Context and introduction
The EU Foreign Direct Investment (FDI) Screening Regulation (Regulation) entered into force in October 2020. It aims to create a cooperation mechanism which enables EU member states and the European Commission (EC) to exchange information on investments that may present national security or public order risks in EU member states or to the EU.
EU member states have increasingly enacted FDI screening mechanisms in their respective domestic legislation since the Regulation came into force. The number of EU member states with an operational FDI screening mechanism has grown from 11 to 24. The remaining three EU member states (Croatia, Cyprus and Greece) are in various stages of legislating and enacting their own FDI screening regimes and currently don’t have operational regimes in place, though Greece intends to implement its regime in the coming weeks. The implementation and continued evolution of so many FDI regimes in such a short timeframe is a testament to the growing focus on national security in the EU and underscores the need for international companies, particularly non-EU investors, to consider FDI implications and shifting geopolitics when deciding whether to pursue certain investments and forecasting deal timelines.
Throughout the Regulation’s lifetime, and in response to global events such as Russia’s military aggression against Ukraine, the EC has issued specific guidance on investments originating from Russia (and Belarus). Russia exerts influence or control over approximately 30,000 companies in the EU, which demonstrates that sanctions and export controls aren’t the only regulatory tools that can be leveraged against perceived threats or otherwise used for foreign policy purposes.
The 4th Annual Report on FDI screening shows that in 2023 the EC reviewed 488 investment cases, mostly in manufacturing, information and communications technology, and retail. Capital mainly came from the US, UK, offshore centres such as the Cayman Islands, and China, Canada, and Japan. Fewer than 2% of the cases filed caused the EC to issue an opinion on the underlying investments. The EC is allowed to issue non-binding opinions to member states if it considers that the FDI is likely to negatively affect the security or public order of more than one EU member state, or has relevant information in relation to that investment. The EC can also issue an opinion if projects or programmes of Union interest for which the EU member state(s) concerned have to take utmost account of the opinion. The member state also has to provide an explanation to the EC if its opinion is not followed in line with its duty of sincere cooperation. Approximately 92% of the cases filed were assessed within 15 days, and approximately 85% of the cases filed cleared without mitigation or conditions imposed, which reflects the EU’s overall efficiency and its openness and alignment on FDI.
Based on the 2023 Joint Communication on a European Economic Security Strategy, on 24 January 2024, the EC published its European Economic Security Package, which included a proposal for a new EU FDI Screening Regulation (draft Regulation). The draft Regulation is intended to tackle current jurisdictional gaps and enforcement shortcomings and reflect the EU’s evolving national security concerns. Building on feedback that the EC previously received on the Regulation, the landscape of foreign investment screening regimes across EU member states will be revamped and the draft Regulation will significantly affect FDI in the EU.
As part of the EU legislative process, the European Parliament (EP) needed to adopt a position before trilateral negotiations (the trilogues) between the EC, EP and Council officially commenced. So, on 8 May 2025, the EP adopted its amendments to the draft Regulation, curtailing the EC’s wider proposal.
We have consolidated and summarized the current positions below.
The EC draft Regulation and the EP amendments
Mandatory establishment of national screening mechanism
Under the draft Regulation, all EU member states (including Croatia, Cyprus and Greece, although the latter is already in the final stages of adoption) would be required to implement a national screening mechanism within 12 months of the draft Regulation’s entry into force (unlike the voluntary basis under the Regulation, which has allowed many EU member states to casually roll out their regimes over the course of the past five years).
Minimum sectoral and risky foreign investor scope
The draft Regulation provides that EU member states need authorisation for foreign investments where the target undertaking:
- participates in one of the projects or programmes of EU interest listed in Annex I of the draft Regulation (Space Programme, Union secure connectivity programme, Trans-European Networks for Transport, for Energy, for Telecommunications, European Defence Fund, Digital Europe Programme, EU4Health Programme); or
- is economically active in one of the areas of particular importance for the security or public order of the Union listed in Annex II of the draft Regulation (dual-use items, AI technologies, space and propulsion technologies, energy technologies, robotics and autonomous systems, critical medicines). It now also includes data storage and processing equipment and facilities, transport operational technologies (eg signalling), submarine fibre optic cables and large agricultural farms.
These areas are aligned with those identified by the EC in its Recommendation of 3 October 2023, as mandated by the European Economic Security Strategy. EU member states would now be mandated to require authorisations for foreign investments at a minimum in the above areas. But they can still have national provisions in addition to what’s required by the draft Regulation.
Interestingly, the EP refined the scope of the draft Regulation by including more details on eg which types of semiconductor activities are covered and by including a definition on what constitutes AI, providing investors with an increased degree of legal certainty and transparency. Moreover, the EP also widened the substantive assessment’s scope, including eg the resilience of certain critical infrastructure opposed to its mere security, integrity and functioning. Other factors include technology security and leakage, and the weaponisation of economic dependencies or economic coercion as well as potential impacts on the internal market. All of these are considered economic security risks, the mitigation of which is identified as the core purpose of the draft Regulation.
