• Nehal Jilka, Partner |
  • Nicola Mazzarotto, Partner |
  • Laurence Crook, Associate Director |
12 min read

The Foreign Subsidies Regulation (“FSR”) is a new EU law concerning subsidies granted by non-EU states to companies active in the EU. It came into force on 12 January 2023, with the EU having power to investigate any mergers or public procurement processes initiated after 12 July 2023.

The finalised Implementing Regulation for the FSR (“FSR IR”) was published on 10 July 2023. We have been considering the challenges that the FSR may create for firms, including the requirement to identify and consolidate a wide range of non-standard financial data, and how firms may be able to effectively meet these challenges.


EU Member States are subject to EU State Aid laws when granting subsidies, but non-EU states are not subject to the same rules. The EU is concerned that subsidies granted by non-EU states may provide recipients with an unfair advantage in acquiring companies or obtaining public procurement contracts within the EU.

The FSR enables the European Commission to investigate financial contributions granted by non-EU states to companies active in the EU. If the Commission finds that these financial contributions constitute distortive subsidies, it can impose measures to remedy the distortion.


As set out in the FSR IR, transactions meeting the notification thresholds [See FSR, Articles 20 and 28. We note that the notification thresholds are based on the value of all financial contributions received, including those below €1m in value.] must submit a notification form to the EC detailing the financial contributions (not just subsidies) received from a non-EU government or government-controlled entity in the last three years.

After notification, the EC will conduct a preliminary review of the submission. This gives the EC 25 days to decide whether to launch an in-depth investigation into whether the firm is in receipt of a foreign subsidy that could distort the EU market.

The FSR IR sets out the procedures and processes that firms will need to follow to comply with the FSR in advance of concluding concentrations or public procurement bids. There are some changes from the draft Implementing Regulation that was published on 6 February 2023, most notably that:

  • the threshold for an individual contribution to be disclosable has risen from €250k to €1m;
  • contributions over €1m are only required to be disclosed if either:
  1. they fall into one of the categories of most likely distortive subsidies[See FSR, Article 5.]; or
  2. the combined value of all contributions received from that country in the past three years is over €45m (for concentrations) or over €4m (for public procurement bids).
  • contributions that do not fall into one of the categories of most likely distortive subsidies set out in Article 5 of the FSR may be presented in aggregated form; and
  • certain transactions, such as sale or purchase of goods on market terms, or non-selective tax deferrals, do not need to be disclosed.

While these changes may reduce the burden of compliance somewhat, they do not change the fundamental requirement for firms to have complete and accurate data on the financial contributions that they receive from non-EU governments or government-controlled entities.

Data Challenges

The requirement for financial information on foreign contributions is likely to be very challenging. Group-wide information going back three calendar years is required, and in our experience, companies are unlikely to have this level of detail readily available from their financial systems. This challenge is particularly acute given the potential breadth of what might be considered to be a ‘financial contribution’ under the FSR.

For example, for some categories of financial contribution, such as purchases, it is likely to be necessary to analyse a large volume of granular data to identify qualifying transactions. This information is unlikely to be held at group level, so may need to be consolidated from multiple financial systems, potentially owned by different legal entities.

A key challenge is likely to be identifying whether a counterparty is a government‑controlled entity, as this is unlikely to be currently recorded in finance systems. Examples of entities that could be judged to be under government control include sovereign wealth funds, government-owned infrastructure operators, or joint ventures where the government is one of the joint venture parties. Learnings from customer due diligence activities are likely to be helpful in efficiently and reliably identifying government-controlled counterparties.

Separately, tax measures are also likely to cause significant challenges. Tax measures have historically presented unique challenges within the State Aid rules and in principle, many of them could come within the meaning of ‘financial contribution’. For example, UK R&D credits or equivalent tax measures overseas could, in principle, come within the scope of financial contribution. Our experience is that identifying these measures can be particularly difficult for businesses.

Gathering and collating the required information in a disclosable format is therefore likely to present significant challenges. Firms that have not prepared in advance will face challenges in both identifying whether a notification is required, and if necessary completing the notification form within the timelines of a merger or public procurement procedure.

