The EU Foreign Subsidies Regulation: Prepare to Succeed
7 min read
2024-11-26
Andreas Reindl
Managing Partner, Van Bael & Bellis
Catherine Gordley
Counsel, Van Bael & Bellis

executive summary

  • Covers subsidies from non-EU governments that impact competition in the EU, including in the area of M&A, public procurement, and services.
  • Requires companies to collect and report a significant amount of information, and can severely impact attractiveness of a company’s bid.
  • Allows companies to challenge competitors who receive large amounts of (unfair) subsidies.

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Relevance of the FSR  

The entry into force of the FSR last year made headlines, but many companies realised it might not have an immediate impact on them. So, how can businesses know if they should be concerned about the FSR?

Andreas Reindl: If I were a company executive with only ten minutes to spend on the “weird thing” called FSR, I would focus on three key questions:

  • Are we planning to bid on public procurement in the EU?
  • Are we considering a merger or acquisition involving significant EU business?
  • Does our industry include non-EU competitors known for large subsidies?

If none of these apply, my company is probably fine. If any do, I would assemble a small team to assess the FSR’s impact.

CRRC Withdraws from Bulgaria Tender Following EU Probe: In March 2024, Chinese rail manufacturer CRRC withdrew from a tender in Bulgaria after the European Union launched an investigation into suspected subsidies. The probe, initiated in February, was part of the EU's first action under the Foreign Subsidies Regulation, aimed at preventing unfair competition within the single market. CRRC is the world’s largest train manufacturer and has contracts in more than 110 countries and regions, from US cities to India and Latin America. The tender was for the purchase and maintenance of 20 electric trains, valued at approximately €610 million. (27 Mar 2024)
Explainer Sheet: EU Foreign Subsidies Regulation

What is the policy intent behind the FSR? The EU already had rules to protect its market from foreign subsidies.

Andreas Reindl: The FSR establishes a new system where the EU investigates whether subsidies from non-EU governments distort competition within its market.  

This approach is unique because no other country has created a regime like this before. Traditional trade defence instruments mainly focus on specific imports, like cars or solar panels, coming into the EU from third countries.

Example: In 2013, the EU imposed tariffs on Chinese-made solar panels after an investigation found that Chinese manufacturers were selling them at unfairly low prices (below production cost), a practice known as “dumping.”

The regulation looks at the effects of foreign subsidies granted outside the EU and affecting acquisitions, public procurement, investments, and the provision of goods and services within the EU.

Example: Imagine a hypothetical scenario where a Chinese company producing car batteries receives large R&D grants from the Chinese government and uses the subsidized technology when producing batteries in the EU, which allows them to outbid other potential battery suppliers in the EU.

Essentially, the FSR expands the EU’s control over subsidies to almost any business activity, including activities carried out entirely within the EU, which is unprecedented.

European Commission investigates Nuctech (China): In April 2024, EU regulators inspected the Dutch and Polish offices of the Chinese security equipment company Nuctech, a producer of security scanners for airports and ports. The unannounced inspections focused on the company's possible use of Chinese state subsidies, which allegedly gave Nuctech an unfair advantage over European competitors. During the inspection, regulators seized IT equipment and employee mobile phones. (Thomson Reuters, 25 April 2024)

Why is the European Commission concerned about non-European taxpayers subsidising European industries?

Andreas Reindl: The FSR’s general policy direction is to ensure a “level playing field” between companies receiving foreign subsidies and those that are not.  

Although EU countries subsidize their industries heavily, these subsidies are regulated by EU state aid laws, which do not apply to funds coming from non-EU countries. Politically, there is a significant amount of frustration with certain countries, who marshal enormous amounts of money towards various industries that cannot be matched in Europe.    

This is important to understand: Behind the FSR lies industrial policy and concerns about fair competition, not fiscal policy.  