Additionally, the scope of foreign investors deemed to pose potential risks has been broadened to include those who:
- support a third country’s violations of international law;
- have faced negative FDI screening outcomes in a non-EU country that cooperates with the EU; or
- originate from a country with serious strategic weaknesses in its anti-money laundering and counter-terrorism financing frameworks, or that requires the sharing of sensitive information with its government without democratic oversight or due process.
Broadening the definition of foreign investments
In the European Court of Justice’s (ECJ) Xella judgment, the ECJ concluded that investments by ultimate non-EU investors via an entity set up in the EU fall outside the scope of the Regulation. As such, the prohibition decision under Hungarian FDI rules would restrict Xella’s freedom of establishment in breach of EU law. Xella is a Hungarian company ultimately owned by foreign companies which intended to acquire another Hungary-based company. Such restrictions can generally only be justified under EU law where the foreign investment poses a “genuine and sufficiently serious threat to a fundamental interest of society.”
The ECJ effectively stated that only direct investments in EU-based companies by non-EU based investors are subject to the Regulation. The Regulation would only apply where the EU subsidiary of the ultimate non-EU investor can be considered as an artificial arrangement with the aim of circumventing FDI screening that doesn’t reflect economic reality.
The draft Regulation intends to cover not only investments in existing EU-based companies, but also includes investments through EU subsidiaries which are, directly or indirectly, controlled by a non-EU investor. This entails an expansion of jurisdiction, and emphasizes the importance of understanding your own structure but also a counterparty’s ownership structure as well as deliberate and thorough due diligence. Several EU member states had already closed this jurisdictional gap in their national legislation. As a result, where a national FDI regime may be applicable, the current Regulation (and the cooperation mechanism) may not. The current Regulation (and the cooperation mechanism) also doesn’t apply to purely internal restructurings, which isn’t expected to change following the changes made by the draft Regulation.
Portfolio investments with a sole purpose of generating a financial return are excluded from the draft Regulation’s scope, as it doesn’t typically allow investors to exercise influence on the entity in which such mere financial stake is acquired. Investments by virtue of a resolution tool, especially relevant in the financial services industry, are also not within scope.
The draft Regulation does, however, require member states to screen greenfield foreign investments in a mandatory sector, of a certain proportion (in excess of EUR250 million) and under certain conditions such as where investments are made by a foreign investor that:
- has links to a foreign government;
- is subject to sanctions; or
- has previously been subject to an adverse FDI screening decision by a member state FDI screening authority in respect of a previous investment, and where they create a lasting and direct links between the foreign investor and the EU.
This occurs where a foreign investor (or its EU subsidiary) sets up new facilities or a new undertaking in the EU (even if part of a public procurement requirement). This may particularly be relevant for the broader energy (solar, wind, electric vehicles) and semiconductor sectors, areas where greenfield investments are becoming increasingly common.
Under the draft Regulation and to introduce a deadlock resolution mechanism, the EC would have the authority to block a deal or require remedies if, despite the host member state believing the investment – after applying any remedies it deems necessary – poses no cross-border security or public order risks, another EU member state or the Commission itself disagrees. However, where a foreign investment constitutes a concentration under the EU Merger Regulation (EUMR), the applicability of this draft Regulation should be assessed on a stand-alone basis.
Near-simultaneous filing obligation in multijurisdictional transactions
In multijurisdictional transactions, the draft Regulation mandates investors to notify the foreign direct investment concerned in all relevant EU member states on the same day. The EP proposes extending this deadline to three calendar days.
This may require increased cross-border coordination, planning and timing alignment due to filings usually being made in the official language of the respective EU member states concerned (which may be relevant with regard to required translations of materials). In addition, since certain EU member states have short filing deadlines post-signing, it has the potential to place significant burdens on the notifying investor.
The Regulation allows for national screening regimes with significantly diverging procedural features and doesn’t implement a one-stop EU shop (unlike the EUMR) resulting in obstacles to investments made in the EU with a potentially fragmented outcome. However, it does provide more flexibility for complex transactions that involve many moving pieces across a wider transaction spectrum.
Limited procedural burden for low-risk investments
In practice, the EC limits its review to the most sensitive or otherwise deemed critical cases. This is in line with the EC’s intention to position the EU as an attractive and welcoming inbound investment destination.
