On 18 July 2025, the European Commission (EC) published draft guidelines on the application of the Foreign Subsidies Regulation (FSR), inviting feedback by 12 September 2025. Despite much anticipation, the draft guidelines fall short of expectations when it comes to practical guidance. Much of the content revisits familiar ground – rather than offering the clarity hoped for, the draft guidelines largely rephrase the FSR itself. As a result, businesses face uncertainty about how the EC will exercise its broad discretion in practice. 

Key takeaways

Businesses should already integrate these important considerations covered in the draft guidelines into their FSR compliance strategies:

• “Distortion” is interpreted broadly: The EC’s approach extends beyond traditional competition metrics to include policy-driven concerns, such as the impact of relocation of activities and technology offshoring. This underscores the need for a holistic view of subsidy effects.
• Subsidy mapping and risk assessment must be thorough and timely: Risk assessments should not be limited to subsidies directly tied to EU activities. Even non-specific subsidies or those granted for non-EU operations may be considered distortive if they free up resources that could be deployed in the EU. Early preparation of narratives and supporting evidence – especially for regular tender participants or those planning M&A activity – is essential. Internal policies alone may not suffice to rebut the presumption of impact.
• Valuation models may come under scrutiny: In acquisition scenarios, the EC may examine the valuation model used to price the transaction. Companies should ensure that their pricing rationale is robust, well-documented and defensible in the context of a potential FSR review.
• Assessment in public procurement may extend beyond the reporting part of the group: The EC may consider the impact of subsidies granted to entities outside the reporting scope – such as sister companies – if those subsidies are accessible to the bidder for use in the tender. This should be factored into both risk assessments and notification preparations.
• Balancing test offers flexibility – but demands preparation and evidence: Although precise quantification of positive or negative effects is not required, companies should aim to support their arguments with economic analysis and concrete evidence. A well-prepared narrative will strengthen their position in the balancing exercise, and help avoid delays or adverse outcomes.
• Burden of proof lies with the parties claiming positive effects: Parties must be ready to demonstrate the nature, likelihood, and proportionality of any claimed positive effects. Vague or generic assertions are unlikely to succeed – credible, well-documented, evidence-based submissions are key.
• Strategic sectors are more likely to attract scrutiny: Companies operating in politically sensitive or strategically important sectors are more likely to be targeted under the EC’s call-in powers. The open invitation for third-party input suggests that the EC’s enforcement priorities are still evolving.

A wide-ranging and flexible approach to defining distortion

The FSR considers a foreign subsidy distortive if it improves the competitive position of an undertaking in the internal market, and negatively affects competition as a result.

The draft guidelines confirm that this assessment will be highly case-specific, with no fixed criteria – even for key parameters.

The EC appears to adopt a broad interpretation of what constitutes an “improvement” in competitive position. General-purpose subsidies and those granted for non-EU activities may still fall within scope if they free up resources that could be deployed in the EU. The burden of proof lies with the parties, who must demonstrate that such subsidies are unlikely to affect their EU operations.

To establish a distortion, the EC must show a reasonable link between the subsidy, the improved competitive position, and a negative impact on competition. However, the subsidy need not be the sole or primary cause of the distortion – its potential contribution is sufficient. The EC will compare the market situation with and without the subsidy, drawing on the methodology used in the EU State aid framework. and rely on additional qualitative factors to be considered in the counterfactual assessment, such as the nature and value of the subsidy and prevailing market conditions. While this opens the door to a broader range of arguments, the threshold for demonstrating the absence of distortion appears to be very high.

The draft guidelines clarify that distortion can be assessed at various market levels: (i) in acquisitions of businesses, where subsidies may allow the subsidised entity to deter or outbid rivals – even in the absence of formal competing offers(!); (ii) the operational level, where the subsidies may enable subsidised entities to offer lower prices or access advanced technology; and (iii) in investment decisions where subsidised entities may increase risk tolerance or facilitate output increase resulting in access to cheaper inputs. 

Expanded scope of distortion and scrutiny 

The draft guidelines appear to stretch both the concept of distortion and the scope of EC scrutiny beyond the literal wording of the FSR. Notably, the draft guidelines expand the notion of distortion to include effects on supply chains. For instance, a subsidised increase in capacity could raise demand for certain inputs, making them scarcer or more expensive for competitors - effectively crowding them out of the market.

The draft guidelines suggest that the subsidy-induced relocation of activities outside the EU could distort competition by negatively affecting EU-based suppliers and stakeholders. Similarly, the offshoring of technology may be considered distortive if it undermines the competitiveness of EU-based businesses. These examples blur the line between traditional competition concerns and broader industrial policy objectives.

In the public procurement context, the EC may assess whether a tender is “unduly advantageous” due to foreign subsidies granted to entities outside the reporting scope, particularly where such subsidies are accessible to the bidding entity. The EC may also compare bids against each other, against internal estimates of the procuring entity, and against hypothetical counterfactuals. Strikingly, a distortion may be found even where the mere presence of a subsidised bidder deters others from participating in the procedure.

Balancing test and call-in powers: broad discretion, limited certainty

The balancing test under the FSR allows the EC to weigh the negative effects of a subsidy against its potential positive contributions – particularly where the subsidy supports economic development in the EU or advances broader EU policy objectives. These may include addressing market failures (e.g. underinvestment in R&D) or promoting environmental goals such as climate action or biodiversity protection. The draft guidelines list a wide array of policy considerations, including non-EU objectives that generate positive spillovers within the EU. In procurement, the EC may also consider the availability of alternative suppliers and the public interest obligations of the contracting authority.

The EC’s call-in powers allow it to request notification of concentrations and tenders below the thresholds if there is a suspicion that foreign subsidies may have been granted in the preceding three years. The draft guidelines specify that this applies not only to the main bidder but also to suppliers and subcontractors in public procurement procedures.

To decide whether to exercise its call-in powers the EC will consider the strategic importance of the entity’s EU activities (e.g. ownership of critical infrastructure or technology), patterns of investment suggesting increasing influence, and whether the subsidy falls within the category of subsidies most likely to distort competition.