Over a year has passed since the Foreign Subsidies Regulation (FSR) fully entered into force, with the European Commission using its new powers to scrutinise both M&A transactions and public procurement processes for distortive foreign subsidies. In this article, we explore the insights and lessons learned from the first year of the regime’s implementation, as well as practical tips to help firms navigate the FSR’s requirements effectively.

Overview of the FSR

The FSR equips the Commission with tools to identify and mitigate the distortive effects of subsidies granted by non-EU countries. The regulation imposes mandatory notification and approval requirements for certain M&A transactions and public tenders, and grants the Commission the authority to conduct ex officio investigations into potentially problematic foreign subsidies. The three primary tools introduced by the FSR are:

1. A mandatory notification and approval requirement for mergers, acquisitions, and the creation of full-function joint ventures that meet specified turnover and foreign financial contribution (FFC) thresholds (the M&A component).
2. A mandatory notification and approval requirement for companies bidding for public tenders that meet specified tender value and FFC thresholds (the public procurement component).
3. Powers to conduct ex officio investigations into foreign subsidies.

For a more detailed overview of the FSR and its practical implications, please see our earlier articles: FSR as a whole; implementing regulation; and notification obligations. 

The Commission’s caseload

According to a Commission policy brief, in the first 100 days following the FSR’s implementation, the Commission engaged in pre-notification discussions in 53 M&A cases, with 14 notifications submitted, nine cases cleared, and one withdrawn. This is considerably higher than the estimated 33 notifications the Commission expected to receive annually (but considerably lower than the 115 notifications the Commission received under the EUMR in that same period). The Commission also reported that a significant proportion of those transactions involved investment fund(s). Under the public procurement component, the Commission received over 100 notifications in the same period, nearly three times its initial estimate of 36 cases annually. The high volume of notifications underscores the significant impact the FSR is having in terms of compliance burden for firms engaging in EU procurement processes and/or acquisitions of businesses with significant activities in the EU.

The decision making process under the FSR is less transparent than under the EU Merger Regulation (EUMR), since the Commission publishes Phase 1 decisions only where an in-depth investigation is opened.  It does not publish, or indeed issue, formal clearance decisions (parties instead receive an administrative letter informing them of the closure of the investigation and the end of the standstill obligation). However, notified transactions have recently begun to be listed in the Commission’s public case register (before, the fact that a transaction had been notified to the Commission only became public when an in-depth investigation was initiated), thereby providing a greater insight into the volume of cases which have been handled. At a recent conference the Commission also revealed that, as of 31 October 2024, it had received 128 draft notifications and 105 formal notifications. Of these, 93 cases have been closed, including one in-depth investigation (Emirates Telecommunications Group/PPF Telecom Group). Based on the case numbers of the transactions listed in its public register at the time of writing, it appears the Commission has allocated case teams in respect of at least 158 transactions¹. Therefore, it appears that some of the case team requests to date have not resulted in the submission of a draft notification.

Notifications are managed by a new Directorate (Directorate K) within DG Competition, established on 1 March 2024. This comprises three units dedicated to enforcing the FSR, staffed by officials with substantial experience in policy as well as merger control and State aid cases. The creation of Directorate K reflects the Commission’s commitment to the effective implementation and enforcement of the FSR. We can expect this to continue under the incoming Commissioner, who, in her recent answers to written questions from the EU parliament, stressed her intention to “give highest priority to enforcing the Foreign Subsidies Regulation”.

Enforcement action

The Commission has not shied away from using its new enforcement powers. 

Public procurement 

To date, the Commission has opened three in-depth investigations further to notifications under the procurement component of the FSR:

• In February 2024, the Commission opened an investigation into a bid by Chinese state-owned enterprise, CRRC, for a Bulgarian rail contract. Although CRRC had not disclosed any FFCs (on the basis that no FFCs met the reporting requirements in the FSR Implementing Regulation), the Commission disagreed and found that it had received over €1bn in government grants since 2020. Given that CRRC’s bid was around half the contracting authority’s estimate (and half the value of the only other bid), the Commission identified potential distortions to the internal market.
• In April 2024, two further investigations were opened in relation to two bids from consortia linked to Chinese companies (ENEVO Group and Shanghai Electric) for a solar farm construction contract in Romania. In both cases, the relevant FFCs significantly exceeded the value of the contracts and the notifying parties had not provided information on their specific nature or purpose, such that the Commission concluded they had a potentially distortive effect on the internal market.

All three bidders under investigation withdrew their bids following the opening of the investigations (which were subsequently closed). This suggests that not many bids will survive being referred for an in-depth investigation, given the significant delay this necessarily entails. This may present difficulties for contracting authorities, as well as bidders. Whilst the FSR itself is nominally country-agnostic, the fact that all bidders investigated to date have been Chinese has not gone unnoticed, with the China Chamber of Commerce to the EU (CCCEU) stating that FSR enforcement is discouraging Chinese investment in the EU economy. 

