A powerful new tool for the EU

The FSR became fully applicable on 12 July 2023, giving the Commission a new mechanism to address potential market distortions caused by foreign subsidies. Conceived as a complement to merger control, foreign direct investment screening and state aid rules, the FSR is intended to ensure a level playing field in the single market. In just over two years, it has become a key part of the EU’s economic security architecture – while at the same time a tension with industrial and investment policies has become obvious.

The FSR’s merger tool has reached further than many expected. As of mid-October 2025, more than 200 transactions have been notified to the Commission – well above the 30 per year initially forecast. Most cases have been cleared swiftly in Phase I, with no prohibitions to date, although five notifications have been withdrawn and two have been resolved with remedies in Phase II.

A wider net than expected

A striking trend is the number of EU-based acquirers caught by the regime. Data from January 2025 reveals that nearly half (47%) involve EU investors – many with no apparent links to non-EU jurisdictions.

This reflects the FSR’s deliberately broad design. Jurisdiction arises when the parties have received more than €50m in “foreign financial contributions” – a term far wider than “foreign subsidies.” The result is a tool that captures far more than its original policy rationale suggested, compelling even EU buyers to conduct global due diligence on all forms of state-linked support.

Financial sponsors, including private equity, sovereign wealth funds and pension funds, account for about one-third of all notifications. The Commission is reportedly exploring a simplified procedure for such investors, though no formal proposal has yet emerged. Looking at the target’s business activities, companies active in manufacturing have triggered the largest proportion of FSR filings so far (25%), followed by wholesale and retail trade (17%), financial and insurance activities, including private equity (14%) and electricity and gas (8%).

Foreign subsidies or strategic investment?

At a time when the EU is seeking greater private investment, the Commission has yet to offer the clarity businesses were hoping for in its draft Guidelines. The text, published in July 2025 and due for final release in early 2026, sets out how the Commission intends to apply key provisions of the FSR – including when a foreign subsidy is considered distortive, how the balancing test will operate and in what circumstances the Commission can require prior notification of transactions or bids that fall below the thresholds. After reviewing stakeholder feedback, the Commission is expected to finalize the Guidelines next year.

One area where the draft Guidelines offer little reassurance is the Commission’s broad discretion to “call in” transactions that fall below the notification thresholds. This power, combined with subjective criteria such as “impact in the Union” or “strategic importance,” creates a moving target for investors. For companies considering EU expansion, that uncertainty translates into real risk: a deal that appears clear today could be pulled into an FSR review tomorrow, with all the associated cost and delay. In competitive processes, such unpredictability can deter bidders or distort valuations – undermining the EU’s own ambition to attract capital for the modernization of strategic sectors. Until clearer guardrails emerge, businesses will need to factor this regulatory gray zone into their investment planning.

Another unresolved issue is how the Commission will treat transactions that generate positive effects for the EU market. The EU has long recognized the need for modernization across key industries – particularly through private investment – yet the draft Guidelines do not acknowledge efficiency arguments as potential mitigating factors.

Under EU merger control rules, efficiencies and synergies can offset competition concerns. By contrast, the Commission maintains that such benefits arise from the transaction itself, not from the foreign subsidies under examination. In doing so, the Commission draws a strict line between the effects of investment and the effects of subsidy: only positive impacts stemming directly from the foreign subsidies may be considered in the balancing test. That stance appears at odds with the EU’s broader policy objective of attracting fresh capital flows into strategic sectors – a tension that that is likely to persist as the FSR framework matures.

Administrative burden and transaction timelines

Even where transactions pose no substantive concerns, the FSR’s procedural demands are considerable. Companies must gather detailed data on all foreign financial contributions received over the last three years – a process that can involve multiple functions (sales, procurement and tax) across numerous jurisdictions. Some large companies have reported mobilizing more than 100 employees to compile the necessary information.

Typical proceedings, including pre-notification discussions, last three to five months, but complex cases – such as Haier/Carrer, the first FSR clearance involving a Chinese buyer – can extend to nine months or more. The Commission also tends to use multiple rounds of information requests, often demanding granular, data-heavy submissions. In some cases, repeated delays due to “incomplete information” show how easily procedural burdens can prolong timelines.

FSR under review: What’s on the horizon?

The Commission is taking stock of the FSR after two years of application. Until now, feedback from businesses, trade organizations and other stakeholders has been loud and clear: the current system is heavy on paperwork and slows down deals. In response, the Commission is exploring ways to make the process leaner and more predictable – without losing sight of its goal to keep competition fair within the EU.

This review could be a game-changer. In the context of the current legislative appraisal, the Commission could enact a simplified procedure for certain companies, such as private equity firms. A simplified procedure would mean fewer data-gathering headaches, faster timelines, and lower compliance costs for cross-border M&A and public tenders. While nothing is final yet, the direction is toward reducing friction for routine cases – good news for dealmakers who have been navigating a complex and resource-intensive regime.

Awaiting reform amidst ongoing challenges

The FSR has reshaped how cross-border M&A is assessed in the EU, embedding subsidy scrutiny within the broader competition and security agenda. Recognizing industry challenges, the Commission has launched a consultation to evaluate the FSR’s impact and explore potential areas for improvement.

Until then, dealmakers must treat the FSR as a central pillar of the regulatory landscape. For cross-border transactions with complex ownership structures or state links, early analysis, robust documentation and close coordination with counsel are now prerequisites for timely execution.

With thanks to Freshfields Maria Dreher-Lorjé, Florian Reiter-Werzin and Justyna Smela for their contributions to this update.