Explanatory Memorandum to COM(2024)23 - Screening of foreign investments in the Union - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2024)23 - Screening of foreign investments in the Union. |
|---|---|
| source | COM(2024)23 |
| date | 24-01-2024 |
1. CONTEXT OF THE PROPOSAL
1. Reasons for and objectives of the proposal
Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments (FDIs) into the Union (the Regulation) was adopted in 2019 and entered into application on 11 October 2020. It responded to growing concerns about certain foreign investors seeking to acquire control of EU firms that provide critical technologies, infrastructure or inputs, or hold sensitive information, and whose activities are critical for security or public order at EU level. The aim of the Regulation was to help identify and address security or public order risks related to FDIs that affect at least two Member States or the EU as a whole, because the high degree of integration of the internal market means that an FDI in an EU company may create a risk beyond the borders of the Member State hosting the FDI. To achieve this objective, the Regulation allows Member States to review FDIs in their territory on security or public order grounds, and to exchange information with the Commission and the other Member States, and empowers them to take measures to address specific risks. Furthermore, the Regulation has created a cooperation mechanism between the European Commission and Member State screening authorities for individual FDIs. This mechanism has made it possible to exchange information, enabling both the Commission and other Member States to highlight possible security or public order risks to other Member States or critical EU-level programmes arising from an FDI. This has strengthened the assessment of FDIs by relevant Member State authorities and has facilitated the ultimate decision by the ‘host’ Member State on whether or not to authorise the transaction and, if the transaction is authorised, whether certain conditions are necessary.
Since the adoption of the Regulation, the issue of security and public order has grown in importance. The COVID-19 pandemic, Russia’s war of aggression against Ukraine and other geopolitical tensions have underlined the need to be able to identify risks to, and better protect EU critical assets from, certain investments. This has also contributed to the significant increase in the number of Member States adopting a national screening mechanism, and in the expansion by some Member States in the number of sectors subject to screening 0. However, a significant share of FDIs in the EU still goes to Member States that do not have a screening mechanism 0 and this leaves vulnerabilities because potentially critical FDIs remain undetected.
Cooperation between all national authorities and the Commission has nevertheless played a major role in raising awareness, and in identifying and addressing risky FDIs that would otherwise have gone unnoticed 0. However, the management of multi-jurisdiction notifications (i.e. transactions that involve the same business in several Member States) has been challenging and raised efficiency issues (particularly for foreign investors, EU targets and screening authorities).
Article 15(1) of the Regulation requires the Commission to evaluate the functioning and effectiveness of the Regulation and to present a report to the European Parliament and to the Council by 12 October 2023 (i.e. no later than 3 years after its full implementation).
Based on the findings of the evaluation report, which accompanies this legislative proposal, it is appropriate to propose the revision of the Regulation to ensure that all Member States have a screening mechanism that allows the assessment of transactions before they are completed, and to address key shortcomings in the effectiveness and efficiency of the cooperation mechanism identified in the evaluation.
2. Consistency with existing policy provisions in the policy area
The objective of the proposal is to protect the EU’s security and public order in the context of foreign investment. This is in line with the EU’s overall policy objectives as laid out in Article 3(5) of the Treaty on European Union, notably to uphold the EU’s values and interests in its relations with the wider world and to contribute to the protection of its citizens, peace, security, and free and fair trade.
The proposal is fully in line with the 2023 ‘Economic Security Communication’ 0, which highlighted FDI screening as one of the tools that the EU deploys to protect itself from commonly identified risks that affect its economic security. In that joint communication, the Commission repeated the call to Member States who had not yet implemented national FDI screening mechanisms to do so without further delay. It also announced a legislative proposal to revise the FDI Screening Regulation.
The proposed regulation strikes the appropriate balance between, on the one hand, the objective of addressing legitimate concerns raised with regard to certain foreign investments and, on the other hand, the need to maintain an open and welcoming regime for such investment into the EU, while being fully compatible with EU law and international commitments.
3. Consistency with other Union policies
The proposed regulation will complement, is consistent with, and does not affect other EU policies and initiatives. Certain transactions may be subject to other authorisation procedures at EU or national level, but there are no inconsistencies between the proposal and these instruments, whose purpose is distinct from that of the proposal. Rather, there is a certain degree of complementarity between the proposed regulation and the EU instruments applicable to sectors or actions relevant for security or public order.
