Background
On 24 January 2024, the European Commission
presented the proposal of five new initiatives for advancing
European economic security. Among these initiatives is the proposal
for a regulation on the screening of foreign investments in the
European Union (theProposal), which seeks to
harmonise foreign direct investment regimes within the EU. With the
Proposal, the European Commission aims to address the shortcomings
identified in the current EU Foreign Direct Investment Screening
Regulation 2019/452 (FDI Regulation). The Proposal
sets minimum harmonisation standards of the essential features of
foreign direct investment screening, including delineating the
scope of covered investments, establishing procedural features of
the screening mechanism, and defining a framework for cooperation
between EU member states and the EU.
Main changes
- Wider scope of application of the FDI Regulation: all foreign investments
- Harmonisation: requirement for national screening prior to completion of investments & minimum sectoral scope of national foreign investment screening legislation
- Enhanced cooperation, information sharing and reporting between Member States and the European Commission
- Own-Initiative Procedure: Member State or European Commission can initiate a screening procedure at its own initiative
Wider scope of
Application
One of the shortcomings of the FDI Regulation is
the absence of an obligation or a defined minimum scope for
screenings mechanism. This deficiency has allowed for loopholes in
FDI screening coverage across the EU. A key proposed amendment in
the Proposal is to broaden the scope to cover indirect investments
within the EU by EU entities controlled by non-EU owners. As a
result, the FDI Regulation would in the future apply to all foreign
investments, both direct and indirect, made through EU subsidiaries
controlled by non-EU investors, even if these subsidiaries are
legitimately established in the EU.
More Harmonisation and Minimum
Requirements
Since the ambiguity in harmonisation is an issue
in the FDI Regulation, the FDI regime is to be interpreted
consistently with other EU instruments, such as the EU Merger
Regulation and the EU principles of freedom of establishment and
free movement of capital. Therefore, if an investment complies with
all requirements of EU law sets forth, Member States must accept
this without imposing conditions that may hinder the application of
EU law.
Furthermore, the Proposal requires that all Member States are required to establish an FDI screening mechanism within 15 months of the regulation into force. The Proposal seeks to bring greater harmonisation by imposing minimum requirementsfor national screening mechanisms. These minimum requirements are outlined in Article 4(2) of the Proposal and include examples like Member States adopting adequate procedures shall be provided for the screening authority to determine whether it has jurisdiction over an investment filed for authorisation, the publishing of an annual public report on Member State advancements and actions and subjecting foreign investments to additional authorization requirements.
The Proposal also includes a list in the annex of sensitive sectors that must be subject by a mandatory FDI screening due to their importance for the security or public order interests. This list is comprehensive, and it designates sectors, such as military and dual-use items, 'critical technologies' (e.g. advanced semiconductor and AI technologies), critical medicines, critical entities and activities which are critical to the EU's financial system, all of which require mandatory screening in each and every Member State. Member States will retain the freedom to impose stricter measures and decide which transactions fall under screening mechanisms.
Enhanced Cooperation
The FDI Regulation introduced a cooperation mechanism for the
screening of FDI in the EU on the basis of which a Member State
where a FDI was planned or completed has to give due consideration
to the comments issued by other Member States and the opinion
issued by the Commission in its screening decision. With the
Proposal, the Commission proposes to enhance the cooperation
mechanism by setting a minimum level and broadening its scope.
Own-Initiative
Procedure
According to the Proposal, if a Member State or
the European Commission considers that a foreign investment in the
territory of another Member State, which has not been notified to
the cooperation mechanism, could impact security or public order,
the Member State or the European Commission can initiate an own
initiative procedure for at least 15 months after the foreign
investment has been completed. Thereby, Member States can play a
role in assisting each other in the security and monitoring of
FDI.
Expected
Effects
Based on the previous weaknesses of the current
FDI Regulation framework, the Proposal aims to provide more
safeguards and addresses a number of prior concerns as well as
minimum standards. Meanwhile, each Member State will remain free to
extend its national law on the matter beyond those standards. The
goal of true harmonisation between Member States may be closer.
However, further improvement is still needed in achieving this
harmonisation. The own-initiative procedure will introduce
uncertainty for transactions as it can be initiated 15 months after
completion of a transaction.
From a Dutch perspective, the potential impact of the new Proposal on existing legislation, primarily the Dutch Act on security screening of investments, mergers and acquisitions (theVifo Act), remains uncertain. Given the significant overlap in the subject matter of these two sources of law, how they would regulate FDI in the Netherlands in the future remains elusive. As the Vifo Act applies to all investments, regardless of the "nationality" of the investor, the wider scope of the Regulation as proposed will not lead to major changes. Meanwhile, the minimum sectoral scope as proposed may lead to a widening of the scope of the applicability of the Vifo Act.
Next steps
Before the Proposal progresses, it must undergo
the ordinary legislative procedure, involving scrutiny by the
European Parliament and the Council of the EU. Considering the
timeline and given that it may become effective 15 months after its
entry into force, these new foreign investment screening provisions
could be applicable by 2026, at the earliest. It is important to
consider the context, including the upcoming European Parliament
elections in June, which could extend the timeline of the ordinary
legislative procedure.
BUREN is committed to assist its clients to navigate the challenges and opportunities within the field of FDI implementation in the Netherlands, leveraging extensive experience, including compliance with the Vifo Act.We will keep you updated on any developments in EU legislation on FDI and the Vifo Act. Feel free to reach out to us if you have any questions about the new Proposal or FDI as a whole.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.