Preparing to Meet the Challenges

We have designed a roadmap to assist firms in meeting the challenges discussed above. This entails:

  1. Gap Identification, comparing available financial information against ‘gold standard’ data.
  2. Gap Assessment and Resolution, considering the appropriate actions to be taken for each gap identified, and then implementing them.
  3. Economic Assessment of disclosable financial contributions identified by this process, in relation to potential market distortions.
  4.  Documentation and Future Controls, ensuring that the basis for key decisions is documented, and robust compliance procedures are in place.

We provide more detail on what each of these steps would entail below.

Gap Identification

To assess their readiness to comply with the FSR, firms will need to review whether they have the data necessary to identify whether a notification is required and, if so, to complete the notification form. To facilitate this, we have reviewed case precedent and subsidy guidance to identify a range of financial contribution mechanisms. We have then defined the ‘gold standard’ data that would be required to support FSR compliance for each mechanism, and the key business processes that would be most likely to currently own this data.

This provides a baseline against which a firm’s available information can be compared. The level of detail of this review will vary from firm to firm, but we would generally recommend that firms initially consider the data that is readily available from existing group-level financial records, such as the consolidated general ledger and core management accounting data.

Gap Assessment and Resolution

We would expect the Gap Identification process to identify multiple gaps in data availability for most firms. Firms should be able to demonstrate that they have assessed these gaps and taken appropriate actions. Taking action will both help to close and minimise gaps, and also help demonstrate positive intent and engagement with the EC’s aims and objectives.

There are three main actions open to firms:

  1. Developing processes or systems to consolidate information from multiple sources, for example, an automated process to consolidate data on government grants received from the underlying financial records of multiple legal entities;
  2. Designing processes to capture data that does not currently exist in finance systems, for example, a process to record on an ongoing basis whether material government contracts were awarded under market conditions; or
  3. Accepting the gap in data availability, based on an assessment that the mechanism is unlikely to be capable of leading to a distortive subsidy.

Most businesses will have a combination of different ERP systems, document management systems, email, and file storage locations across multiple operational jurisdictions which they will need to identify and inspect to identify relevant documentation for disclosure. The individual data landscape across each business will require a tailored response for review.

Utilising the right skillsets, tooling and approach is vital to ensure that the process is both sufficiently robust to undergo regulatory scrutiny and as efficient as possible. Businesses may leverage the approaches used on regulatory investigations and inquiries to map the landscape of potentially relevant data repositories and systems, establish mechanisms for extraction and collect material in a suitable format for review.

Ingestion into an eDiscovery platform could allow a standardised and targeted review across large data sets from multiple repositories. This can be further enhanced by machine learning algorithms used to refine the identification of responsive material as the review progresses. Using the right platform, combined with an iterative eReview approach, can drastically cut both the time and effort required to review collected data. It can also enable rapid scaling of resources to undertake reviews when required. eDiscovery platforms can support the disclosure process and provide an audit log of steps taken to respond to potential regulatory challenge.

Selecting the most appropriate action for each gap identified will require a degree of judgment on the part of firms, and the basis for these decisions should be clearly documented to support engagement with the EC. Key factors impacting this decision will include:

  • the likelihood that a mechanism could lead to a distortive subsidy;
  •  the level of effort required to gather, consolidate, and provide assurance over data that could fill the gap; and
  • the feasibility of gaining comfort over the financial contribution mechanism in question through alternative methods.

As an example of a potential alternative method, one financial contribution mechanism identified by the EC is the sale of goods to government-controlled entities. Reviewing whether all counterparties to sales transactions represent ‘government-controlled entities’ may be highly onerous. However, it may be significantly easier to validate (through appropriate sample testing) that sales were priced on an arms‑length basis, so are not disclosable.

Economic Assessment

Why Perform Economic Assessment?

