The current state of affairs of FDI screening in Europe

The Proposal aims to both harmonise foreign investment screening regimes across the Member States and expand their scope. The key revisions of the Proposal as it has resulted from the trilogue negotiations are:

1. to make the requirement for national foreign investment screening mechanisms mandatory across all Member States;
2. to adjust the role of the Commission in regard to the Member States’ screening decisions;
3. to expand the scope of the EU FDI Screening Regulation to include the screening of indirect investments under Member State FDI screenings;
4. to harmonise the range of critical sectors requiring mandatory filing and clearance under EU Member State FDI screening regimes such that all regimes require the review of a minimum set of sectors;
5. to improve the cooperation mechanism procedure to allow for better coordination of screening transactions among EU Member States.

1. Mandatory screening of foreign investments

While the EU FDI Screening Regulation has been in force since 11 October 2020, Member States have approached the implementation of foreign investment review regimes differently and according to varying timelines. The EU FDI Screening Regulation in its current form provides a framework for the creation of national regimes but ultimately leaves it to the Member States to decide on the adoption of an FDI screening regime in the first place and on the approval of FDI in their country.

The Proposal preserves the principle that the Member States retain full discretion over the approval of FDI in their country, rebutting the Parliament’s proposal to vest the Commission with decision-making power. However, the Proposal obliges Member States to enact domestic FDI screening regimes and provides for a minimum subject matter scope of application to FDI into specific, particularly sensitive, business sectors, as set out further below (see 3.).

2. Adjusted role of the Commission

Although the Proposal leaves the final decision on approval or restrictions following the FDI screening to the Member States, the Parliament initially proposed to vest the Commission with decision-making powers, especially if it disagrees with a Member State on whether to approve or restrict an FDI. Such overruling power of the Commission was however rejected in the trilogue negotiations and the Commission’s participatory rights in the FDI screening procedures were reinforced instead. As is currently the case, the Commission has the right to express its opinion on the FDI screening of a Member State and in particular to state any concerns from public order and security perspective and suggest mitigation measures. However, under the Proposal, the Commission would have the right to request information on the FDI from the Member State conducting the FDI screening under its domestic law as well as the investor, which would significantly enhance the Commission’s role especially in controversial FDI cases.

The Member States’ obligations with respect to the opinions received under the EU FDI notice-and-comment procedure are also clarified further. The Member State conducting the FDI screening shall give due consideration to the opinions received from the Commission and other Member States. It also has to state how due consideration was given to these opinions and indicate in its decision the reasons why it agreed or disagreed with them. The Commission and other Member States may also request consultations if a Member State decides to not subject an FDI in its jurisdiction to FDI screening at all.

Overall, the Proposal strengthens and clarifies the role of the Commission and the other Member States and further formalises their participation in the FDI screening procedure under the FDI regime of the screening Member State. 

3. Indirect foreign investments brought into scope of the EU FDI Screening Regulation and greenfield investments

While the screening of indirect investments made through, for example, EU subsidiaries – including by mere investment vehicles set up for the purpose of the FDI – is standard practice under most Member State FDI screening regimes, the ECJ held in its Xella judgment (ECJ, Case C‑106/22, Xella Magyarország Építőanyagipari Kft v Innovációs és Technológiai Miniszter) of 13 July 2023 that the EU FDI Screening Regulation as such does not apply to indirect investments.

The judgment is arguably based on an incorrect interpretation of the term “Foreign Direct Investment” by the ECJ, which is used to distinguish between direct investments and portfolio investments, rather than to exclude investments in companies through other entities, i.e. indirect investments (see blog post of Juliane Kokott, Advocate General at the CJEU, https://www.celis.institute/posts-celis-2019/the-ecj-and-investment-control-intensified-investment-screening/).

The Proposal clarifies that the EU FDI Screening Regulation shall also apply to indirect investments and thereby addresses the shortcoming identified by the ECJ’s holding in the Xella case. In particular, the EU FDI Screening Regulation revised on the basis of the Proposal will explicitly cover investments made by foreign investors’ EU subsidiaries.

4. Minimum range of critical sectors established / no mandatory FDI filing and clearance requirement for greenfield investments

Whereas Member States currently have discretion to define the sectors deemed to be "strategic" or "critical" to their national security interests and therefore triggering mandatory FDI filing requirements or call-in risks, the Proposal establishes a minimum set of critical sectors, for which mandatory FDI filing and clearance requirements must apply under the domestic Member State FDI screening regimes.

