The Foreign Subsidies Regulation (FSR) entered fully in force on 12 October 2023 bringing with it onerous obligations for multinational companies. Its expansive definition of financial contributions means businesses with global operations must closely monitor their dealings with non-EU states and entities controlled by them.

The FSR fills a regulatory gap in the EU’s regulatory arsenal protecting competition. It aims to tackle foreign non-EU subsidies that distort the level playing field in the EU single market, by applying similar concepts to those under its State aid framework for examining subsidies granted by EU member states. Therefore, the FSR will address the growing concerns that EU-based companies are significantly disadvantaged when competing against companies that are heavily subsidised by foreign non-EU states. Such foreign subsidies could enable their beneficiaries to outbid rivals in public tenders, to outprice businesses that did not benefit through similar subsidies, and could even facilitate the acquisition of EU companies by allowing these beneficiaries of foreign subsidies to offer excessively high purchase prices.

Prior to the FSR, the EU could not intervene to prevent these foreign subsidies. EU State aid law only applies to subsidies granted by EU member states, while merger control and antitrust rules serve different purposes. Some subsidies could be investigated by the EU through its trade defence instruments (anti-subsidy and anti-dumping rules), but these instruments only apply to the importing of goods into the EU. They do not cover the import of services, nor can they be used to tackle foreign subsidies regarding the production of products within the EU. Therefore, the FSR will complement the use of trade defence instruments, with the recent anti-subsidy investigation on Chinese electric vehicles being a candidate for a parallel ex officio investigation under the FSR.

It is important to note that despite the rhetoric about the FSR being centred around the protection of EU companies from subsidised foreign companies, the FSR affects EU and non-EU companies alike. EU companies which receive or deal with third countries could be subject to notification obligations or an ex officio investigation in the same way as non-EU companies, ensuring that the FSR is compatible with WTO rules.

While the FSR was originally proposed more than three years ago, in June 2020, many businesses remain unprepared for the practical implications of the FSR on their activities, especially in light of the new concepts it introduces into the regulatory landscape, for which limited guidance currently exists. More clarifications are expected as the European Commission (EC) develops its case practice and grapples with the first notifications under the FSR. Until then, businesses are advised to take a pragmatic but diligent approach to complying with the FSR.

For more information on the FSR and to find out how your business can navigate its way through this new regulatory tool, please check Reed Smith’s Roadmap to the Foreign Subsidies Regulation.