Where financial contributions are identified, there is a risk of follow-up questions or the launch of an investigation by the EC in response to the notification form. Performing an assessment of whether contributions are likely to distort competition, and drafting appropriate narrative to accompany submissions, may help to minimise follow-ups or the potential for investigations. Again, this can be completed in advance of the requirement to submit a notification form, to reduce the risk of delays to the process.

In addition to reviewing identified financial contributions, economic assessment can help to assess whether gaps in data availability are likely to be capable of leading to a distortive subsidy. For example, to identify government loan guarantees, it may be necessary to review contractual agreements for all loans. Economic analysis of the size of any potential distortive impact of loan guarantees may allow lower value loans to be eliminated, allowing firms to focus on the most material loan agreements.

How to Approach Economic Assessment?

The EC has stated that both the preliminary and in-depth reviews will consider whether the negative distortive effects of a financial contribution outweigh any positive effects on the internal market and relevant policy objectives. This is broadly consistent to the approach taken under EU State Aid laws.

To assess the negative distortive effects of a financial contribution, it is necessary to consider the nature of the contribution, and the potential size of any economic advantage it provides to the firm. It is also necessary to define the market in which the subsidy is provided, and assess the characteristics of this market, including its size and competitiveness.

Using this information, it is possible to assess the impact on competition by considering the difference between two scenarios, one where the financial contribution was provided, and a counterfactual where it was not. This would consider how the financial contribution impacts the firm’s decisions, with decisions around pricing and investment likely to be key areas of focus.

We would expect any positive impact of a financial contribution to be based on either an efficiency rationale (such as correction of a market failure), or an equity rationale (such as redistribution of resources to an economically disadvantaged group). These are also likely to be assessed through market definition, assessment, and consideration of a counterfactual scenario.

Documentation and Future Controls

To ensure that they are ready to comply with the FSR when it becomes necessary, firms will need to implement processes and controls to enable the interrogation of the relevant data over a three year look back period, the start date for which will be set according to the timing of the merger or public procurement process.

This should cover both the data gathering process and the systems in which the data is contained, and should, at a minimum, assure that the relevant data is both complete and accurate. This will enable analysis of whether a notification will be required and, if it is, identification of those financial contributions that must be individually disclosed.

Clear documentation of the process for gathering financial contribution information for the FSR is likely to help firms:

  1. Complete timely analysis of whether notification thresholds are met, and a disclosure is necessary.
  2. Comply effectively and efficiently with data requirements if disclosure is determined to be necessary, reducing the risk of delays to notification form submission.
  3. Demonstrate ‘good faith’ engagement with the aims of the FSR to the EC, which may help reduce the risk of follow-up questions after notification form submission.

This documentation should include:

  1. documentation of the process to be followed when gathering data, with defined ownership for each stage of the process, including the data sources to be relied upon and the assurance procedures to be performed;
  2. explanation of the process design, setting out the basis for management decisions around the data to be used. It is likely to be helpful to include details of the searches performed to identify relevant data, and the reasoning behind any decisions to accept gaps in data availability.


The FSR creates a significant disclosure burden for many firms, and has the potential to significantly delay mergers or tender bids. However, firms that are well prepared and engage positively with the aims and objectives of the EC are likely to be able to efficiently minimise this risk.

At KPMG, our broad range of experience enables us to effectively support firms in meeting all the challenges of the FSR:

  • Competition Economics - our expertise, including extensive experience of engaging with the EC on competition issues, enables us to assess whether identified financial contributions are likely to distort the market, and to evaluate the importance of any gaps in the available data.
  • Regulatory Finance - our experience of supporting provision of financial information to regulators enables us to effectively develop and persuasively present relevant analysis.
  • Forensic - our extensive experience provides us with in-depth knowledge and experience of working with companies’ finance systems, extracting data, and assessing financial information through a range of well-established methodologies.
  • Controls and systems transformation - our expertise allows us to design robust FSR compliance processes, and to support in implementing finance system changes if required.

Alongside these core services, KPMG’s multi-disciplinary practice gives us the ability to draw on specialist input as needed as part of a multi-disciplinary delivery team. This ensures we can bring the right set of skills and experiences to all cases and their unique challenges.