Contents
- Free movement of capital and freedom of establishment
- The EU Merger Regulation
- The Foreign Subsidies Regulation
- Resilience of critical entities
- Cybersecurity
- Energy
- Air transport
- Prudential assessment of acquisitions and increases of qualifying holdings in the financial sector
- Dual-use export control
- Anti-coercion instrument
- EU restrictive measures (sanctions)
The proposed regulation applies to investments which establish or maintain a lasting economic link between a foreign investor and the EU target. This includes, for example, the acquisition of a majority or full shareholding, as well as any acquisition of shares granting rights to the foreign investor to control or influence the operations of the EU target, or the setting-up of facilities in the EU (greenfield investments). Such investments, when they concern movement within the EU, therefore mostly fall within the area of freedom of establishment. The provisions of the Treaty on the Functioning of the European Union (TFEU) on freedom of establishment are contained in Articles 49-55 TFEU. These provisions establish the general principle that restrictions to the freedom of establishment are prohibited unless they are justified on the basis of specific reasons of public order, security or health, as outlined in Article 52(1) TFEU. Member States can rely on grounds of public policy and public security to restrict investments only if there is a genuine and sufficiently serious threat to a fundamental interest of society and if less restrictive measures are insufficient to address such threat. The Court of Justice clarified that the concept of public security covers both the State’s internal and external security.
These provisions only apply, however, to natural and legal persons of EU Member States and are therefore not relevant when it comes to FDIs from a non-EU country into the EU. Therefore, the disciplines for the screening of FDI from a non-EU country into the EU as outlined in the proposed regulation do not interact with the provisions on freedom of establishment.
The proposed regulation also extends the scope of the current regulation to capture certain investments within the EU. involving investments controlled by non-EU investors. As explained later, this extension is important for bringing a specific group of such investments into the scope of the Regulation, where they establish or maintain a lasting economic link between the non-EU investor and the EU target. These investments are carried out by an EU entity, but this entity is controlled by the non-EU investor and the decision-making power on the investment remains with the non-EU investor. It is therefore appropriate to ensure that the treatment of these transactions – and specifically the elements which can affect a decision to screen the transaction or to take further measures mitigating impacts on security or public order concerns – is to the extent possible consistent with that of the FDIs, in order to avoid a situation where, for the purposes of the proposed regulation, investments carrying comparable risks for the EU are treated differently.
In this respect, the assessment of the likely risk for security and public order should maintain sufficient flexibility to make it possible to take into consideration the specific character and structure of investments within the EU carried out by EU subsidiaries of foreign investors. The existence of a clear link with a foreign investor, together with the other specific criteria provided by the Regulation with respect to the scope of the covered transactions (including the specific list of areas where the investment is carried out or the particular attention given to public presence in the ownership structure of the foreign investor, as well as the fact that the foreign investor may be screened because it is subject to EU sanctions) all highlight specific characteristics of the investment which may translate into specific concerns for security and public order and which need to be managed at the EU’s level. Such concerns are common to FDIs and investments within the EU where the EU entity is controlled by a non-EU investor. However, they are not naturally associated with other investments within the EU where there is no involvement of foreign investors, and it should be possible (where justified and proportionate) to reflect this difference from the perspective of security and public order when assessing the investment.
On this basis, it is possible, to make a distinction between the application of internal market freedoms to investments within the EU where the EU entity is controlled by a non-EU-country investor and pure intra-EU situations. Consequently, under the Treaty, restrictions on transactions involving a non-EU country may be based on different considerations. This is also appropriate considering that these transactions are screened as part of a Union-wide cooperation mechanism.
In order to ensure consistency and predictability of the assessment across the Member States, it is also appropriate for the criteria and elements to be used for the assessment of foreign investments to be established through EU action by means of the current regulation.
Treaty provisions concerning the free circulation of capital are only relevant for a marginal set of transactions, as explained above, also in light of the explicit exclusion of portfolio investments from the scope of the proposed regulation. In any event, the considerations made above apply with respect to the potential basis for limiting free circulation of capital, which are set out in Article 65(1)(b) TFEU and relate to public security, public order or health. Also in this respect, it is important to ensure that the basis for screening transactions which are ultimately aimed at establishing a lasting link with a non-EU investor are treated consistently (from the perspective of protecting security and public order) and that any particular concerns that may arise when the transaction involves a foreign investor (even when carried out through an entity established in the EU but controlled by a foreign investor) are taken into account when assessing the investment.
These considerations are without prejudice to the possibility for Member States to further limit foreign investments, beyond the criteria and scope of the proposed regulation, provided that these further limitations are consistent with Article 65(1)(b) or Article 52(1) TFEU (as applicable).
FDIs may take the form of mergers, acquisitions or joint ventures that constitute concentrations falling within the scope of the EU Merger Regulation 0. In relation to such concentrations, Article 21 i of the EU Merger Regulation allows Member States to take appropriate measures to protect legitimate interests provided they are compatible with the general principles and other provisions of EU law. To that effect, Article 21 i, second paragraph, explicitly recognises the protection of public security, plurality of the media and prudential rules as legitimate interests. Screening decisions taken under the proposed regulation to protect these interests do not need to be communicated to the Commission under Article 21 i, third paragraph, provided that they are compatible with the general principles and other provisions of EU law. By contrast, when a Member State intends to take a screening decision under the proposed regulation to protect other public interests, it will need to communicate this to the Commission under Article 21 i, third paragraph, if the decision concerns a concentration that falls within the scope of the EU Merger Regulation. The Commission will ensure the consistent application of the proposed regulation and of Article 21(4) 0. To the extent that the respective scopes of application of the two regulations overlap, the likely impact on security or public order determined on the basis of the considerations set out in Article 13 of the proposed regulation and the notion of legitimate interests within the meaning of Article 21 i, third paragraph, of the EU Merger Regulation should be interpreted consistently and without prejudice to the assessment of the compatibility of the national measures aimed at protecting these interests with the general principles and other provisions of EU law.