Concentrations

In June 2024, the Commission initiated an in-depth investigation into Emirates Telecommunications Group’s (e&) acquisition of PPF Telecom Group, which it concluded in September. The Commission was concerned that subsidies previously granted to e& by entities linked to the Emirati state could lead to a distortion of competition post-transaction by artificially improving the merged entity’s capacity to finance its activities in the internal market (the acquisition process itself was not distorted, as there were no competing bids and e&’s own resources were sufficient to finance the acquisition). However, the Commission conditionally approved the transaction after e& agreed to a 10 year commitment package which included: 

• removal of an unlimited State guarantee from the UAE government, through alterations to e&’s articles of association; 
• a prohibition on e& and the Emirates Investment Authority financing PPF’s EU activities (with some exceptions); and 
• a requirement to notify the Commission of future acquisitions (including those falling below the notification thresholds), to provide the Commission with an appropriate monitoring mechanism going forward. 

Acquirers are likely to be encouraged by the Commission’s willingness to agree to behavioural remedies rather than imposing structural remedies, although it is notable that the territorial scope of the remedies appears to extend beyond the EU. In particular, the removal of the unlimited State guarantee from the UAE government required amendments to the articles of association of e& (an Emirati company), to ensure they do not deviate from ordinary UAE bankruptcy law.

Ex officio

Two such investigations, both in April 2024, have been initiated: one concerning Chinese suppliers of wind turbines for projects in several EU countries; and another concerning Nuctech, a Chinese supplier of airport security scanners (including the first surprise on-site inspections under the FSR). Again, this enforcement action prompted an adverse reaction from the CCCEU, which accuses the Commission of imposing “market barriers against Chinese companies”. 

In relation to the latter investigation, Nuctech appealed the on-site inspections to the EU General Court, arguing that the Commission had unlawfully requested information outside the EU, specifically email correspondence involving Chinese nationals stored in China. Nuctech claimed that complying with the request would violate Chinese laws and that the on-site inspections violated its EU rights, were arbitrary, and lacked evidence of foreign subsidies distorting the internal market. Nuctech also argued that the Commission had failed to meet procedural requirements. Alongside its appeal, Nuctech sought interim measures suspending the investigation, but the General Court rejected this request, citing insufficient evidence. The main appeal is still ongoing.

Notification 

The notification process under the FSR can be complex and demanding, not least because the concept of FFC is very broad (capturing more than just subsidies) and the information required by the notification form (on those FFCs, and otherwise) can be extensive. This has placed a significant administrative burden on firms in the private equity sector in particular, where the Commission scrutinises limited partner commitments (see below) and potential state-linked investments. 

When notifying M&A transactions and public tenders, detailed reporting is required for all FFCs exceeding €1m² that may fall under Article 5 FSR (which captures subsidies that are “most likely to distort the internal market”). In this regard, the Commission's Policy Brief provides some important clarifications on two key categories of subsidy that may fall under Article 5 FSR:

i. contributions to “ailing” undertakings

These are firms that are likely to go out of business without subsidies, as identified through the application of specific financial indicators, such as a significant loss of capital or a high debt-to-equity ratio. Significantly, the Commission's Policy Brief clarified that this assessment must be carried out at the legal entity level. This means that if any entity within a group is considered ailing, that fact must be disclosed in the Form FS-CO notification, even if the overall group is not ailing.

ii. contributions “directly facilitating a concentration”

These are FFCs used to finance or benefit the transaction, including grants, loans, or guarantees specifically intended for the acquisition in question. However, the intention of the relevant third country to facilitate a specific transaction is not determinative – a grant, loan or guarantee which is issued for acquisitions generally, or is otherwise used for an acquisition, may also be considered as directly facilitating a concentration. Consequently, the Commission has stated that limited partner investments by state-linked entities in an acquiring investment fund should in principle be reported as potentially falling under Article 5 FSR, since such investments are typically made to provide resources for acquisitions. The notifying party will also be expected to explain in the notification whether or not those investments have been made at market conditions and whether the state-linked investors have any governance or decision-making rights. That said, the Commission may, at its discretion, allow state-linked limited partner investments to be reported in aggregate/at a high level, without the need to provide the full details requested in the Form FS-CO.

The FSR Implementing Regulation offers exemptions from reporting for certain tax measures, as well as for contracts for goods or services on market terms. The Commission has clarified that parties may self-assess whether these exemptions are applicable. By way of contrast, the exception applicable to concentrations involving investment funds (pursuant to which investment companies may not need to report FFCs granted to controlled funds which are not involved in the transaction being notified) does not permit self-assessment. Instead, the Commission has made clear that parties must expressly invoke the exception and substantiate that its conditions are met (including that the investors in the non-acquiring funds differ sufficiently from those in the acquiring fund in terms of their entitlement to profit, and there are limited economic and commercial links between the different funds). 