Share of Total Number of Industrial Policies Relating to Domestic Subsidies and Export Incentives (2017-2024)
Belgian Football club Royal Excelsior Virton complaints about “financial doping” SK Lommel: In May 2023, Belgian football club Royal Excelsior Virton filed a complaint with the European Commission against rival club SK Lommel, alleging that Lommel benefited from significant foreign subsidies. Lommel is part of the City Football Group and reportedly owned by Sheikh Mansour of Abu Dhabi. This funding allegedly allowed Lommel to secure a professional license for the 2023-2024 season. (VBB on Belgian Business Law, August 2023; Irish Independent, 10 May 2023)

Not all non-EU subsidies can be challenged under the FSR, but only those that cause a “distortion” in the internal market. What is meant by that?

Andreas Reindl: “Distortion” means that the company that received the subsidy “got a leg up”. It is this broad notion of an advantage vis-à-vis rivals that do not receive the same type of financial support from EU or foreign governments.

The advantage can arise at all levels. The FSR looks at competition broadly—upstream, downstream, anything that affects companies’ ability to compete with one another, from access to supplies, personnel, use of public resources, tax burden, etc.

Example: In football, foreign subsidies might help a club build better facilities, offer higher salaries, or pay lower transfer fees, giving them an unfair advantage over teams without the same financial support.

Haier acquires Carrier’s Commercial Refrigeration Business (CCR): In December 2023, Haier Smart Home entered into a stock purchase agreement to acquire Carrier’s Commercial Refrigeration Business (CCR) for $640 million. The acquisition allowed Haier, a leader in household appliances, to expand into the commercial refrigeration sector. CCR, with over 4,000 employees, specializes in CO2 refrigeration technology and serves customers across more than ten countries. The deal was expected to close in the second half of 2024, pending regulatory approvals. This acquisition was noteworthy as Haier became the first known Chinese company to receive approval under the EU’s Foreign Subsidies Regulation for an acquisition. (MLex Market Insights, 3 October 2024)

How to prepare for an FSR review

In anticipation of the FSR, many companies, including European ones, expressed concerns that it would impose heavy burdens on them due to the extensive reporting requirements.

Catherine Gordley: The monitoring requirements can be quite extensive, as the FSR captures all foreign “financial contributions” which is a much broader category of information than “subsidies”.  Nearly every financial interaction between the company and a non-EU government over a three-year period must be reviewed to see if it needs to be reported in a notification.

Example: Reportable items can include a wide range of measures, e.g., capital injections, operating grants, tax incentives for manufacturing, tax credits for R&D, VAT and excise tax concessions, wage subsidies, low-interest loans, land-use control, underpriced government goods or services (e.g., electricity).

The challenge is that most companies don’t gather this information centrally, as there's usually no business reason to do so. Starting from scratch, and covering a company’s worldwide activities, can be time-consuming.

However, the worst strategy is ignoring it and hoping for the best. If you are planning a major M&A deal or procurement process, it is crucial to prepare in advance, so the FSR does not delay your transaction.

Dedicate a core team to set up an internal reporting system. Give them the authority to do what they need to do to prepare the information. An FSR review might can involve different areas within an organisation—tax, finance, subsidiaries, different jurisdictions, etc. They should ideally all be called upon to support the effort.

"When you participate in tenders as part of a consortium, it is important to consider not just your own company but the other members as well. Even if your organisation is well-prepared, you will rely on others to submit their information on time to avoid delays."

Some consortium members may raise substantive concerns or may not be organised enough to provide the necessary information promptly. Therefore, assess whether you are working with well-prepared, low-risk partners. If you have any doubts, consider including contractual protections in your consortium agreement.  

Does the submitted information genuinely impact the outcome of the review, or is it more of a check-the-box exercise?

Andreas Reindl: So far, cases in which the Commission has opened in-depth investigations concerned jurisdictions where heavy subsidies for industrial policy purposes are evident.

However, the information submitted is not just a procedural formality—it can signal a problematic case right from the start.

If you submit a sloppy or incomplete form, where the Commission can easily use public sources to identify missing information or inconsistencies—such as claiming you did not receive financial contributions when it’s clear you did—they will quickly flag these issues.  

Can the Commission request internal documents?

Catherine Gordley: The Commission indeed has wide ranging powers to request internal documents. You definitely do not want to create opportunistic-seeming documents that state, “This is a huge opportunity for us, and we can outperform our rivals by about 20% thanks to these foreign subsidies.” The basic rules of careful communication and document hygiene apply.