While the risk assessment under FDI screening may take into account whether the foreign investor is directly or indirectly controlled by the government of a non-EU country (including through ownership structure or significant funding), the purpose of this assessment is to determine whether an FDI is likely to negatively affect the EU’s security or public order. However, foreign subsidies appear to have distorted the EU’s internal market in recent years and, until the Foreign Subsidies Regulation 0 (FSR), there was no instrument to assess and counter the impact of foreign subsidies on fair competition in the internal market. Subsidies granted by non-EU countries went unchecked, while subsidies granted by Member States have been subject to close scrutiny under EU State aid rules – where prohibition is the rule and authorisation is the exception.
The FSR addresses such distortions and closes a regulatory gap, while keeping the internal market open to trade and investment.
Under the FSR, the Commission has the power to investigate financial contributions granted by non-EU governments to companies active in the EU. If the Commission finds that such financial contributions constitute distortive subsidies, it can impose measures to redress their distortive effects. The FSR introduces three procedures:
- a notification-based procedure to investigate concentrations involving financial contributions granted by non-EU governments – where the acquired company, one of the merging parties or the joint venture generates an EU turnover of at least EUR 500 million and the parties were granted foreign financial contributions of more than EUR 50 million in the last 3 years;
- a notification-based procedure to investigate bids in public procurement procedures involving financial contributions by non-EU governments – where the estimated contract value is at least EUR 250 million and the bid involves a foreign financial contribution of at least EUR 4 million per non-EU country in the last 3 years; and
- an own initiative own initiative procedure to investigate all other market situations, where the Commission can start a review on its own initiative.
Where the Commission decides to launch a preliminary review of whether the financial contribution under examination constitutes a foreign subsidy and whether it distorts the internal market, it is to inform the Member States that have notified the Commission about a national procedure pursuant to the Regulation.
To the extent that the respective scopes of application of the two regulations overlap, the grounds for screening set out in Article 1 of the Regulation should be without prejudice to the Commission’s assessment pursuant to the FSR whether the financial contribution under examination constitutes a foreign subsidy and whether it distorts the internal market.
Council Directive 2008/114/EC0 provides for a procedure for designating European critical infrastructure in the energy and transport sectors the disruption or destruction of which would have a significant cross-border impact on at least two Member States but only focuses on the protection of critical infrastructure in these two sectors. Recognising the importance of comprehensively addressing the resilience of critical entities (i.e. entities identified as critical entities by Member States in their territory), the Critical Entities Resilience Directive0 (CER Directive) has created an overarching framework that addresses the resilience of these entities with respect to all hazards, whether natural or man-made, accidental or intentional. The CER Directive requires Member States to take specific measures to ensure that services essential for the maintenance of vital societal functions or economic activities in 11 sectors are provided in an unobstructed manner in the internal market. The CER Directive entered into force on 16 January 2023 and Member States have until 17 October 2024 to transpose its requirements into national law.
To the extent that the scope of application of the proposed regulation overlaps with the CER Directive, the identification of an EU target as a critical entity should be factored in the assessment of foreign investments for the purpose of the proposed regulation.
The EU cybersecurity rules introduced in 2016 0 were updated by the Directive on measures for a high common level of cybersecurity across the Union (the NIS2 Directive) 0, which modernised the existing legal framework to keep up with increased digitalisation and an evolving cybersecurity threat landscape through a wider scope, clearer rules and stronger supervision tools. The NIS2 Directive expands the scope of the cybersecurity rules to include new sectors and entities and introduces a clear size threshold meaning that, as a rule, all medium and large-sized companies in the selected sectors will be included in the scope. The NIS2 Directive also strengthens and streamlines security and reporting requirements for public and private entities by imposing a risk management approach.
The NIS2 Directive addresses security of supply chains and supplier relationships by requiring entities in its scope to address cybersecurity risks in their supply chains and supplier relationships. At EU level, the Directive strengthens supply chain cybersecurity for key information and communication technologies. The NIS Cooperation Group0, in cooperation with the Commission and the European Union Agency for Cybersecurity, may carry out Union level coordinated security risk assessments of critical supply chains. The NIS2 Directive entered into force on 16 January 2023 and Member States have until 17 October 2024 to transpose its requirements into national law.
