by Natalie Greenwood & Andrea Zulli
The Foreign Subsidies Regulation (FSR) started to apply on 12 July 2023 and has introduced a paradigm shift in the EU’s approach to addressing market distortions caused by foreign subsidies. The Regulation empowers the European Commission to maintain fair competition within the EU while upholding an open market for global trade and investment, by ensuring a level of playing field in the single market.
In the last two years, we have seen two in-depth investigations relating to M&A deals, Emirates Telecoms / PPF (e&/PPF) and ADNOC / Covestro (both resulting in commitments decisions) and two ex officio in-depth investigation launched against Nuctech and Goldwing, two Chinese companies. Last month we also saw the publication of the Commission’s guidelines.
The FSR establishes three pillars of regulatory review: public tenders, mergers and acquisitions (M&A), and ex-officio investigations (including a distinct market investigation tool). This article focuses on the FSR’s merger control provisions.
FSR in M&A and the Commission’s final guidelines
The FSR mandates notification for M&A where (i) at least one undertaking (merging party, target, or joint venture) is established in the EU with an EU turnover of at least €500 million in the prior year, and (ii) the parties together received at least €50 million in foreign financial contributions from non-EU states in the preceding three years. This mandatory and suspensory notification process involves an initial 25-working-day review (phase 1), followed by a (extendable) 90-working-day in-depth review if required (phase 2). At the end of its review, the Commission can clear the transaction unconditionally, accept remedies offered by the parties or block the transaction.
Under the FSR, the Commission assesses whether a concentration distorts the internal market. Article 4(1) FSR defines a distortive subsidy as one “liable to improve the competitive position of an undertaking in the internal market and where, in doing so, that foreign subsidy actually or potentially negatively affects competition in the internal market.” Article 5 lists categories “most likely to distort,” including subsidies “directly facilitating a concentration” or “unlimited guarantee(s) for the debts or liabilities of the undertaking”.
In January 2026, the Commission published guidelines on the FSR, providing a detailed framework for how it will investigate and redress distortions caused by foreign subsidies in the internal market. The guidelines offer guidance on three core aspects of the FSR’s application: the criteria for determining the existence of a distortion, the application of the balancing test, and the Commission’s power to request prior notification of transactions that fall below the standard thresholds (which has not yet been exercised). The overall aim is to enhance predictability and legal certainty for businesses interacting with the FSR, albeit providing the Commission with very wide discretion and therefore failing to address some of the challenges facing businesses in transaction planning, in particular around deal certainty and risk allocation in transaction documents.
In terms of analysis, once the Commission has established that the undertaking engages in an economic activity in the Union (a jurisdictional point), it will first determine whether the foreign subsidy is liable to improve the competitive position of that undertaking in the internal market, according to the concept of ‘targeted’ and ‘non-targeted’ subsidies.
- Targeted subsidies which directly support an undertaking’s activities in the internal market (e.g., subsidies for EU-based manufacturing), are generally considered to improve its competitive position without needing further assessment.
- Non-targeted subsidies (e.g., a general grant for a plant in a third country) are assessed for their potential to be used for “cross-subsidisation” of EU activities. The Commission will examine factors like shareholding structures, group-level management, and other economic links to determine if resources can be transferred to benefit the undertaking’s EU operations.
In the context, in accordance with Art. 4(2)(3)(4), the guidelines include a section on subsidies not considered liable to cause distortion, creating clearer safe harbours. These safe harbours include a de minimis subsidy threshold where the aggregate amount of foreign subsidies in the three years prior does not exceed EUR4 million as well as subsidies aimed at making good the damage caused by natural disasters or other exceptional disasters, for purely non-economic or social objectives, to address market failures for activities taking place exclusively outside of the Union or amounts insignificant relative to the undertaking’s EU activities.
The next stage of the assessment is to determine whether the subsidy actually or potentially negatively affects competition. The core principle is that a subsidy negatively affects competition when it leads to an “alteration of, or interference with, competitive dynamics to the detriment of other economic actors.” In a merger context, the focus is on the acquisition process itself, looking at first, if the subsidy facilitated the acquisition or allowed the acquirer to behave different than it would have without the subsidy (e.g. through improved financing structure) and whether this has resulted in a “crowding out” of other potential investors through outbidding of rivals or deterring participation.
Where a distortion is found, the Commission may – and de facto does – conduct a balancing test. This involves weighing the negative effects of the subsidy against its positive effects. Positive effects can include the development of the subsidised economic activity within the EU (e.g., by remedying a market failure) or broader contributions to EU policy objectives like environmental protection, social standards, or R&D. Whilst the burden of proof to establish a “distortion” rests with the Commission, the burden of proof to establish the “positive effects” remains with the undertaking under investigation; this means that it is up to such undertaking to provide verifiable evidence of any claimed positive effects – and the guidelines already state that it is less likely that this will be overcome for Article 5 subsidies, considered to be the most distortive categories of subsidies.
