European Commission Publishes Call for Evidence for Upcoming FSR Guidelines

The EU Foreign Subsidies Regulation entered into force on 12 July 2023, and as of 12 October 2023, companies engaging in large transactions and bidding for large public procurement contracts in the European Union, are required to obtain prior approval from the European Commission.

The EU Foreign Subsidies Regulation [1] (FSR) allows the European Commission (EC) to address distortions in the internal market, caused by subsidies provided by foreign countries to companies which operate in the EU.

The FSR aims at closing a regulatory gap. Indeed, up until its adoption, the EC had the power to review distortions of competition in the internal market caused by subsidies provided by a member state to a private company (under the state aid regime). However, similar distortions were not captured when the subsidy came from an extra-EU country.

HOW THE FSR WORKS

Under the FSR, the EC can review transactions in which the purchaser has benefited from foreign subsidies. The FSR is based on a far-reaching concept of “foreign financial contribution” and requires notifying companies to identify and report all financial contribution provided by a third country (with limited exceptions), which confers a benefit on any specific undertakings. This includes, but is not limited to, interest-free loans, unlimited guarantees, capital injections, debt forgiveness, tax credits, tax emption or benefits, and the provision or purchase of goods or services.

Whenever a company that has received these types of contributions implements a concentration which has an impact in the EU (Concentrations Module) or submits a bid in a public tender in the EU (Public Procurement Module), the company has a duty to notify the EC if certain thresholds are met. This article focuses only on the Concentrations Module and does not cover the EC activity in the public procurement sector.

A concentration has to be notified under the FSR when (1) the target has an EU turnover of at least €500 million, or (2) the foreign financial contributions amount to more than €50 million in the three years prior to the conclusion of the transaction, the announcement of the public bid, or the acquisition of a controlling interest. [2]

The vast majority of financial contributions count towards the EUR 50 million notification thresholds; however, detailed reporting is only required for financial contributions that

• individually exceed €1 million;
• qualify as one of the “most likely distortive” categories of subsidies, including:
  • subsidies granted to ailing firms with no viable restructuring plan that are otherwise likely to go out of business in the short or medium term;
  • an unlimited guarantee for debts or liabilities;
  • export credits that are not compliant with the Organisation for Economic Co-operation and Development arrangement on officially supported export credits; and
  • subsidies directly facilitating a specific merger or enabling the submission of an unduly advantageous tender.

Simplified reporting will be required for all “other” financial contributions over €1 million, that in aggregate and per country, amount to more than €45 million.

Once the EC has received a notification, it will assess the legality of the financial contribution through several tests:

• The EC will identify the relevant subsidy.
• The EC will assess the distortion caused by the subsidy. A subsidy will be considered distortive when it improves the competitive position of an undertaking in the internal market, and places it in a position that its competitors cannot achieve absent the subsidy. Certain types of subsidies are considered most likely distortive, such as unlimited guarantees, or export financing.
• The EC will conduct a balancing test between the positive and the negative effects that the subsidy will produce. Positive effects can either be economic efficiencies stemming from the transaction or relate to EU policies and priorities.

If the EC concludes that a foreign subsidy distorts competition within the internal market, it can either prohibit the transaction or accept remedies that resolve the distortion. Such measures can be structural, behavioural, or redressive.

THE FIRST AND ONLY EC DECISION TO DATE

While data on notifications and “phase I” clearances have not yet been published, it is estimated that the EC has received approximately +150 FSR notifications.

In September 2024, the EC issued its first FSR decision in the Concentrations Module, following an in-depth investigation on the proposed acquisition of PPF Telecom Group BV (PPF), a telecom group active in Eastern Europe by Emirates Telecommunications Group Company PJSC (e&) (a telecom operator based in the UAE controlled by the Emirates Investment Authority (EIA)). The EC first confirmed that e& and EIA received potentially distortive subsidies from the UAE in the form of an unlimited state guarantee via exemptions from the applicable bankruptcy laws and a term loan to e& used to finance the transaction from five banks whose actions could be attributed to the UAW, with indications that it was not obtained at market conditions.

POTENTIAL DISTORTIONS FROM SUBSIDIES

The EC found that the foreign subsidies

• did not lead to any distortive effects on competition in the acquisition process, as e& was the sole bidder interested in acquiring PPF, could have financed the transaction with its own resources, and the acquisition was conducted at market value;
• gave rise to a risk of potential distortion of competition in the EU internal market post-transaction. In particular, the unlimited state guarantee provided by the UAE could have “shielded” the new entity from risk and influenced its investment decisions, “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.” [3]

The EC eventually cleared the transaction by approving the remedies, which are for a 10-year period, proposed by e& and the EIA, which consisted of the following:

• E& subject to regular UAE bankruptcy law
• A general prohibition on any financing from the EIA and e& to PPF’s activities in the EU (unless PPF is under serious financial distress)
• That e& inform the Commission of future acquisitions that are not notifiable concentrations

LESSONS FOR FUTURE CASES

The decision demonstrates the EC’s willingness to accept remedies that exclude EU activities from the potential effects of foreign subsidies granted outside the EU. Future remedies will need to be assessed on a case-by-case basis, and in particular the ability to structure the remedy so that it does not impact the EU.

THE FUTURE FOR FSR - THE CALL FOR EVIDENCE AND THE 2026 GUIDELINES

With only one decision issued to date, the content and functioning of the FSR remain obscure to the vast majority of potentially interested stakeholders (such as foreign states and foreign companies). Similarly unknown and still developing are the ways in which the EC intends to interpret certain key concepts contained in the FSR.

In the call for evidence, the EC explicitly states, “The FSR guidelines aim to contribute to fostering predictability and ensuring transparency on certain key concepts in order to make it easier to apply the FSR in practice.”

The guidelines [4] aim at clarifying technical concepts outlined in the FSR for the assessment of foreign subsidies, namely,

• the criteria to determine that a “distortion” exists;
• how the “balancing test” will be applied;
• the criteria considered and the procedure that will be followed by the EC when requiring the notification of a below-threshold transaction; and
• the assessment criteria that will be used in public procurement procedures.

The guidelines are due to be published on 14 January 2026, and, on March 5, the EC has launched a call for evidence to collect feedback from stakeholders (i.e., companies, lawyers, and academia). Interested parties are invited to submit their feedback by 2 April 2025 and provide their opinion on the matters that will be the subject of the guidelines. In parallel, the EC will conduct targeted consultations with member states and selected stakeholders (authorities, consumers’ associations, and industry representatives), and will later publish draft guidelines to receive comments for an eight-week period.

WHAT SHOULD COMPANIES DO

The FSR has already proven to be an important player in the EU regulatory arena, in addition to traditional merger review regulation, with the EC already receiving hundreds of notifications a year. For this reason, industry players should closely monitor developments in this area, and ideally contribute to EC’s initiatives that invite for comments.

Additionally, companies involved in merger and acquisition activities should seek dedicated legal counsel, to ensure full compliance with the new FSR regime.