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    Navigating the EU Foreign Subsidies Regulation

    Qiheng Chen and Patrick Crotty

    Jun 06, 2025

    7 min read

    Antitrust Antitrust Litigation & Enforcement Asia & Pacific Europe Market Definition Media & Technology Premerger Review Pricing
    Navigating the EU Foreign Subsidies Regulation
    iStock.com/Richard Sharrocks

    Introduction

    The Foreign Subsidies Regulation (FSR) enacted by the European Union (EU) took effect in July 2023 and has become a pivotal concern for businesses looking to invest or bid for public procurement contracts in the EU. Particularly affected are businesses from state-led economies such as China and other state-dominated economies. While the European Commission (EC) is fleshing out the guidelines, the FSR cases seen so far have painted a picture of the regulation’s overall impact and offer insights on how to effectively navigate FSR investigations with the help of robust legal and economic evidence.

    A group of esteemed experts – Carles Esteva Mosso (Latham & Watkins), Julia Zhu (Skadden, Arps, Slate, Meagher & Flom), Lena Hornkohl (University of Vienna) and Maggie Xiaoyang Chen (George Washington University) – answered questions about the FSR regime and how to go through it unscathed, in a webinar titled “Navigating EU Foreign Subsidies Regulation: Risks, Solutions, and the Road Ahead,” moderated by Sophie Yang (Econic Partners), co-sponsored by the ABA International Law Section’s International Antitrust Law Committee and the Antitrust Section’s Economics Committee

    I. What is within the scope of FSR investigations?

    The FSR regime grants the EC unilateral power to assess the impact of subsidies granted outside the EU. The regulation introduces three procedures:

    • Mandatory notification for mergers and acquisitions above relevant thresholds,
    • Mandatory notification for public tenders above relevant thresholds, and
    • Ex-officio investigations including call-in power on below-threshold activities.

    The FSR expands the scope of EU’s Basic Anti-Subsidy Regulation (Regulation (EU) 2016/1037) in several key areas. While both the FSR and the Basic Anti-Subsidy Regulation afford the EC with the ability to assess the effect of foreign subsidies on competition within the EU market, the Basic Anti-Subsidy Regulation allows the EC to assess foreign subsidies’ effect on international trade and grants the EC the power to impose countervailing duties on imports to level the playing field between domestic and foreign producers. By contrast, the FSR expands the EC’s purview to address the effect of foreign subsidies across other commercial activities, including mergers and acquisitions and public procurement. In addition to this broadened scope, the FSR gives the EC additional tools to deploy tailored remedies to address subsidy-specific concerns.

    II. How does the EU evaluate foreign subsidies?

    Across the above-mentioned mechanisms, FSR investigations have essentially the same steps. First, the EC determines whether financial contributions have been received. Next, the EC determines the existence of subsidies by considering if such financial contributions provide a selective benefit to the companies concerned. If subsidies are present, the EC determines whether the subsidies will distort competition in the EU internal market. Finally, the EC balances any distortive effects with the potential positive effects of the subsidies on consumer welfare and the European economy.

    1. Determine whether a financial contribution has been received from a foreign country.

      Financial contributions include loans, guarantees, tax exemptions, the granting of special or exclusive rights without adequate renumeration, or the provision or purchase of goods or services. In addition to financial contributions provided by a third country’s government (at all levels), financial contributions provided by a foreign public entity or private entity with connections to a third country’s government are considered.
    2. Determine whether a foreign contribution is a subsidy.

      For a foreign contribution to be considered a subsidy, the financial contribution must confer a selective benefit to the entity involved. Financial contributions are benefits when they are offered on terms more favorable than what would be offered in the market. Financial contributions are selective when they are not available to all companies.
    3.  Determine whether the subsidy distorts competition.

      For mergers and acquisitions, the EC considers whether the subsidy negatively distorts the acquisition process (i.e., changing the outcome or terms) or competition in the target’s product market post-merger. For public procurement, the EC assesses the impact on the bidding process (i.e., whether government grants may allow a bidding firm to submit an unduly advantageous bid). In order words, FSR investigations consider the distortive effects of a subsidy on both the action and entities under investigation and on the potential distortion to the market in the future.
    4. Determine whether the positive effects of a subsidy outweigh the consequences of distorted competition.

      The Balancing Test allows the EC to holistically weigh the tradeoffs between distortive effects of subsidies and positive contribution to consumer welfare and EU-wide policy objectives such as environmental protection, social standards, and research and development. No FSR case has reached this stage, and more clarity will become available as the EC is slated to publish draft Foreign Subsidy Guidelines in 2025Q3 and issue final guidelines in January 2026.

    III. What is the current state of FSR enforcement?

    The EC has cast a “broad net” with the enforcement of FSR. During its first year of enforcement, as of October 2024, the EC received 91 notifications related to mergers and acquisitions and more than 1,000 related to tender participation. While very few of these notifications progressed to the investigation stage, some acquisitions have been abandoned pre-notification and some procurement bids have been voluntarily withdrawn, indicating that the FSR may have an impact on business decisions.

