The EU’s Foreign Subsidies Regulation (FSR) is getting real for China, with an active European Commission (EC), backed by the bloc’s top court, showing its eagerness to employ this instrument to the fullest extent possible – ‘ex officio’ included.

The FSR was added to the EC’s tool kit in 2023, enabling the watchdog to go after foreign subsidies that distort competition in the EU. There are notification obligations for acquisitions or public tenders over a certain value threshold.

But the EC can also use the FSR on its own initiative, for instance to call in deals that don’t meet the notification thresholds, or to address subsidies given to EU-based companies that tip the scales in their favour.

News in the past couple of weeks has indicated that the EC is flexing these powers, with the support of the European Court of Justice (ECJ).

“The Commission is really ratcheting up the pressure when it comes to the FSR,” one Brussels lawyer said.

As such, the “China-factor” is becoming a real consideration for companies contemplating deals or investments with any link to the Chinese state, he said.

In the first FSR EU court litigation, signs thus far are that the EC has the court’s support.

On 21 March, Chinese-backed Nuctech ran out of road in its refusal to comply with the EC’s FSR information demands, when the ECJ confirmed the rejection of the company’s request for interim measures, according to an undisclosed court order seen and reported on by this news service last week.

The Chinese security scanning equipment provider’s EU subsidiaries are fighting FSR dawn raids that the EC conducted in the Netherlands and Poland in April 2024. As part of the raids, the EC demanded a slew of documents, including emails from Chinese nationals held on servers located outside the EU.

The Nuctech subsidiaries balked, saying they could risk a myriad of sanctions, ranging from fines and loss of business licenses to criminal prosecution of individuals, if they complied. Providing the documents would violate Chinese data protection laws and potentially Chinese legislation covering “important data”, they said.

The court wasn’t buying it, which was no surprise, really. Similar arguments about off-site documents have already failed in disputes about cartel investigations.

The EU’s top court, on appeal, said the companies have no excuse not to comply, since even if the EC inspections are ultimately deemed unlawful, the damages can be compensated.

“The Commission is going to step up the pressure after this order and demand that they upload those emails,” said one Brussels lawyer familiar with the case. “They can threaten to fine the companies 1% of turnover if they don’t do it.”

Use of ‘facts available’

It may not come to that, since the Commission has another card up its sleeve: the threat of using “facts available” in cases of non-cooperation.

Rather than being hamstrung by the parties’ stonewalling, the Commission can get creative in gathering evidence, for instance from cooperative rivals.

The FSR explicitly envisages this possibility and warns that the result may be “less favourable to the undertaking than if it had cooperated”.

It’s a card that has proven very powerful in wrenching cooperation out of companies in the context of EU antidumping and countervailing duties investigations, a Brussels trade lawyer said, noting that the “facts available” can be very unfavourable indeed.

FSR ‘call-ins’ envisaged

Another potential hiccup for deal makers to watch out for: unexpected requests for FSR notifications of below-threshold deals.

As this news service has reported, the EC is already contemplating such ‘call-ins’, with China-based Midea’s takeover of Arbonia’s climate division a concrete example.

While the Commission ultimately decided not to call that deal in, it shows that the option to do so is not only a paper tiger — the EC is ready to investigate smaller transactions when a concerning case comes along.

This creates a dilemma, particularly for buyers from China and Gulf countries and their advisers. Should they proactively approach the EC even when they don’t need to notify to check whether their deal might be called in? Midea’s experience suggests this is at least something to think about.

First, companies should not assume that because they have a parallel EU merger filing, the FSR team has been made aware of their non-notifiable deal. The Commission reached out to Midea with FSR-related questions in August 2024 – four months after the company started merger pre-notification talks.

Second, an unexpected FSR probe starting late in the process could delay the targeted closing of a deal.

Midea initially aimed to close the purchase of Arbonia’s climate division in 2H24, but it did not know whether the Commission would start an FSR review into the case until January 2025. That same month, it also obtained EU merger approval.

Shutting a loophole?

The EC might also be going after Chinese electric cars from multiple angles, as hinted by a Financial Times report on 20 March, which said the EC is sniffing around China-backed car maker BYD’s plant in Hungary.

At the time of the article, BYD had not received any formal queries or information requests from the Commission, a source familiar with the matter told this news service on 21 March.

But that doesn’t mean the commission isn’t talking to third parties and conducting its own research.

Electric cars were hit with EU tariffs in October 2024, with duties of 17%, 18.8% and 35.2% imposed on Chinese exporters BYD, Geely and SAIC, respectively.

A common tactic for exporters hit with antidumping or countervailing duties has long been to start, or ramp up, production inside the EU borders. Unless that EU company was merely an assembly operation, the Commission couldn’t get at it.

That is, until the advent of the FSR.

Now, the Commission might have finally found a tool to close that loophole, at least in cases where it can prove the EU company is propped up by foreign subsidies.

State of Play is a weekly column that offers commentary from our editorial team on the main deals undergoing regulatory reviews. The opinions expressed here are those of the writers only.