The critical sectors for which mandatory screening and clearance shall be provided for are:

(i) export-controlled dual-use items; 

(ii) defence-related products;

(iii) semiconductor technologies;

(iv) artificial intelligence technologies;

(v) quantum technologies;

(vi) critical transport, energy, or digital infrastructure sectors, based on a risk-based assessment;

(vii) critical raw materials (exploration, extraction, processing, recycling, recovery, stockpiling);

(viii) specific entities critical to the EU financial systems;

(ix) electoral infrastructure, e. g. voter database, voting system, electoral management system.

It is important to note that EU Member States will continue to have a broad discretion to include additional sectors within their respective national regimes. 

In any case, it will be important for clients, investors, sellers and target companies to carefully assess whether a specific transaction and the target’s activities can be expected to fall within the scope of application of a Member State FDI regime and filing and clearance requirements.

Despite a proposal by the Parliament to that end, the trilogue negotiations have resulted in rejecting the introduction of a mandatory obligation of the Member States to screen greenfield investments in the sensitive sectors laid out above.

5. Reinforced cooperation mechanism

Although the EU FDI Screening Regulation provides for a notice-and-comment procedure to coherently address potential risks resulting from FDI transactions impacting multiple Member States, the existing mechanism has been criticised for failing to provide sufficient certainty of process to investors – particularly in relation to expected timelines and outcomes of the FDI screenings.

The revised mechanism will harmonise timelines for FDI screening by the Member States, partly by granting additional powers to the Commission with respect to both information-gathering and the resolution of disagreements between the Commission and the Member States involved. 

The Proposal specifies in which cases Member States are obliged to notify the Commission and other Member States through the cooperation mechanism addressing the discrepancy in Member State practice as to whether the Commission needs to be notified only in Phase 2 or also in Phase 1 FDI screenings. Notification through the cooperation mechanism is mandatory whenever a foreign investment concerns a sector that belongs to the minimum set of critical sectors and fulfils any of the following requirements:

(i) Foreign investor is directly or indirectly controlled by a third-country government; 

(ii) Foreign investor or a related party thereof is subject to EU sanctions;

(iii) Foreign investor or a related party thereof was involved in a foreign investment which was previously not authorised by a Member State or was subject to mitigating measures which were significantly or repeatedly violated.

The notification through the cooperation mechanism may also be mandatory in cases where the target is active in a project of Union interest or is part of a group with multiple subsidiaries in other Member States. If that is the case, the cooperation mechanism, i.e. the notification of the Commission and indirectly the other Member States, becomes mandatory for the following investments:

(i) Where a Member State initiates an in-depth investigation under its domestic framework;

(ii) Where a Member State intends to impose mitigating measures or prohibit an investment without an in-depth investigation.

Lastly, notification via the cooperation mechanism will be mandatory whenever the screening Member State considers that the FDI in question could negatively affect security or public order in another Member State.

As of early 2026, the Parliament and the Council of the EU, together with the Commission, have reached an agreement on the provisional text of the Proposal. The provisional text is yet to be formally approved by the co-legislators, which is expected to happen in one of the next Parliament’s plenary sessions and Council’s meetings. After formal endorsement, the revised EU FDI Screening Regulation will start applying 18 months after its entry into force. We currently therefore expect the revised EU FDI Screening Regulation to apply as of early 2028.

Aside from the revision of the EU FDI Screening Regulation itself, the Commission has found additional instruments needed to respond to geopolitical challenges and their impacts on FDI transactions. Against this background, the Commission has published a proposal for the IAA in order to promote strategic investments in certain industrial sectors. While forming part of the broader EU industrial policy to strengthen European autonomy and competitiveness, accelerate the building up of industrial capacity and decarbonisation in strategic sectors under the so-called ‘open strategic autonomy’ concept, the Commission draft IAA contains significant elements expanding FDI screening framework in the EU.

The proposal is noteworthy given its suggestion to vest the Commission with limited, but independent FDI screening powers. This suggestion is remarkable given that the controversy between the Commission (and the Parliament) on the one hand and the Member States or the Council of the EU on the other on whether the Commission should have decision-making powers in FDI screening procedures seemed to have been resolved as part of the trilogue negotiations over the revision of the EU FDI Screening Regulation. Given the resistance displayed by the Member States and the Council against FDI screening powers of the Commission in the past, it is unlikely that the IAA will be accepted and enter into force in its current form.

It is nonetheless important to assess the proposal in order to understand the dynamics underlying FDI regulations and screening regimes in the EU at present. One of the key elements proposed to achieve the goals of the IAA is the introduction of mandatory FDI clearance requirements for foreign investments in so-called ‘emerging strategic sectors’.

