Understanding the Balancing Test under the Foreign Subsidies Regulation

The central purpose of the EU’s Foreign Subsidies Regulation (FSR) is clear: to tackle distortions in the internal market caused by subsidies granted by non-EU states. But what if these subsidy-fuelled activities not only distort but also create positive effects? How should they be measured and assessed? This is addressed by one of the most discussed und misunderstood features of the FSR: the balancing test under Article 6.

After several discussions on the blog over the summer following the Commission’s Draft Guidelines (see here and here), we would like to contribute to the ongoing debate with our recent draft paper „Weighing the Scales: The Balancing Test of the Foreign Subsidies Regulation“. The main findings are summarised in this post. We look forward to receiving comments for adapting the final version!

The Balancing Test: Overview

The balancing test was originally conceived as the “EU interest test” in the 2020 White Paper, inspired partly by the “Union interest” analysis in trade defence law. But its scope was vague and politically contested. During the legislative process, it morphed into today’s Article 6 FSR: the Commission may balance the negative effects of a foreign subsidy (i.e., the distortions it causes) against possible positive effects.

Those positive effects can be of two types:

1. Economic effects: benefits for the development of the subsidised activity in the EU.

2. Other policy effects: broader contributions to EU objectives, such as environmental protection, research and development, or social standards.

The Commission is required to take the balancing into account when deciding whether to impose remedies or accept commitments. If positive effects clearly outweigh distortions, it must issue a “no objection” decision. This is more than a mere technicality: the balancing test could be the FSR’s safety valve, preventing mechanical enforcement and allowing space for industrial policy considerations.

Mapping the Legal Sources

To understand the balancing one must piece together the limited legal sources guiding it:

• Article 6 FSR and related provisions (Articles 4–5 on distortions, Articles 11, 25, and 31 on procedures).

• Recital 21 FSR, which offers hints about avoiding “unjustified discrimination.”

• Legislative history, tracing the shift from the White Paper’s EU interest test to the Draft Regulation’s narrower focus and finally to today’s compromise.

• Commission clarifications of 2024 (see blogpost here), the first decision in e&/PPF Telecom Group (see blogpost here), and now the Draft Guidelines.

• General principles of EU law: necessity and proportionality.

Comparisons with Other Areas of EU Law

Taken the complementary nature of the FSR, the balancing test itself can be situated within the broader EU legal landscape but seems unique:

• State aid law offers only limited parallels. There, aid is generally incompatible unless justified by predefined compatibility criteria. By contrast, the FSR allows case-by-case balancing of positive and negative effects.

• Trade defence law is closer. The “Union interest test” weighs competing interests to decide whether to impose measures, without strict quantification.

• Competition and merger control also provide analogies. Efficiencies and non-competition goals may be considered alongside anti-competitive effects, much like positive effects under the FSR.

This comparative exercise shows that the balancing test is not an alien transplant but a hybrid, borrowing elements from several fields.

The Dogmatic Setup: Where Balancing Fits

The balancing test sits procedurally in the in-depth investigation phase, after the Commission has found a subsidy distortive but before deciding on remedies. Its role is therefore pivotal: it connects the distortion assessment with the remedy stage. Remedies must target “unnecessary” negative effects while preserving positive ones. If positive effects prevail, no remedy can be imposed. Coming back to comparing: Unlike in State aid law, the subsidy has already been granted, so the FSR cannot reshape the aid itself. Instead, the balancing influences what corrective measures the Commission may demand from the company.

How Balancing Works in Practice

Drawing on the Draft Guidelines and the e&/PPF case, the balancing process can be summarised in the following:

1. Specificity: Positive effects must be directly attributable to the subsidy, not merely to the subsidised activity more broadly. This tripped up e&/PPF, where alleged benefits came from the acquisition itself rather than the foreign subsidy.

2. Weighting of interests: The Commission compares the significance of positive and negative effects. Necessity plays a role: distortions “unavoidable” to achieve the positive effects are treated more leniently, while “unnecessary” distortions count heavily against the company.

3. Discretionary assessment: There is no mathematical formula. The Commission will rely on broad factors such as the nature, impact, and contribution of effects to EU policy goals. The question remains: to what degree will this be reviewable in court?

4. Interaction with remedies: Commitments offered by companies can reduce distortions, thereby easing the balancing. Conversely, strong positive effects may reduce the need for remedies.

What Positive Effects Count Where?

A crucial part of the analysis concerns the hierarchy of possible positive effects.

• Primary focus: the development of the subsidised activity in the EU. Examples include correcting market failures, boosting innovation, or enabling investment that would otherwise not occur.

• Secondary focus: other EU policy objectives, such as environmental protection, research and development, social rights, or strategic autonomy. The Draft Guidelines draw on the EU Treaties and State aid practice for inspiration.

• Tertiary consideration: non-EU policy objectives (e.g., development goals of the granting country). These may be considered only insofar as they also benefit the Union, for example by contributing to global public goods like climate action. And there is some tension here: while Article 6(1) FSR suggests EU objectives dominate, the Treaties’ international commitments might justify giving some weight to third-country goals.

Procedural Points: Evidence and Burden of Proof

The balancing test is evidence-driven but the burden of proof lies with the affected companies. Article 6(1) specifies that the Commission bases it “on the information received.”

This means:

• Companies must self-assess and provide detailed evidence on positive effects.

• The Commission is not expected to identify positive effects on its own.

• Other stakeholders (Member States, third parties) may also submit information.

This makes the balancing test a unique hybrid: closer to self-assessment under Article 101(3) TFEU than to State aid or trade defence practice.

Conclusion and Broader Policy Implications

Ultimately, the balancing test’s significance lies not just in legal doctrine but in policy:

• It could allow the Commission to integrate industrial policy objectives (similar to state aid law), including economic security and strategic autonomy, into competition enforcement.

• At the same time, its case-by-case, evidence-based design may steer it back toward a narrower, competition-like logic.

• The test may also temper enforcement, avoiding rigid “automatic” prohibitions and offering undertakings a last chance to defend their subsidies.

The balancing test is arguably the most innovative and uncertain part of the FSR. It sits at the intersection of competition law, trade defence, State aid, and EU policy. It gives the Commission discretion but also binds it to principles of necessity and proportionality.

For businesses under investigation, two things are important. First, the balancing test offers a genuine opportunity to argue that a subsidy’s benefits outweigh its harms, but only if they can marshal robust, subsidy-specific evidence. Second, the Commission’s evolving practice, starting with e&/PPF and guided by the forthcoming Guidelines, will be decisive in shaping how much space the balancing test leaves for positive effects.