EU Foreign Direct Investment (FDI) Screening

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FDI Screening Summary

The European Union and Member States are introducing systems for the screening of foreign direct investment (FDI) from third country investors into their territory. The screening process will require the Member States to check whether such foreign direct investment will have implications on the security and public order of that Member State, other Member States or even the European Union.

The Regulation

On the 19th March 2019 the European Parliament and the Council of the European Union enacted REGULATION (EU) 2019/452 establishing a framework for the screening of FDI into the European Union (herein the “Regulation”) . The Regulation was published in the Official Journal of the European Union on the 21st March 2019 and entered into force on the twentieth day following this publication.

The Scope

This Regulation establishes the framework for the screening by Member States of FDI entering the European Union (herein the “Union”) on the grounds of security and public order. The Regulation further provides for a cooperative mechanism to be established between the Member States themselves and between Member States and the European Commission (herein the “Commission”) for the coordination and reporting of this data on cross border basis to ensure effective implementation of the measures.

This Regulation was implemented in response to the objectives and concerns expressed by Member States with respect to FDI and the potential consequences on security and public order. The field of foreign direct investments falls under the ambit of common commercial policy, over which the Union has exclusive competence in accordance with article 3(1)(e) of the TFEU. The common framework established by this Regulation is without prejudice to the right of a Member State to safeguard its national security and essential security interests in accordance with article 345 of the TFEU and article 4(2) of the TEU.

The Regulation covers FDI into the Union. Outwards investment and access to third country markets remains to be dealt with under other trade and investment policy instruments.

Foreign direct investment is defined in the Regulation as meaning ‘an investment of any kind by a foreign investor aiming to establish or to maintain lasting or direct links between the foreign investor and the entrepreneur to whom, or the undertaking to which, the capital is made available in order to carry on an economic activity in a Member State, including, investments which enable effective participation in the management or control of a company carrying out an economic activity’. A foreign investor is defined as ‘a natural person of a third country or an undertaking of a third country, intending to make, or having made, a foreign direct investment.’

The Screening Mechanism

The Regulation calls for Member States to adopt mechanisms to screen foreign direct investment in their territory on the ground of security and public order.

The Regulations further provides a list of criteria in order to assist the Member States in determining whether a FDI may impact the security or public order of that Member State.

In making this determination the Member State may consider the impact that such FDI will have on the below mentioned sectors:

  1. critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure;
  2. critical technologies and dual use items as defined in point 1 of Article 2 of Council Regulation (EC) No 428/2009 (15), including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies;
  3. supply of critical inputs, including energy or raw materials, as well as food security;
  4. access to sensitive information, including personal data, or the ability to control such information; or
  5. the freedom and pluralism of the media.

The Member State may also consider the below mentioned factors to determine the potential impact of a foreign direct investment:

  • whether the foreign investor is directly or indirectly controlled by the government, including state bodies or armed forces, of a third country, including through ownership structure or significant funding;
  • whether the foreign investor has already been involved in activities affecting security or public order in a Member State; or
  • whether there is a serious risk that the foreign investor engages in illegal or criminal activities.

Member States must ensure that the screening mechanism set up provides clear and transparent rules and procedures, this includes the applicable timeframes and the grounds for screening. It is furthermore important that the Member States may not discriminate between different third countries and their procedures must include the possibility for recourse against a decision taken against the foreign investor or foreign undertaking.

Cooperative Mechanism

The framework also establishes a mechanism which requires the Member States to cooperate and coordinate between themselves, as well as requiring the Member States to cooperate and coordinate with the Commission, on the exchange of information and comments on the screening of foreign direct investment.

Member States are required to exchange information in respect to the screening of a foreign direct investment which may have an impact on the security of public order of another Member State. This information is also required to be simultaneously exchanged with the Commission. The Commission retains the power to submit any comments on the screening of a foreign direct investment and the actions taken by the various Member States. The Commission furthermore may pass an opinion on the outcome of a decision taken by a Member State.

The Commission may take further action where it is of the belief that a foreign direct investment is likely to affect the projects or programmes of Union interest on the grounds of security and public order.

The Member States are obliged to submit to the Commission an annual report in respect to the measures taken by the Member State throughout the preceding calendar year on the screening of foreign direct investment applications.

National Foreign Direct Investment Screening Office in Malta

The Maltese Government has established the National Foreign Direct Investment Screening Office (herein the “Screening Office”) in order to implement the requirements of the Regulation.

The Screening Office shall be in charge of screening new foreign direct investment projects, joint ventures with a foreign component and the transfer of any shares and/or controlling interests in existing companies where the owner, titleholder or ultimate beneficial owner originates from a third country.

The Screening Office shall be vetting applications received in respect to transactions within the sectors listed from (1) – (5) in this article.

Any transactions received by the Screening Office in respect to a sector listed from (1) – (5) in this article will be subject to full due diligence by the Screening Office, which will require an assessment to be done on both the activity and the beneficial owner/s in respect to such transaction.

The Screening Office may request any of the below information to be provided:

  • the ownership structure of the foreign investor and of the undertaking in which the foreign direct investment is planned or has been completed, including information on the ultimate investor and participation in the capital;
  • the approximate value of the foreign direct investment;
  • the products, services and business operations of the foreign investor and of the undertaking in which the FDI is planned or has been completed;
  • the Member States in which the foreign investor and the undertaking in which the foreign direct investment is planned or has been completed conduct relevant business operations;
  • the funding of the investment and its source;
  • the date when the foreign direct investment is planned to be completed or has been completed.

As from the 1st April 2020 the Screening Office shall be vetting all applications submitted to the Maltese Business Registry in respect to company formations and share transfers relative to third country nationals, irrespective of the area of operation of the entity. This is a transitionary measure.

 

This article is only intended to give a general overview of the legislation. Professional advice should be separately sought on the applicability of these rules to any actual company structure or situation.

Please contact Dr Alexandra Marinelli, DM Europe, should you wish to discuss any matter relating to Companies registered in Malta.

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