European Commission Launches Consultation on FSR Guidelines

The FSR – in force since July 2023 – marks a significant shift in the regulatory landscape for companies engaging with EU markets. The Regulation empowers the EC to scrutinize foreign subsidies that could distort competition in the EU’s internal market. Specifically, it introduced new notification requirements for M&A transactions as well as for EU public procurement procedures, and equips the EC with ex-officio powers to investigate potentially distortive market activities at its discretion.

Under Article 46 of the FSR, the EC is required to issue Guidelines by 13 January 2026 to enhance legal certainty and predictability for companies and practitioners. The newly launched consultation marks the first step towards finalizing these Guidelines.

Why Are These Guidelines So Important?

Since the FSR entered into force in July 2023, businesses and legal practitioners have struggled with uncertainties in its enforcement, particularly regarding how distortions will be assessed in practice.

To address these uncertainties, the EC published a Staff Working Document on 26 July 2024, which provided some initial guidance on key issues such as the concept of distortion and the balancing test (see also here: The EC publishes clarifications on the assessment whether Foreign Subsidies distort the internal market). However, this document left many questions unanswered, and crucially, is noted by the EC has being “preliminary in nature”. The upcoming Guidelines will carry more legal weight, making them a critical reference point for businesses and legal advisors navigating the FSR.

Consultation Process and Key Issues

The EC’s consultation will focus on three main areas:

1. Defining "Distortion" Under the FSR

The first objective of the Guidelines is to clarify what constitutes a "distortion" caused by foreign subsidies. Article 4 FSR provides that a “distortion in the internal market shall be deemed to exist where a foreign subsidy is liable to improve the competitive position of the undertaking in the internal market and where doing so, that foreign subsidy actually or potentially negatively affects competition in the internal market”. The remainder of Article 4 FSR provides a non-exhaustive list of indicators that the EC can take into account, including the amount of the foreign subsidy and the “level and evolution of the economic activity” of the undertaking on the internal market. The EC Staff Working Document explains the need for the EC to establish a relationship between the foreign subsidy and the activities of the undertaking in the internal market, and that the foreign subsidy needs to actually or potentially negatively affect competition in the internal market. The same document, however, then states that “the notion of ‘distortion in the internal market’… will be developed through the Commission’s case practice”.

The details of the envisaged clarifications are not yet known. While the EC has pointed out that the FSR should as a general matter be applied and interpreted in light of the relevant Union legislation, notably that relating to state aid, mergers and public procurement, the Guidelines are expected to build on the EC's FSR enforcement experience and specify to what extent such concepts can be applied in assessing distortions under the FSR.

The Guidelines may also provide parameters for assessing subsidies granted outside the EU, their relationships with activities of an undertaking in the EU (e.g. because of cross-subsidization), and how they might create competitive imbalances within the internal market.

2. The Balancing Test: When Can Foreign Subsidies Be Justified?

As a second objective, the Guidelines will need to offer guidance regarding the application of the balancing test. The balancing test, set out in Article 6 of the FSR, requires the EC to weigh the negative effects of foreign subsidies against their positive effects. Conceivable positive effects could, for example, be those linked to EU policy objectives, such as environmental protection and social standards, or the promotion of innovation. In July 2024, when the EC published its Staff Working Paper, the EC stated that it had not yet gathered substantial experience on the application and interpretation of the balancing test.

A key challenge for EC for the purposes of the Guidelines will be to determine how such effects should be measured and balanced, particularly when they cannot be quantified. Stakeholders may have the opportunity to significantly impact the outcome of the Guidelines on this topic through their feedback during the consultation.

3. "Call-in" Power for Below-Threshold Transactions

The existence of the call-in powers under the FSR are likely inspired by the EC’s frustration at its inability to conduct merger reviews over transactions that remain below the thresholds of the EU Merger Regulation (in the absence of a request for a referral from an EU Member State national competition authority). The FSR grants the EC a direct ability to call-in mergers – so long as they have not been implemented – dispensing with the need for any referrals from a Member State. The FSR also grants the EC a similar ability with regard to public procurements.

The Guidelines will aim to provide clarity on the criteria for exercising this power, which is currently one of the major areas of uncertainty and specifically relevant for businesses engaging in below-threshold M&A transactions and public procurement procedures.

What Happens Next?

The Call for Evidence is open until 2 April 2025 and stakeholders can submit feedback via the on the EC's "Have your say” portal.

In parallel, the EC is conducting targeted consultations with EU Member States and around 30 selected stakeholders – including legal and economic professionals, industry groups, and consumer associations. This phase is expected to run until the end of Q2 2025.

A draft of the Guidelines is aimed to be released later in 2025 for public consultation, with the final adoption envisaged for January 2026.

Authored by Anne-Kathrin Lauer, Victor Levy, and May Lyn Yuen.