To the extent that the scope of application of the proposed regulation overlaps with the NIS2 Directive, the assessment of foreign investments for the purpose of the proposed regulation should factor that an EU target also falls in the scope of the NIS2 Directive, as well as the results of EU level coordinated security risk assessments of critical supply chains carried out in accordance with Article 22 of Directive (EU) 2022/2555.
Over the years, the EU has adopted legislation to improve the security of supply in the field of energy of the EU and its Member States. The Electricity and Gas Directives0 require the assessment of security of supply implications not only for individual Member States but also for the EU as a whole, if the gas or the electricity transmission system of a Member State is controlled by a non-EU-country operator. Moreover, the Regulation on Gas Supply Security in the EU 0 focuses specifically on security of supply concerns and requires Member States to assess, at national and regional level, all possible risks for the gas system (including risks associated with the control of infrastructure relevant to security of supply by third-country entities) and to prepare comprehensive preventive action plans and emergency plans containing measures to mitigate those risks. The Regulation on Risk-Preparedness in the Electricity Sector 0 contains similar provisions for the electricity sector. Certain entities in the energy sector are also expressly included within the scope of the Critical Entities Resilience Directive.
Where a foreign investment is followed by a request for certification pursuant to Article 10 of the Electricity Directive or the Gas Directive, the application of the proposed regulation should be without prejudice to the application of the relevant directive. To the extent that the respective scopes of application of the two rules overlap, the grounds for screening set out in Article 1 of the proposed regulation and the notion of security of energy supply should be interpreted consistently and without prejudice to the assessment pursuant to the relevant directive of whether the control by a person or persons from a non-EU country or non-EU countries will put at risk the security of energy supply to the EU.
Regulation (EC) No 1008/2008 0 lays down common rules for the operation of air transport services in the EU, including the licensing of EU air carriers and price transparency. It requires (as one of the conditions for granting an operating licence to an undertaking permitted to carry by air passengers, mail or cargo for remuneration or hire) that Member States or nationals of Member States must own more than 50% of the undertaking and effectively control it, except as ‘provided for in an agreement with a non-EU country to which the Community is a party’ (Article 4).
The proposed regulation applies to foreign investments that are below the threshold set out by Regulation (EC) No 1008/2008. It therefore allows assessment of whether a foreign investment in an EU undertaking providing air services in the EU is likely to negatively affect security or public order. Where a foreign investment is subject to the proposed regulation, the application of the proposed regulation should be without prejudice to the application of Regulation (EC) No 1008/2008.
Prudential assessment of acquisitions and increases of qualifying holdings in the financial sector
EU legislation in the financial sector empowers competent authorities to carry out a prudential assessment of acquisitions and increases of holdings in financial institutions (i.e. credit institutions, investment firms, and payment institutions). The objective of these provisions is to ensure the sound and prudent management of the financial institutions and the smooth functioning of the financial sector.
Nevertheless, as recognised in the Commission’s 2021 Communication ‘The European economic and financial system fostering openness, strength and resilience’,0 the financial sector is also key for the economic security and resilience of the EU economy. Recognising the importance of the financial system for security and public order, the proposed regulation requires all Member States to screen foreign investments into a list of entities set out in Annex II and notify those transactions to the other Member States and the Commission that meet the criteria set out in Article 5(1) and 5(2) of the proposed regulation.
The financial entities listed in Annex II are critical for the smooth clearing and settlement of financial transactions (payments, securities and derivatives) allowing internal and external trade and providing a basis for the international role of the euro. Furthermore, the financial entities listed in Annex II carry out essential functions for the society and usually have a cross-border activity, hence, can pose risks to the security or public order of more than one Member State.
The proposed regulation will not affect EU rules on the prudential review of acquisitions of qualifying holdings in the financial sector, which will remain a distinct procedure serving a different objective than assessing risks to security and public order.
Dual-use items are goods, software and technology that can be used for both civilian and military applications. The EU controls the export, transit, brokering and technical assistance of these items so that the EU can contribute to international peace and security and prevent the proliferation of weapons of mass destruction. The Regulation on dual-use export controls 0 was revised in 2021 to better address risks associated with the rapidly evolving security, technology, and trade environment, with a particular focus on the export of sensitive, emerging technologies. Investment screening complements dual-use export control. Both are important tools for strategic trade and investment controls to ensure security in the EU.
The proposed regulation requires Member States to screen and notify to the cooperation mechanism foreign investments, where the EU target has the power to decide to export items from the EU’s customs territory.
The proposed regulation will not affect national provisions and decisions affecting exports of dual-use items, which will remain a distinct procedure with specific objectives.
The anti-coercion instrument (ACI) 0 is another important building block for the EU’s economic security. It allows the EU to respond to economic coercion and therefore to better defend its interests and those of its Member States on the global stage.
