EU foreign investment screening: new measures on the horizon

While a modest EU investment screening framework has been in place since 2019, the latest amendments represent a shift towards greater harmonisation of economic security policy across the EU and provide the European Commission with an expanded role in overseeing and coordinating national regimes.

Background

Currently, decisions on whether and how to screen foreign investments are left to individual member states. However, recent geopolitical developments have heightened concerns about foreign influence in sensitive sectors.

Although the majority of member states have implemented some form of screening mechanism, the results have been a fragmented landscape of inconsistent national rules and screening authorities, with the potential for loopholes and incentives for countries to implement lower standards to attract foreign investments.

Key changes

The most significant changes under the recent amendments will likely be:

1. Mandatory screening regimes: all member states will be required to adopt national foreign investment screening mechanisms with minimum requirements across the EU;
2. Harmonisation of rules: there will be a more consistent approach and enforcement trends across national regimes in relation to the scrutiny of critical sectors, such as artificial intelligence, semiconductors and dual-use and military items;
3. Enhanced role for the European Commission: the European Commission will have the authority to intervene in national foreign investment reviews where it identifies specific risks or where different member states disagree on the assessment of a cross-border transaction; and
4. Inclusion of indirect investments: the rules will apply equally to indirect investments where the investor is EU-based but ultimately controlled by a non-EU individual or entity.

Each member state will be required to designate a national screening authority tasked with implementing clear and non-discriminatory rules, with standardised procedures across members states, streamlined screening timelines, and due consideration of the limited resources of small and medium-sized enterprises (SMEs). A standstill obligation will also be mandated for transactions in sensitive sectors pending regulatory approval.

Likely impact

The proposed changes reflect growing confidence in the ability of the European Commission to lead on economic security matters, with the latter likely being empowered to investigate transactions even when national authorities have not initiated a review.

Investors will need to be mindful that transactions could still be subject to screening even if not investigated by a national authority. Understanding which activities fall within the scope of the expanded regulations will be crucial as the increased compliance obligations will likely lead to longer approval timelines.

Nonetheless, the proposed harmonised approach aims to improve efficiency as it arguably only stops short of creating a single EU-wide screening system.

Looking ahead

The proposed amendments remain subject to negotiations with member states and are not expected to come into force until 2026 at the earliest. However, member states can be expected to begin revisiting their national screening regimes in anticipation of the new requirements.  

If you would like to discuss any of the matters covered in this blog, please get in touch with a member of our European Competition and Antitrust team.

With thanks to Trainee Solicitor Annabel Twose for her assistance preparing this blog.