Mind the competitiveness gap: Measuring the AI Act's extraterritorial reach

The 2024 EU Artificial Intelligence Act (AI Act) asserts broad extraterritorial scope: it applies to any AI system whose output is used in the EU, no matter where the company behind the AI is located. The AI Act reflects a wider trend of the EU extending its legislation beyond its borders. But does this mean that companies actually comply with the AI Act? And do compliance levels differ between companies based inside and outside the EU? Empirical evidence on the effectiveness of extraterritorial legislation has so far been limited, focusing mostly on privacy and consumer protection laws. This paper provides such evidence by assessing demonstrated compliance with the AI Act's prohibitions on certain AI practices under Article 5(1), for which high financial penalties started to apply in August 2025. To this end, this study analysed terms of service and acceptable use policies from 53 AI companies. Results indicate that foreign companies without EU subsidiaries rarely comply, with little improvement following the introduction of penalties. Only around 14% of such companies refer to the AI Act's prohibitions in their documents, whereas significantly more companies with an EU establishment do so. This may result from limited (extraterritorial) enforcement and uncertainty among non-EU companies about the AI Act's scope. The findings suggest that EU companies may face a competitive disadvantage compared with foreign firms. This concern is highly relevant to current debates on the competitiveness of EU firms and the potential need for legislative simplification.