The ACI is first and foremost designed to deter any potential economic coercion. If economic coercion nevertheless takes place, the ACI provides a structure to get the non-EU country to cease its coercive measures through dialogue and engagement. However, if engagement fails, it also provides the EU with a wide range of possible countermeasures against a coercing country. These include the imposition of tariffs, restrictions on trade in services and restrictions on access to FDI or public procurement.
If the proposed regulation were to be applied to foreign investors from non-EU countries that are subject to countermeasures pursuant to the ACI, the assessment whether a foreign investment is likely to negatively affect security or public order would have to be carried out without prejudice to the notion of coercion, except where risks to security or public order would arise as a result of coercion. Furthermore, Member States’ screening decisions on grounds of security or public order would have to be without prejudice to possible EU measures aiming to counter economic coercion.
The proposed regulation is consistent with EU restrictive measures (sanctions), which, based on Article 215 TFEU, take precedence over other EU regulations and may prohibit or stand in the way of authorising investments by certain non-EU countries or nationals of non-EU countries.
EU restrictive measures apply to a range of entities, including to any person inside or outside the territory of the EU who is a national of a Member State, to any legal person, entity or body, inside or outside the territory of the EU, which is incorporated or constituted under the law of a Member State, and to any legal person, entity or body in respect of any business done in whole or in part within the EU.
EU restrictive measures can take the form of measures specific to companies, groups, organisations, or individuals (e.g. asset freeze and prohibition on making funds or economic resources available) or of sectoral measures.
The Commission takes the view that asset freezes and prohibitions on making funds available extend to the assets of any non-designated entity, which is owned or controlled by a designated person or entity, unless it can be proven that the assets concerned are not in fact owned or controlled by the designated person or entity.
It is important to closely and strictly control any attempts by designated or otherwise sanctioned persons to acquire control over EU firms, either directly or indirectly. It is therefore crucial that this rule should also apply when the investor is not directly subjected to sanctions but is owned or controlled by, or acting on behalf or at the direction of, such a person or entity. The proposed regulation would therefore require Member States to notify other Member States and the Commission of any foreign investment in their territory made by investors that are subject to any type of EU restrictive measures, as well as any other party owned or controlled by, or acting on behalf or at the direction of, such a person or entity.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
1. Legal basis
FDIs are explicitly included in the scope of the EU common commercial policy, which falls under Article 207 TFEU. Furthermore, it is necessary to use Article 114 TFEU as an additional legal basis, which provides for the adoption of measures to ensure the establishment and functioning of the internal market. This provision enables the adoption of measures for the approximation of the provisions laid down by law, regulation or administrative action in the Member States which have as their object the establishment and functioning of the internal market. It is the appropriate legal basis for an intervention requiring Member States to screen certain investments within the internal market and addressing differences between Member States’ screening mechanisms, which may obstruct the fundamental freedoms and have a direct effect on the functioning of the internal market.
Differences in national laws exist and are increasing, given that a number of Member States already maintain screening mechanisms, while of them are in the process of establishing such mechanisms extending to investments within the EU. This situation of regulatory fragmentation insofar as the national screening mechanisms differ as to the specific elements, such as their scope (the types of activities and sectors covered), as well as their deadlines (duration of assessment and decision by the national authority), procedural requirements, and the criteria applied for the likely negative effect for security or public order. This is all the more relevant considering the level of integration of the internal market, which may result in a single transaction affecting multiple Member States across the EU.
Such fragmentation poses obstacles to the freedom of establishment and is likely to increase with the number of Member States maintaining a screening mechanism. The proposed harmonised measures aim at (i) creating a level playing field among Member States, (ii) reducing existing compliance costs for foreign investors as well as (iii) preventing the emergence of additional obstacles in the internal market for investments.
In line with its internal market objective, this proposal provides that certain foreign investments would need to undergo screening, regardless of the Member State(s) where the target is located. In addition, the proposal provides that foreign investments are assessed against harmonised standards and timelines. In view of the above, a higher degree harmonisation at Union level is necessary, therefore Article 114 TFEU is a relevant legal basis for this initiative.
The use of Article 114 TFEU allows to include certain investments within the EU in the scope of the proposed regulation. The aim of doing this is to ensure that risks to security and public order posed by such transactions are addressed. In particular, the proposed regulation would be limited to those investments within the EU which:
(i) are made by a foreign investor’s subsidiary in the Union where the subsidiary is directly or indirectly controlled by a foreign investor. Entities which have no third-country participation, or which only have a non-controlling participation by a foreign investor (portfolio investments) are not covered;
(ii) have the aim of establishing a lasting link between the foreign investor and the EU target.
This extension of scope of the current FDI Regulation, is aimed at capturing a specific set of foreign investments made through EU subsidiaries controlled by non-EU investors. It complements and expands the existing provisions which allow such investments to be covered where the chosen structure is used to circumvent the screening of FDI into the EU. This ensures a consistent approach to risks to security and public order flowing from investments that ultimately lead to control and decision-making power by a third-country investor, whether they are carried out either directly from outside the EU or indirectly through an entity established in the EU but controlled by a foreign investor.
