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 (the Proposal), 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.
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.
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.
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.
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 (the Vifo 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.
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.
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