeholders continue to be very critical of the foreign subsidies review system itself. Unsurprisingly, this includes the American Chamber of Commerce and its Chinese equivalent, but also within Europe there are powerful voices that want to reduce the red tape created by the FSR. The German Government, for instance, has argued for a “fundamental redesign” of parts of the FSR without notification-based procedures for concentrations and public procurement, built around the Commission call-in and ex officio powers. However, many other stakeholders – and Mario Draghi – agree that the FSR is a necessary tool to advance the competitiveness agenda, as it can level the playing field and allow European businesses to compete fairly and on the merits.

The upcoming review of the FSR will provide an opportunity to reassess the merits and costs of the FSR, but in the meantime, the new Guidelines should at least provide further clarity on the way the Commission currently applies the rules.