Nonetheless, this extension will lead to the screening of transactions which are carried out through entities legitimately established in the EU. This constitutes an additional step by comparison with the concept of circumvention in the current Regulation, which only applies when the transaction is carried out within the EU by means of artificial arrangements that do not reflect economic reality. This extension requires the use of Article 114 TFEU as a legal basis to reflect the fact that investments within the EU would be covered by the proposed regulation.
The legal basis of the proposed regulation would therefore be Articles 207 and 114 TFEU.
2. Subsidiarity (for non-exclusive competence)
According to the principle of subsidiarity (Article 5(3) TEU), action at Union level should be taken only when the aims envisaged cannot be achieved sufficiently by Member States alone and can therefore, by reason of the scale or effects, be better achieved by the Union.
As Member States’ screening mechanisms diverge in their scope, content and effect, a fragmented regulatory framework of national rules can be observed and risks to increase, especially when it comes to the screening of foreign investments within the EU. It undermines the internal market by creating an uneven playing field and unnecessary costs for entities that seek to carry out an economic activity in sectors relevant for security or public order.
Only intervention at Union level can solve these problems, as rules at national level already result in the creation of obstacles to investments made within the EU. In contrast, the effects of any action taken under national law would be limited to a single Member State and risk being circumvented or be difficult to oversee in relation to foreign investors. Furthermore, some Member States are currently considering legislative initiatives in the field of investment screening. Only action at Union level can address this consistently across the internal market. Introducing common and proportionate standards for screening investments within the EU with foreign control is essential to ensure that such measures are established consistently across all Member States with respect to all fundamental rights. A common and coordinated EU approach that aligns national screening systems will provide certainty to potential investors as regards critical infrastructure, technology and inputs by letting them know in advance the common rules that the Commission and Member States use to assess and address risks related to security and public order.
Finally, the screening of foreign investments in the EU is a transnational issue with cross-border implications that need to be addressed at Union level. A foreign investment in one Member State can have an impact beyond that Member State’s borders, in another Member State or at the EU level. The absence of EU-level action may result in Member States being less able to protect their security or public order interests related to foreign investments, in particular for cases where the foreign investment likely to negatively affect their security or public order is carried out in the territory of another Member State. Experience gained with the implementation of the Regulation shows that it is unlikely that Member States would converge on aligned standards and procedures on how to screen foreign investments on grounds of security and public order or reinforce the systematic Union-wide cooperation mechanism to exchange information with each other and the Commission.
There is therefore a strong argument for action at EU level to align and harmonise these national frameworks to make investing more predictable in the internal market, especially in multi-jurisdiction transactions, to strengthen the legal certainty of investment screening in the EU, to reduce the administrative burden, to contribute to a level playing field across Member States where investments are made and to allow a more effective and efficient cooperation between Member States and the Commission on cross-border security and public order risks related to foreign investments.
3. Proportionality
The proposed regulation aims to protect security and public order in the EU as regards foreign investments.
It does not contain rules that are equivalent to a national screening mechanism, because such a mechanism can impose conditions on a transaction and, as a last resort, prohibit its completion. The proposed regulation would leave the final decision on any investment with the Member State where the transaction is planned or is completed. The objective of the proposed regulation is rather to help identify and address security and public order risks that affect at least two Member States or the EU as a whole through a cooperation mechanism between Member States and the Commission. This cooperation mechanism provides an official channel for exchanging confidential information and raising awareness about specific circumstances where an FDI may affect security or public order. It also makes it possible for the Commission and other Member States to recommend steps to the Member State where the FDI is planned or has already been completed in order to address the specific concerns identified.
The evaluation of the Regulation has shown that the effectiveness of the EU framework for investment screening is considerably reduced by (i) the absence in some Member States of screening mechanisms that make it possible to scrutinise transactions before they are completed; and (ii) the limited coverage of national investment screening mechanisms 0. This may have spill-over effects on security or public order interests in other Member States and on projects or programmes of EU interest.
In the absence of a common scope of transactions subject to screening or other ways to harmonise the conditions that should trigger screening at national level, the number and scope of notifications that the cooperation mechanism receives from the Member States are likely to continue to vary greatly. Furthermore, some foreign investors may continue to take advantage of jurisdictions in the EU that do not have a FDI screening mechanism or whose mechanism does not apply to the sector concerned.
The measures in the proposed regulation to establish a cooperation mechanism and set certain procedural and substantive requirements for national screening mechanisms are proportionate, because they achieve the objective of the proposed regulation while also allowing Member States to take account of national specificities in their screening mechanisms and to take the final decision on any foreign investments.
The proposed regulation requires companies to cooperate with the national screening authorities, but the administrative costs for companies will be reasonable and proportionate, thanks to the standardised form for notifications to the cooperation mechanism.
