The European Union (EU) framework for foreign direct investment (FDI) screening is set out in Regulation 2019/452 (as amended, the Current FDI Regulation). In January 2024, the EC adopted a proposal for a new FDI screening regulation (the Proposal) to strengthen and further harmonize FDI screening in the EU. It will require all EU Member States to adopt FDI screening mechanisms and imposes minimum requirements for these (see also our update here).
Neither the Current FDI Regulation nor the Proposal creates an EU-level FDI screening mechanism. But they do set out minimum requirements for Member States’ FDI screening mechanisms and create a framework for the European Commission (EC) and national authorities to share information and views.
According to both the Current FDI Regulation and the Proposal, the host country has the final say over whether to approve FDIs. However, the host Member State must give the comments and opinions of the EC and other interested Member States “due consideration.” In the case of investments deemed to be of “Union interest,” the EC will have greater authority, as host Member States have to take “utmost account” of EC opinions and explain any non-compliance.
Compared to the Current FDI Regulation, the Proposal aims to make the cooperation between the Member States and the EC more effective and efficient by obliging Member States to notify the EC and other Member States of certain proposed investments. Applicants requesting authorisations in multiple EU Member States will have to file all notifications on the same day to ensure parallel timelines. Member State authorities and, upon request, the EC, will be required to coordinate.
The Current FDI Regulation covers investments by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the target company, including investments that enable effective participation in the management or control of the target, but excluding “portfolio investments”. Foreign investor means a natural person or business (“undertaking”) of a non-EU country. The Proposal would broaden the framework’s scope to include EU investors controlled by non-EU entities.
The Current FDI Regulation requires that national FDI screening mechanisms be transparent and do not discriminate between third countries. Member States will have to set out the circumstances triggering the screening, the grounds for screening and detailed procedural rules. Member States must establish timeframes for issuing screening decisions that allow them to consider the comments and opinions of Member States and the EC. Confidential information must be protected, and foreign investors and other parties concerned must have the possibility to seek judicial redress against screening decisions of the national authorities. These protections will remain under the Proposal.
The FDI Regulation also sets out a uniform set of areas for screening by Member State authorities, including:
- critical infrastructure (including energy, transport, water, health, communications, media, data processing or storage, aerospace, defense, electoral or financial infrastructure, as well as sensitive facilities and investments in land and real estate crucial for the use of such infrastructures);
- critical technologies and dual use items (including artificial intelligence, robotics, semiconductors, cybersecurity, quantum, aerospace, defense, energy storage, and nuclear technologies, nanotechnologies and biotechnologies);
- supply of critical inputs (including energy or raw materials, as well as food security);
- access to or the ability to control sensitive information (including personal data); and
- freedom and pluralism of the media.
Under the Proposal, FDI screening would be mandatory in certain sectors, which largely overlap with the list in the current FDI Regulation set out above.
The EC has published a number of documents providing further insight into the application of the Current FDI Regulation, including frequently asked questions, a notification form and a factsheet. The EC also publishes annual reports on FDI screening in the EU.
According to the EC’s third annual report (the Report) published in November 2023, all 27 Member States had active FDI screening mechanisms or were in the process of adopting such legislation, compared to 11 when the Current FDI Regulation was tabled. As mentioned, under the Proposal all Member States will be required to implement FDI screening mechanisms.
Even without an EU-wide mandate, the Current FDI Regulation has dramatically changed the EU landscape for FDI screening in just a few years. According to the Report, 17 Member States submitted a total of 423 notifications pursuant to the Current FDI Regulation’s cooperation mechanism in 2022. The EC closed 81% in Phase 1, with 11% proceeding to Phase 2 (8% were still ongoing). Manufacturing and information, communications and technology accounted for a significant majority of Phase 2 cases (50% and 32%, respectively). Where a decision was reported, 86% were approved without conditions, 9% of decided cases entailed mitigating measures (a significant decrease compared to 23% in 2021) and 1% of decided transactions were blocked.
Given the widespread implementation of FDI screening mechanisms under the current framework, the Proposal’s mandate for Member States to adopt such mechanisms may not lead to more transactions being subjected to EU-level coordination. Indeed, the opposite may be true, since Member States will only need to notify other Member States and the EC of proposed investments in sensitive sectors. However, the higher level of harmonization under the Proposal should lead to a more joined-up approach and more effective intervention.
