Commission Proposes New FDI Regulation

On 24 January, as part of its Economic Security Package, the European Commission presented five initiatives to strengthen the economic security of the European Union (EU) amid rising geopolitical tensions and technological disruptions.



The five initiatives presented by the Commission are the following:

• Council Recommendation on Research Security;
• White Paper on options for enhancing support for research and development involving technologies with Dual-Use potential;
• Proposal for a new regulation on the screening of foreign investment;
• White Paper on Export Controls;
• White Paper on Outbound Investments.

In this briefing, we outline the main elements of the Commission’s proposal for a new regulation on the screening of foreign investment. Key measures include mandatory screening in all Member States, revisions of the sectoral scope, as well as rules aimed at capturing foreign-backed transactions realized through EU vehicles.

We look at the EU’s existing foreign direct investment (FDI) screening regulation and showcase how the proposed measures would change the regulation and allow the EU to reach shifting policy objectives.

FDI screening in the EU since 2019

The EU has one of the world’s most open investment regimes, making it an attractive destination for foreign investment. In 2019, the EU adopted a foreign direct investment (FDI) screening regulation addressing security and public order risks arising from foreign entities attempting to gain significant influence or control over European companies crucial to the Member States’ strategic interests. Such risks encompass the impacts foreign investments could have on critical EU technologies, infrastructure, inputs, sensitive information, and even media freedom, while also scrutinizing investors potentially influenced by foreign governments or subject to sanctions.

Given the EU’s interconnected market, a technology deemed critical in one Member State can hold equal significance for neighbouring countries or the EU at large. Hence, the FDI screening framework, designed to complement national mechanisms, is applied to investments that may pose a threat to the public order or security across multiple Member States. This regulation mandates both individual Member States and the Commission to collaboratively assess and determine the potential risks associated with specific foreign acquisitions, ensuring a coordinated response to safeguard collective interests.

Since its inception, the regulation has facilitated the scrutiny of over a thousand transactions, predominantly in sectors critical to national and EU-wide security and public order such as energy, aerospace, defence, semiconductors, healthcare, data processing and storage, communications, transport, and cybersecurity.

The Commission’s proposal for a new FDI regulation

In January 2024, the Commission submitted a legislative proposal for a new and improved framework for the screening of foreign investments into the EU, seeking to address the shortcomings of the current framework such as insufficient cooperation between national screening authorities and substantial disparities between screening mechanisms across the EU.

The key new measures included in the Commission’s proposal are the following:

• The obligation for all Member States to have an FDI mechanism in place (currently, 22 out of 27 have one). Said mechanisms should have minimum standards including screening potentially critical transactions before they are completed, having transparent rules and procedures, protecting confidential information, performing annual reporting, and allowing for recourse against decisions.
  
• Screening EU investments controlled by third-country individuals or entities, requiring Member States to scrutinize both inbound and intra-EU investments by EU subsidiaries of foreign firms.
• Setting a mandatory sectoral baseline for Member States to screen foreign investments, with flexibility for additional scrutiny based on national security needs.
• Enhancing cooperation and information exchange between Member States and the Commission, allowing for meetings to discuss investments and mandating notification of final decisions, beyond the original requirement of considering comments from others.
• Broadening the definition of sensitive investments to include foreign investments in EU companies operating in vital sectors like semiconductors, AI, critical medicines, and military or dual-use items, as well as those participating in EU initiatives like the European Defence Fund, Space Regulation, and Horizon Europe.
  
• Including screening for greenfield investments, where a foreign investor or their EU subsidiary establishes new facilities or ventures within the bloc. This was included to prevent enduring direct connections formed between the foreign investors and these new enterprises.
  
• Implementing an own-initiative procedure (OIP) that enables the Commission or a Member State to independently initiate a review of unnotified foreign investments in another EU jurisdiction, potentially impacting the security or public order of Member States. This procedure can be activated post-completion of the FDI with a 15-month deadline.

The European Economic Security Strategy

The Draft Regulation on FDI screening, unveiled as part of a quintet of initiatives by the Commission in January 2024, marks a significant step in advancing European economic security. This move is in sync with the European Economic Security Strategy outlined in June 2023 by the European Commission and High Representative for Foreign Affairs Josep Borrell, focusing on four critical risk areas: supply chains, security of critical infrastructure (both physical and cyber), preventing technology leakage, and the weaponization of economic dependencies.

Set against a backdrop of escalating geopolitical tensions, notably in Ukraine and the Middle East, these measures underscore the urgency of mitigating risks and reducing the EU’s reliance on detrimental external dependencies. The comprehensive strategy aims to improve the EU’s economic resilience by maintaining trade, investment, and research openness, enhancing mechanisms for risk assessment in both inbound and outbound investments, improving coordination in export controls, and fostering the development and secure research of dual-use technologies.

If adopted, the new FDI framework is anticipated to significantly influence sectors such as solar and wind energy, electric vehicles, and semiconductor technology, particularly addressing concerns over foreign, notably Chinese, investments in these areas.

Anticipated response of Member States

The introduction of new FDI requirements may encounter resistance from Member States. To reach the desired level of harmonization, a majority of Member States will need to significantly overhaul their existing national screening frameworks. Additionally, some may view the enhanced screening obligations as an undue burden, potentially deterring investment. FDI screening is regarded by many Member States as a crucial aspect of their strategic autonomy, with some hesitant to cede greater control to the European Commission or other Member States, fearing a loss of national interest oversight. This reluctance could manifest in the invocation of Article 346 TFEU to safeguard their “national security sovereignty” against the Commission’s influence.

The response of Member States to these new mandates, particularly those that have only recently updated their screening mechanisms (like Ireland and Bulgaria) in alignment with the existing EU FDI Screening Regulation, remains uncertain due to the extensive reforms and resources required.

Next steps

The Commission’s proposal for a new FDI regulation will have to follow the ordinary legislative procedure, with scrutiny from both the European Parliament (EP) and the Council of the EU. The upcoming EP elections in June 2024, and the current focus of the Belgian Council Presidency to finalize ongoing legislative proposals before the end of its mandate will most certainly delay the legislative process. For now, the appointment of lead draftspersons and allocation of the proposal to the relevant committee is scheduled for September 2024 once the new Parliament is in place.

The new FDI regulation is currently expected to become effective in 2026. Once adopted, it will start applying 15 months after publication in the Official Journal of the EU to give Member States sufficient time to adapt their national screening mechanisms.