As the draft IAA framework is meant to complement the EU FDI Screening Regulation, it would add an additional regulatory layer for foreign investors. Any investor from a third country – holding more than 40 % of the respective global manufacturing capacity – intending to undertake an FDI in any of the emerging strategic sectors exceeding a value of EUR 100 million, would have to fulfil at least four out of six possible so-called ‘value-added criteria’ regarding the envisaged FDI in order to obtain the mandatory regulatory approval. These criteria are meant to ensure that foreign investments add value to the EU’s economy and include the following:

(i) Foreign investors do not acquire, hold, or exercise ownership interests exceeding 49 % of the share capital or voting rights, or equivalent ownership interests in any EU target; 

(ii) Foreign investor undertakes a foreign investment through a joint venture with an EU entity and does not hold 49 % of share capital, voting rights, or equivalent ownership interests in the joint venture; 

(iii) Foreign investors license their IP rights and know-how to the EU target in order to enable it to carry out its economic activities in the context of the foreign investment;

(iv) Foreign investors annually direct at least 1 % of the EU target’s gross annual revenue to research and development spending in the EU;

(v) At least 50 % of the workforce employed in the context of the foreign investment shall be EU workers; this criterion is the only mandatory condition that must be met in any case;

(vi) Foreign investor prepares and publishes on its website a strategy for enhancing EU value chains, prioritising the sourcing of inputs from the EU.

These value-added criteria apply to foreign investments in any of the emerging strategic sectors. The Commission’s IAA proposal qualifies the following manufacturing sectors as emerging strategic:

(i) Battery technologies and their value chain for battery energy storage systems; 

(ii) Pure electric vehicles, off-vehicle charging hybrid electric vehicles and fuel-cell electric vehicles, including components related to electrification and digitalisation;

(iii) Solar PV technologies;

(iv) Extraction, processing, and recycling of critical raw materials.

The draft IAA leaves the decision-making power to approve, restrict or block FDI with the Member States, but allocates the decision-making power to the Commission in the following cases:

(i) Where the foreign investment has the potential to significantly impact added value creation in the EU market;

(ii) Where the foreign investment has a value of more than EUR 1 billion;

(iii) On the request of a national authority in which the foreign investment in question would have a significant impact on a Member State’s territory. 

The draft IAA proposal is interesting in that it conceptualises FDI differently from most existing FDI regimes. Rather than merely focusing on potentially negative effects of FDI, it explicitly takes positive effects into account in the interest of strengthening the EU’s economy. The Commission’s proposal posits the IAA based FDI screening next to the EU FDI Screening Regulation based Member State screening regimes. It would provide for an additional regulatory layer and an additional clearance requirement if its scope of application applies to the transaction in question. Whereas “ordinary” and EU FDI Screening Regulation based FDI screening would focus on the compatibility with the traditional concept of non-interference with the EU and the EU Member States’ public order and security, the IAA based FDI screening would focus on value-added criteria of FDI. In practice, both standards will overlap and be difficult to distinguish in practice, which is another aspect rendering an adoption of the draft IAA in its current form rather unlikely. Rather, the interplay of both types of FDI screening would have to be further clarified. Alternatively, the IAA’s FDI-related policy objectives could be incorporated in the existing FDI screening framework in the EU.

Since the EU FDI Screening Regulation entered into force in October 2020, the European FDI screening landscape has changed fundamentally. The Regulation created a cooperation and notice‑and‑comment mechanism between the screening Member State, the Commission and other Member States, while leaving the design of national regimes to each Member State but nudging them towards adopting domestic screening. As a result, there has been a marked proliferation and expansion of national regimes, driven by concerns over national security, technological sovereignty and critical infrastructure, and accelerated by geopolitical tensions and the strategic use of investment.

The current Proposal to strengthen the EU framework, including the revised EU FDI Screening Regulation and the draft IAA, responds to these developments and forms part of the EU’s strategy of ‘open and strategic autonomy’. It moves towards a more harmonised and robust framework, broadens the scope of FDI screening (notably to indirect acquisitions) and signals a tougher regulatory environment, with increased scrutiny and potential intervention for foreign investors.

For foreign investors, sellers and EU targets, these changes mean that even greater care must be taken to assess and identify all relevant FDI filing and clearance requirements at an early stage of any transaction, across both EU‑level and Member State regimes (and, in future, potentially under the IAA). Transactions should be structured and timed on the assumption of multi‑layer screening, with sufficient execution buffers and a clear mapping of the different FDI restrictions that may apply.