4. Choice of the instrument
This is a proposal to revise an existing regulation, so it seems legitimate to keep the present form of the instrument (i.e. as a regulation).
3. RESULTS OF EX POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
1. Ex post evaluations/fitness checks of existing legislation
The legislative proposal is accompanied by a Commission staff working document evaluating the Regulation against the five ‘better regulation’ criteria (effectiveness, efficiency, relevance, coherence, and EU added value).
2. Stakeholder consultations
The Commission published a targeted consultation and a call for evidence that ran between 14 June and 21 July 2023. The Commission received 47 replies to the consultation 0 and 10 contributions to the call for evidence 0.
The Commission invited Member States and stakeholders (law firms, business associations and businesses) with proven experience in implementing the EU rules on FDI screening to provide further written input based on a questionnaire. These replies were collected between 3 August and 1 September 2023. A summary of replies is available in Annex V to the evaluation report accompanying the legislative proposal.
3. Collection and use of expertise
The Commission used an external contractor to help carry out the evaluation of the FDI Screening Regulation. The OECD Secretariat (the Investment Division of the Directorate for Financial and Enterprise Affairs) carried out a study on the effectiveness and efficiency of the FDI Screening Regulation and offered conclusions and broad recommendations on how to address the shortcomings identified in the study 0. This study was co-financed by the Commission and was carried out between October 2021 and June 2022.
4. Impact assessment
The legislative proposal is not supported by an impact assessment. This is in line with the better regulation toolbox, which provides that an impact assessment may not be necessary for ‘policy initiatives that propose limited changes based on a thorough evaluation, which has clearly identified the necessary amendments to a policy or legislation’ 0. The Commission considers that the proposed regulation and the evaluation report accompanying this legislative proposal fulfil these criteria.
5. Regulatory fitness and simplification
This initiative is part of the Commission work programme 2023 0. It is not part of Annex II (REFIT initiatives).
The proposed regulation improves the ability of the Commission and the Member States to identify and address foreign investments likely to negatively affect security or public order in the EU. The proposal requires all Member States to screen foreign investments, which may increase the administrative burden on businesses, because foreign investments in the EU will be subject to control in more jurisdictions than the 21 Member States currently maintaining a screening mechanism. However, the proposal is expected to result in potential cost savings due to the simplification and alignment of the current rules and arrangements at EU and national level. The simplification concerns the alignment of national screening deadlines; focusing the EU-level cooperation on FDI screening on the potentially critical transactions (as opposed to all transactions subject to formal screening in a Member State); and increasing the procedural transparency of the EU cooperation mechanism.
6. Fundamental rights
The proposal is aligned with the Charter of Fundamental Rights of the European Union and respects the freedom to conduct business. The proposed regulation leaves the screening of investments with the Member States (including the final decision on specific transactions), but the requirements for national screening mechanisms help Member States to ensure full respect for the fundamental rights to fair proceedings and good administration.
4. BUDGETARY IMPLICATIONS
In order to effectively achieve the objectives of this initiative, it is necessary to finance a number of actions at Commission level. The annual human resources expenditure will amount to approximately EUR 5.162 million per year, which is intended to provide for a total number of 29 officials (in Full Time Equivalent unit) in the Commission. Other administrative expenses are related to the reimbursement of Member States’ travel costs to the meetings of the expert group (Article 5) and committee (Article 21). These costs are projected to amount to EUR 0.032 million per year. Operational expenditure, which will be used to finance the necessary IT infrastructure to support the direct cooperation between the Commission and Member States through secure channels of communication will reach approximately EUR 0.25-0.29 million per year. The Commission intends to launch an external study with a budget of EUR 0.25 million to support its assessment of Member States’ compliance after the end of the transitional period. The Commission will consider launching a second study to support the 5-year evaluation of the proposed regulation by the Commission.
A detailed overview of the costs involved is provided in the financial statement linked to this initiative.
5. OTHER ELEMENTS
1. Implementation plans and monitoring, evaluation and reporting arrangements
Monitoring, reporting and evaluation are an important part of the proposal.
Monitoring will be continuous and based on operational objectives and specific indicators. Regular and continuous monitoring will cover the following main aspects:
(i) the number of transactions notified to the cooperation mechanism; and
(ii) the number of transactions likely to negatively affect security or public order in more than one Member State or through a project or programme of Union interest.
In addition, the Commission may monitor developments relating to the final decisions reported by Member States on a confidential basis to the Commission.
The proposed regulation will continue requiring Member States to report each year to the Commission, on a confidential basis, on the activities under their screening mechanism for the preceding calendar year. Member States will also be required to publish an annual report with information on relevant legislative developments and the activities of the screening authority including aggregate data on the cases screened and the screening decisions taken. The Commission will continue to provide an annual report on the implementation of the proposed regulation to the European Parliament and to the Council. That report will continue to be made public.