Under the current mechanism, EU member states generally only had to notify investments to the EC where an in-depth screening procedure was opened. Under the draft Regulation, this is broadened as EU member states will have to notify high-sensitivity investments to the EC and other EU member states, in particular where:
- the target participates in one of the projects or programmes of Annex I of the draft Regulation; or
- the target is economically active in one of the areas of Annex II of the draft Regulation, and the foreign investor or its EU-based subsidiary:
- is controlled by a foreign government (both directly and indirectly); or
- is subject to EU sanctions; or
- was involved in a previous investment screened by an EU member state that was prohibited or only conditionally approved; or
- where the ownership structure of the investor is opaque, which the EP added to the EC’s proposal as a relevant criterion.
- the EU member state initiates an in-depth investigation or has the intention to prohibit or conditionally approve the transaction absent an in-depth investigation
Own-initiative procedures
The draft Regulation would enable EU member states and the EC to open an own-initiative procedure to review a foreign investment in another EU member state that was not notified under the cooperation mechanism for at least 15 months after the foreign investment’s completion date.
To open own-initiative procedures, the draft Regulation would require EU member states to claim that the investment may present risks to its national security or public order. The EC on the other hand should claim that the investment may present national security or public order risks in more than one EU member state, negatively affecting EU projects or programmes or where the EC has relevant information related to that specific foreign investment based on case-specific expertise.
Before opening the procedure, the member state or the EC has to check that the host member state doesn’t intend to notify the foreign investment to the cooperation mechanism.
Transparency considerations
The draft Regulation requires member states to provide annual reports to the EC about their screening activities and requires them to publish annually aggregated and anonymised data on screened investments.
Before taking a decision, screening authorities have to inform the investor of the reason for the decision and give investors the possibility to express their views. In addition, national authorities must have effective measures in place to address non-compliance (including the power to impose mitigating measures on, prohibit, or unwind investments). Judicial recourse against decisions taken by national authorities must be enabled. EU member states have to implement standardised procedural milestones and structured communication throughout the process, including formal acknowledgment of complete filing within five working days and informing the undertakings concerned where the screening authority decides to open an in-depth investigation.
The draft Regulation proposes to implement a risk evaluation form that may be used by member states to assess the elements relevant to judging whether an investment might negatively affect security or public order. The EC can carry out a risk assessment relating to a specific sector, critical technology, foreign investors or EU undertakings to inform screening decisions of the member states. Where a host member state issues a screening decision, it should be based on a well-documented risk assessment.
Conclusion and next steps
The draft Regulation guarantees that all EU member states have a screening mechanism in place, harmonising screening mechanisms to make cooperation with the EC and other member states more effective and efficient. It also establishes a minimum sectoral scope that all EU member states have to screen, while leaving EU member states free to go beyond that minimum scope. Enlarging the foreign investment definition to include investments by non-EU investors through subsidiaries in the EU.
The anticipated overhaul is welcomed, but the draft Regulation may still need to be finetuned given that some aspects could benefit from a coordinated approach as divergences in interpretations and application by national regimes can decrease deal certainty. Although these could result from country-specific (economic) considerations, the level of regulatory scrutiny may vary due to the draft Regulation’s minimal harmonisation feature. An increased level of minimum harmonisation avoids a race to the bottom for EU member states in terms of jurisdiction and/or enforcement to appear as a more attractive foreign investment destination. However, there is a new requirement for the EC to issue detailed guidelines on filing triggers and factors relevant to assessing investments’ risk profile for national security.
The draft Regulation leaves open which standards should be applied to define “control,” “features aimed at influencing management decisions” or what “effective participation in the management” means. These are key concepts for determining jurisdiction. And increased guidance is expected only at a later stage after the draft Regulation's entry into force. Setting clearer transaction thresholds would be helpful to avoid screening minority investments where the investor is unable to exercise control over the target company. It is unclear whether the draft Regulation would also capture national low-threshold (eg 10% of voting rights) transactions.
It is strongly debateable whether two specific areas of low-risk investments should in principle fall outside the scope of EU member states’ screening mechanisms. The first is internal corporate restructurings where there is no ultimate change of control of an entity and only entities in the middle of the corporate chain are repositioned (which is excluded from the draft Regulation but eg the Belgian FDI regime puts a particular emphasis on). The second is greenfield investments, which are now covered by the draft Regulation under certain conditions and require a value of a minimum magnitude.
The draft Regulation will go through the full EU legislative process, as it needs to be adopted by the EU co-legislators (the EP, having already reviewed and amended, and the Council). During this process, EU member states will also have the opportunity to give their opinion. If adopted, the draft Regulation will enter into force, repealing and replacing the current one, after a transitional period of 12 months. A fully applicable and final version of the draft Regulation is likely to become operational by 2027.
Changes implemented by the EP to the draft Regulation aim to tighten the EC’s flexible proposal in various ways, such as making the Regulation subject to an accelerated evaluation period of three years instead of five, providing for more flexibility in case of geopolitical and rapid economic shifts, curtailing the EC’s powers of delegation to a period of five years instead of unlimited and shortening the transition period to 12 months from the draft Regulation’s entry into force.
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