Timing considerations 

In theory, the Commission’s review timetable under the M&A component of the FSR mirrors that under EUMR, with a 25 working day Phase 1 review followed, if necessary, by a 90 working day Phase 2 process.

However, experience to date shows that the distinct issues addressed under the FSR and EUMR can make it challenging to align notification strategies and clearance timelines. Notably, pre-notification periods can vary significantly between the two processes, influenced in particular by the complexity of the requisite information gathering exercises, and there have been cases where transactions have been cleared under the EUMR whilst pre-notification discussions under the FSR were still ongoing (with the gap between the conclusion of the EUMR process and the formal commencing of the FSR process sometimes being as long as two and a half months). 

For the one transaction to date which required an in-depth investigation (Emirates Telecommunications Group/PPF Telecom Group), pre-notification discussions may have taken over eight months, assuming they began shortly after the deal was publicly announced in August 2023. At the same time, that case suggests that the Commission is perhaps better able to keep to the standard timetable, without a need for extensions, than it is under the EUMR. The Commission concluded its investigation 15 working days ahead of the deadline, despite having to negotiate suitable remedies to address the potential distortion it identified.

Clarification of the concept of distortion

The Commission’s substantive assessment under the FSR involves a determination of whether foreign subsidies have been granted which distort the internal market, in particular by improving the competitive position of the recipient such that competition in the internal market is negatively impacted.

On 26 July 2024, the Commission issued a Staff Working Document providing some initial clarifications on the concept of distortion (and the balancing test) under the FSR, ahead of more formal guidelines being adopted by January 2026. Points of note included the following.

• To find a distortion, the Commission must establish a clear link between the foreign subsidy and the recipient undertaking’s activities within the EU. Such a link is likely to be presumed where the subsidy is granted to an entity active in the internal market. Where the subsidy is received by an entity not active in the EU, the Commission will need to examine how the subsidy has been used in practice and whether it might cross-subsidise the undertaking’s EU activities.
• In determining whether competition is negatively affected, the Commission will have in mind the FSR’s aim of preserving a level playing field within the internal market, in which undertakings compete on the merits. The level playing field is not respected when the chances of succeeding are unduly altered by support from a third country for one or more market players.
• Where a subsidy falls within the Article 5 FSR categories of foreign subsidies most likely to distort the internal market, the Commission does not need to perform a detailed assessment of whether the subsidy will lead to a distortion; it will instead presume the existence of a distortion, subject to any evidence to the contrary submitted by the recipient undertaking.
• In an M&A context, when assessing whether a subsidy in a concentration distorts the internal market, the Commission’s assessment is limited to the concentration concerned. In this regard, the Commission will consider both whether the foreign subsidy distorted the competitive process through which the target was sold (i.e. by giving the recipient an advantage when bidding for the target) and whether, post-merger, subsidies granted in the three years prior to the conclusion of the sale agreement could lead to distortions in connection with the merged entity’s activities on internal market (see Emirates Telecommunications Group’s/PPF Telecom Group, discussed above). 

In public procurement scenarios, the Commission must establish both that the tender submitted was unduly advantageous (including by reference to other bids submitted and the contracting authority’s own estimates or budgets) and there is a clear link between the foreign subsidy and the submission of the advantageous tender.

Practical tips 

In view of these developments, to navigate the FSR’s requirements effectively, firms should:

• where applicable, ensure any notification and clearance requirements are adequately provided for in transaction timelines and documentation (including through the use of appropriate long-stop dates), in view of the significant time needed to collate information and documents, prepare the notification, and engage in pre-notification discussions (which can last upward of four months, even in no-issue cases);
• establish robust processes and systems to collect group/portfolio-wide information on potential FFCs. For buyout firms operating with the EU, ideally this should be done on a continuous basis (rather than in response to a specific prospective transaction), in order minimise delays to the FSR analysis and notification process;
• be prepared to submit to the Commission a larger number of documents relating to the preparatory stages of a transaction, compared to a typical EUMR notification process; and 
• proactively engage with the Commission case team, once allocated, to confirm the level of detail required in respect of FFCs that may fall under Article 5 FSR – particularly buyout firms looking to take advantage of the investment fund exception.

Conclusion

The first year of the FSR’s implementation has been marked by a high volume of notifications, detailed scrutiny of FFCs, and active enforcement by the Commission. Firms should adapt to the new regulatory landscape by implementing robust processes to identify, and report foreign financial contributions and integrating FSR requirements into their transaction management. As the Commission continues to refine its approach and issue further guidance, firms should stay informed and proactive in complying with the FSR.

¹ A case number is assigned once a case team is allocated to a transaction – i.e. before receipt of any draft notification.

² Based on experience to date, the Commission may also request information on contributions below this threshold.