Foreign direct investment in the EU

The new EU FDI legal framework came into force in each EU member state on 11 October 2020.

Regulation (EU) 2019/452 (the Regulation) is the first set of EU level rules to address FDI. It is not aimed at a full harmonisation of the FDI control mechanisms in the EU nor does it replace the national FDI screening with an EU level review mechanism. Instead, it promotes cooperation, information sharing and a minimum level of transparency regarding FDI control between the European Commission and member states.

Even under the new Regulation, the member states largely remain autonomous in their approach on how to deal with FDI. It is up to each member state to adopt FDI rules or not, as well as the final decision on whether or not FDI is permitted.

The EU FDI framework

The pillars of the EU FDI framework are:

• an EU legal framework for screening of FDI by the member states on grounds of a risk to security or public order;
• a cooperation mechanism between member states, and
• new competences to the European Commission to screen FDI and issue a non-binding advisory opinion to a member state.

The Regulation broadly applies to investments of any kind by a foreign, meaning non-EU, investor aimed at establishing or maintaining lasting and direct links between the foreign investor and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity in a member state, including investments which enable effective participation in the management or control of a company carrying out an economic activity. Greenfield or portfolio investments are not covered by the Regulation.

The screening framework

The Regulation suggests that foreign investment should be reviewed by the member states on the basis of a risk to "security or public order". This terminology originates from EU treaties and has been clarified by the Court of Justice of the EU only on a high level. This means a substantial amount of discretion is left with the member states.

In order to harmonize the existing member states' FDI rules to some extent, the Regulation provides for a non-exhaustive list of certain factors that the member states may take into consideration in determining whether a foreign investment is likely to affect security or public order. These factors cover:

• investments in critical infrastructure, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, as well as sensitive facilities and investments in land and real estate, crucial for the use of such infrastructure;
• critical technologies and dual-use items, including artificial intelligence, robotics, semiconductors, cybersecurity, quantum technology, aerospace, defence, energy storage, nuclear technologies, nanotechnologies and biotechnologies;
• supply of critical inputs, including energy or raw materials, as well as food security;
• access to sensitive information, including personal data;
• the freedom and pluralism of the media;
• control of a non-EU government, including state bodies or armed forces, over the foreign investor;
• involvement of a foreign investor in activities affecting security or public order in a member state; or
• a serious risk that the foreign investor engages in illegal or criminal activities.

These are only examples of factors that constitute a risk to security or public order. The member states may or may not consider them. It is however expected that member states will consider the factors when adopting or amending their FDI laws, and further that the European Commission as well as the other member states may consider these factors in their various roles in the new cooperation mechanism.

Cooperation mechanism between member states

The second pillar of the EU FDI framework is the future cooperation mechanism between a member state in which the FDI is intended and the other member states. Member states will be required to inform the European Commission and other member states of any ongoing FDI screening. Each member state may issue comments to the screening member state if it determines that a particular FDI subject to screening in another member state is likely to affect its security or public order. A comment may also be issued in cases where a member state did not carry out any screening, either because its FDI rules did not (yet) apply or it did not adopt any FDI screening rules. The member state in which the FDI is intended shall give due consideration to the other member states' comments.

Role of the European Commission

Member states will also be required to inform the European Commission of any ongoing FDI screening. Regardless of whether a member state has notified the European Commission, it may issue a non binding opinion to a member state in which an FDI is intended if it considers it likely that the FID may affect (i) security or public order in more than one member state or (ii) projects with significant EU funding, or if the European Commission has additional relevant information in relation to that FDI. In addition, a member state may also request from the European Commission to issue an opinion if it considers an FDI in another member state to likely affect its security or public order. The member state in which the FDI is intended shall give due consideration to an opinion in the FDI screening process.

Furthermore, the Regulation introduces annual reporting obligations the member states with respect to national security screening to guarantee a minimum level of transparency regarding FDI in the EU.

Consequences for foreign investors

Time implications

The duration of national FDI screening processes has further increased as member states are obliged to give the European Commission's opinion and other member states' comments due consideration. For example, if a national screening takes place, other member state comments or an opinion of the Commission can be issued up to 35 days after notification of the FDI to the other member states and the European Commission. The member state in which the FDI is intended will likely wait until this period is over until it will conclude its national screening procedure.

Increasing complexity and uncertainty

The new role of the European Commission and the involvement of other member states in the national screening procedures will further increase the complexity as well as the level of uncertainty of the FDI review process. Foreign investors will have to consider for their investment in a target located in a member state not only the foreign investment restrictions of the target jurisdiction but also take into account the perspective of other member states as well as the European Commission. While neither the European Commission nor other member states have the right to prohibit the transaction on the grounds of FDI considerations, the member state of the target jurisdiction will have to duly consider their points of view.