The challenge is that the review under the FSR is retrospective, going back at least three years. It does not seem practical to create a document creation policy that covers every financial interaction globally. So companies will need to be prepared that some internal documents may include unhelpful or at least unclear statements.  

What if companies are bound by confidentiality obligations not to make such data available?

FSR Disclosure Requirements vs. Confidentiality Clauses

Andreas Reindl: There are indeed situations where companies are obligated to keep certain information confidential, even from the European Commission. This is common in areas like defense, intelligence, or critical infrastructure, where state secrets may be involved.

Sensitive information is more likely to become disclosable under FSR processes compared to other regulations. Unlike merger control, the FSR specifically focuses on financial interactions with governments, so sensitive government contracts are more likely to surface during these reviews.

In these cases, companies face conflicting obligations—one requiring disclosure and the other demanding secrecy. Navigating this regulatory conflict is challenging, and there’s no clear template for resolving it.

The best approach is to anticipate this issue, prepare a strong argument, and engage the Commission early. The expectation is that if you address concerns proactively, you will receive fair treatment.

Being successful in FSR reviews

How to minimize the risk of a transaction being held up under the FSR?  

Andreas Reindl: In theory, you could de-risk by refusing subsidies or cutting ties with government agencies, but nobody is going to do that.

Hence, the key to risk minimization is preparation. Having government relationships or financial ties does not mean you will automatically face problems under the FSR. Even in cases where Chinese companies withdrew from procurement processes, it was not because the Commission finally ruled against them; they aborted because they could not meet the Commission’s requirements during the review period.

One reason you can be robust in defending your non-EU subsidies (if you are well-prepared) is the sheer amount of EU state aid flowing into certain sectors, which often dwarfs what other countries provide. If an EU sector is heavily subsidised, equivalent subsidies from elsewhere cannot be remedied under the FSR. This is an untested area, but you can make a strong argument that your subsidies aren’t distorting European markets if there is already a lot of government support there.  

Is the FSR process open to political intervention?

Catherine Gordley: The FSR is more like a merger review: a very legal, technical instrument. Assuming a politician will intervene and fix everything—that’s not going to happen under the FSR.  

But if something is negotiated between political actors in advance, that will certainly inform how the Commission looks at a case. Note that this is a centralised review and decision-making powers rest with the Commission once the notification has been made. So once started, it will be difficult for EU Member States to successfully advocate on your behalf.

We have been advocating to prepare and engage with the regulator on a technical level. This has been the preferred strategy so far. Unlike in the American regulatory context, this is also not a naturally litigious process—you are best served by establishing a relationship of cooperation, rather than opposition, with the Commission.  

There is not an immediate benefit to trying to stir public opinion. Our advice would be to keep the foreign subsidy aspect very low-key in external communication.

Looking ahead

What is a common misunderstanding that you observe with respect to the FSR?

Andreas Reindl: Clients are—understandably—very focused on the impact the FSR has on M&A. Of course, M&As are highly important events, so the attention is naturally centered on that.

However, our advice is not to underestimate the impact on public tenders. For instance, many of our tech clients are involved in procurement, often as sub-suppliers. In tech, public procurement is substantial, often involving large contracts subject to the FSR—consider companies like Amazon and Google with their cloud services. So the message is: do not overlook preparing for potential tender processes.  

Looking ahead, do you expect countries to adapt and hand out fewer subsidies to companies operating in the EU?

Andreas Reindl: One motivation behind the FSR was to create leverage for the EU in multilateral and bilateral negotiations. By raising the stakes and saying, “We have more tools to defend against subsidies”, the EU may have hoped to convince a third country to negotiate on acceptable subsidy levels. But whether major economies like China will actually engage with the EU on that level is questionable. It might happen with smaller countries through trade agreements, but with the major players, it’s hard to imagine the FSR, even if it is a fairly “big stick”, can force them to upend their industrial policy.

Andreas Reindl is the managing partner, and Catherine Gordley is counsel at Van Bael & Bellis.

Sources