    Although the FSR is agnostic to the nationality of companies, the majority of enforcement actions have affected Chinese companies. However, panelists stress that the intention of the FSR is not to have a “chilling effect” on Chinese investment in the EU.

    In fact, the outcomes of in-depth investigations have shown the EC’s rational approach and receptiveness to rebuttal evidence. For example, in the acquisition of PPF Telecom Group by e&, a state-controlled telecom operator in the UAE, the EC accepted that e& the price paid for the target was not inflated by the subsidies, e& hard sufficient resources on its own, and there were no competing bidders. Thus, the acquisition process was not distorted.

    IV. How does FSR resemble or differ from State Aid?

    The State Aid regime regulates aids given by EU member states, in order to level the playing field in the EU internal market. The FSR extends that rationale to subsidies given by non-EU countries, and additionally draws elements from EU laws in merger control, competition, and trade. A few differences are highlighted between FSR and State Aid:

     

    FSR

    State Aid

    Notification

    Companies receiving subsidies must notify

    Member states must notify before providing aid

    Burden of Proof

    Upon best evidence available (i.e., when the investigated firm does not cooperate)

    Burden of proof falling on the EC

    Legal Tests

    No presumption of illegality. Allowing detailed legal tests to be applied

    By presumption, state aid if given selectively distorts the EU internal market

    Worth noting is that the legal tests seen in FSR cases so far resemble a counterfactual analysis. In reviewing the acquisition of PPF Telecom by e&, the EC considered advantages enjoyed by the post-merger entity. For example, state guarantees would allow e& to secure better financing terms, and thus, potentially create advantages over its rivals in the EU.

    We likely see some alignment between the two regimes in the last step of evaluation: the balancing test in FSR and the compatibility assessment in State Aid. Both seek to weigh the positive effects against distortion to competition. The balancing test requires companies to prove the positive effect, and the positive effect must come from subsidies per se (i.e., not from the merger).

    V. What does economic literature tell us about the impact of foreign direct investment (FDI)?

    There is an extensive literature on the impact of FDI on the host country. At aggregate level, there is almost always positive effect on the host country’s growth, including productivity growth. At the firm level, economic literature shows three channels for such growth to take place:

    • Productivity spillover: Investment by more productive foreign multinational firms increases the productivity of local firms within the same industry as well as firms across industries through production linkages.
    • Competition effect: FDI brings more competition in output market, upstream input market, and labor market, which may crowd out local firms.
      • There is a high degree of heterogeneity across local firms and across industries and the types of multinational firms. Maggie’s own research suggests that least productive firms that already struggled will bear most of the crowding out effect from intensified competition; the productive incumbent firms will do just fine.
    • Innovation: More productive local firms can react by increasing innovation to better compete with foreign multinationals.

    Economic research also shows that tit-for-tat dynamics is common to subsidies. When the central or local governments in China provide subsidies, the EC has a 93% chance to provide subsidies to the same product within the same industry within the year. The chance rises to 98% if looking at a two-year window. The tit-for-tat dynamics is less salient between China and the US but remains a regular pattern.

    Looking ahead, the panelists expect China to increasingly become a net investor whose outbound direct investment exceeds inbound direct investment. China will look to geographically diversify its investment with the EU as a key destination. Subsidies can be motivated by a range of goals including climate mitigation, global value chain resilience, and geopolitical concerns. It is important for the EC to have a sophisticated tool to distinguish between distortive and benign investments.

    VI. How to maximize the chance of getting through the review process quickly and unscathed?

    The FSR allows a range of legal and economic toolkits for the defense of companies under review, and early FSR cases have shown the EC’s acceptance of rigorous economic evidence.

    Economic analysis can prove that financial contributions received do not amount to subsidies. For example, in terms of loans from state-affiliated entities, benchmark analyses – against undertaking’s loans from commercial banks or against loans to similarly situated companies – can provide effective defense. Even if subsidies exist, it remains possible to show that such subsidies do not lead to negative distortion. The analysis of distortion in the target firm’s product market can draw from economic toolkits to analyze the counterfactual, albeit more difficult than analyzing the present.

    The last defense is the balancing test where the companies must bring up the positive effects originating from the subsidies. Economic literature points to positive impact of foreign direct investment on the host country at both aggregate and firm levels. In fact, the industries susceptible of subsidies are often critical to EU-level strategic goals such as clean energy transition and digital infrastructure building. The Draghi report on European competitiveness also advocated for a longer-term view on efficiencies and the consideration of out-of-market efficiencies. Taken all together, the balancing test which has not yet been formally carried out presents an opportunity for companies to offer a defense, showing net positive impact on competition and the EU’s broader goals.

    As case precedents and the upcoming FSR guidelines provide clarity on enforcement, firms involve in above-threshold mergers and public procurement may find themselves better off addressing the Commission’s concerns with legal and economic evidence than forgoing commercial opportunities in the EU.

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