Finally, with regard to the Commission’s call-in power of below-thresholds deals, the guidelines clarify the scope of Art.21(5) indicating that the Commission enjoys “a margin of discretionin deciding” whether to use this power and “will, therefore, seek to strike a balancebetween the effective protection of the internal market and the need to minimise the administrative burden on undertakings”. This balancing exercise is based on whether a below-thresholds deal merits an ex ante review and the underlying assessment is based on the deal’s impact – direct or indirect – on the Union; in this context, the guidelines provides a non-exhaustive list of factors that the Commission will take into account in its assessment (e.g., the strategic or important character of the companies involved) as well as a safe harbour companies can rely on (i.e., the de minimis €4 million threshold).
FSR in practice
The Commission has received over 200 notifications, with only two of these being reviewed at phase 2, and both of which have been cleared with commitments. The Commission has not prohibited any M&A deal so far.
The Commission’s conditional approvals of e&/PPF (September 2024) and ADNOC/Covestro (November 2025) highlight evolving approaches to foreign subsidies. In e&/PPF, subsidies were not found to distort the acquisition, but post-transaction market distortion from state guarantees was a concern. Remedies included aligning e&’s articles with UAE bankruptcy law but also restricted financing to EU operations of PPF Telecom by e& or the Emirates Investment Authority and included obligations to notify any future concentrations involving e&, even if under the FSR notification thresholds.
Conversely, in ADNOC/Covestro, subsidies were found to distort both the acquisition process (with a capital increase seen as instrumental in securing the deal, enabling a “high” offer price that could create a “chilling effect” discouraging other potential acquirers) and the post-transaction market (enabling a more aggressive investment strategy described in internal documents as “unconstrained growth” which would shield Covestro, a key innovator, from market pressures faced by others). While ADNOC agreed to remove the state guarantee (as in e&/PPF), there were no financing prohibition / notification obligations, and instead additional remedies were included in the form of an innovative patent-sharing remedy to offset the broader distortive effects. This remedy requires Covestro to license its key sustainability-related patents to eligible third parties under transparent and non-discriminatory terms. Crucially, the licences permit manufacturing within the EU and worldwide sales, intended to make the remedy commercially viable. The remedy is carefully calibrated: it excludes a narrow list of 8 of Covestro’s strongest competitors (including BASF, Dow, and SABIC) to preserve their own incentives to innovate, while rebalancing the competitive landscape for other players. This patent-sharing remedy was intended to actively balance existing distortions in the acquisition process and mitigate negative effects on the internal market by benefiting competitors reliant on access to Covestro’s sustainability technology.
The following table summarises the Commission’s approach to remedies in these two precedents:
| Removal of unlimited State guarantee | Financing prohibition / market-terms obligation | Notification of future concentrations | Licensing of sustainability-related patents | |
| E& / PPF Telecom | Yes | Yes | Yes | No |
| ADNOC / Covestro | Yes | No | No | Yes |
What comes next?
The FSR merger control regime has become a critical consideration for any M&A transaction in the EU, especially those involving parties with state links. The first two decisions indicate that the Commission is not seeking to block foreign subsidies but to ensure they proceed on “fair” terms.
Companies should anticipate close scrutiny of their corporate structure and financing, with unlimited state guarantees now being treated as a “red flag”. Remedies will depend heavily on the transaction’s specific facts, ranging from standard commitments to more innovative market-opening measures, depending on the nature and severity of the distortions identified. Remedies may however not be as predictable as merger control remedies, which tend to be more directly linked to the harm identified. This should be borne in mind for acquirers negotiating conditions precedent in share purchase agreements. We can also expect greater scrutiny of non-notifiable transactions. The remedy in the e&/PPF case, which required e& to inform the Commission of future acquisitions below the FSR thresholds, is a clear indicator of this intent although, following Adnoc/Covestro, it is unclear if the Commission will be able to obtain it again. The Commission may use this power to review deals in sensitive sectors or involving companies that have previously received significant subsidies.
Proactive preparation and strategic engagement will be essential for any business with non-EU state links that is active in the EU market. This includes both proactive compliance including tracking of foreign financial contributions, integrating FSR into transaction planning and deal documentation (not only in terms of condition precedent but also representations & warranties) and ultimately effective engagement with the Commission, including in preparing for creative remedies.
Whilst this article focuses on FSR’s impact on M&A deals, it would be remiss to omit the Commission’s ramping of use its ex-officio powers. Following the launch of an investigation in December 2025 into Nuctech, a Chinese company active in in the manufacturing and sale of threat detection systems, on 3 February 2026, it launched an ex-officio in-depth investigation into Goldwind, a company involved in the production and sale of wind turbines and the provision of related services.
This move signals the Commission’s readiness to use its powers to scrutinise foreign subsidies in various strategic sectors, particularly those crucial to the EU’s security and green transition sectors. And, the next step for the Commission in the FSR field remains the launch of a sector inquiry.