The proposed regulation would be assessed in the context of an evaluation exercise 5 years after the date of its entry into full application. If required, a review clause could be activated under which the Commission would be able to take appropriate measures, including legislative proposals.
2. Detailed explanation of the specific provisions of the proposed regulation
Chapter 1 sets out general provisions, including the subject matter and scope of the proposed regulation (Article 1). The proposed regulation establishes an EU framework for screening by Member States of investments in their territory, on the grounds of security or public order. It also set out a cooperation mechanism to allow Member States and the Commission to exchange information on investments, assess their potential impact on security and public order, and identify potential concerns that the Member State which is screening the investment would be required to address. The grounds for investment screening are determined in compliance with the relevant requirements for the imposition of restrictive measures based on grounds of security or public order stipulated in the World Trade Organization Agreement (including, in particular, Articles XIV(a) and XIV bis of the General Agreement on Trade in Services) and in other trade and investment agreements or arrangements to which the EU or its Member States are parties.
Article 2 lays down a number of applicable definitions. In particular, it clarifies that the proposed regulation covers investments that are either foreign direct investments or investments within the EU with foreign participation. For the purpose of this proposed regulation, foreign direct investment covers a broad range of investments which establish or maintain lasting and direct links between investors from non-EU countries and undertakings carrying out an economic activity in a Member State. It includes investments by a foreign investor in an EU target, where the EU target is a subsidiary of a foreign target in which the investment is made. Investment within the EU with foreign participation covers a broad range of investments carried out by a foreign investor through the foreign investor’s subsidiary in the EU and with the aim of establishing or maintaining lasting and direct links between the foreign investor and an EU target in order to carry on an economic activity in a Member State. The proposed regulation does not cover portfolio investments.
Chapter 2 contains rules for national screening mechanisms. Article 3 requires all Member States to set up and maintain a screening mechanism that complies with the requirements of the proposed regulation and to notify this mechanism to the Commission. On the basis of these notifications, the Commission is required to publish a list of national screening mechanisms. Article 4 sets out certain requirements for national screening mechanisms. In particular, these mechanisms are required to cover at least (i) investments in EU companies participating in projects or programmes of EU interest set out in Annex I to the proposed regulation; and (ii) investments in EU companies active in areas of particular importance for the security or public order interests of the EU set out in Annex II to the proposed regulation; (‘notifiable investments’). Furthermore, it sets out a number of requirements to ensure the effectiveness of screening mechanisms.
Chapter 3 provides for a cooperation mechanism allowing Member States and the Commission to exchange information and suggest measures if a foreign investment is likely to negatively affect security or public order in more than one Member State, or through a project or programme of Union interest. Articles 5 and 6 lay down rules and procedures related to the notification of foreign investments, including a specific procedure for foreign investments screened by multiple Member States simultaneously (‘multi-country transactions’). Article 7 describes the conditions applicable to comments issued by Member States and opinions issued by the Commission following the assessment of a notified foreign investment. It allows Member States to provide comments to the Member State where the foreign investment takes place if that foreign investment is likely to negatively affect their security or public order, or they have information relevant to the screening of that foreign investment. The Commission is allowed to issue an opinion to the Member State where the foreign investment takes place if it considers that such a foreign investment is likely to negatively affect the security or public order of more than one Member State, or projects or programmes of Union interest on grounds of security or public order. The Commission may also issue an opinion if it has information relevant to the screening of the foreign investment or if several foreign investments present similar risks to security or public order. Furthermore, Article 7 sets out detailed procedures to provide information about the screening decision taken by the notifying Member State to the relevant Member States and the Commission. Article 8 sets out the deadlines and procedures for providing comments and opinions, including for cases of multi-country transactions. Article 9 provides a mechanism allowing Member States and the Commission to cooperate on foreign investments not notified by the Member State where the foreign investment is planned to take place. Article 10 sets out requirements for the information that is to be provided and that may be requested in relation to foreign investments subject to the cooperation mechanism. It requires the Commission to adopt an implementing regulation to provide a standardised form for the notification of foreign investments. Article 11 sets out common requirements for national screening mechanisms in order to ensure their effective participation in the cooperation mechanism. Article 12 provides rules to ensure the confidentiality of exchanges between Member States and the Commission.
Chapter 4 provides rules for Member States and the Commission for the determination of a foreign investment’s likely impact on security or public order (Article 13) and for Member States’ screening decisions (Article 14).
Chapter 5 sets out the final provisions. Article 14 provides a legal basis for cooperation with the responsible authorities of non-EU countries on issues relating to the screening of investments on grounds of security and public order. This cooperation is not intended to allow exchanges of information on transactions that are subject to the cooperation mechanism between the Member States and the Commission. To ensure the transparency of screening mechanisms and the EU cooperation on foreign investment screening, Article 16 requires Member States to report annually to the public about their screening activities and screening decisions by publishing aggregated and anonymised information. The Commission is also required to publish an annual report about the implementation of the regulation. Lastly, Chapter 5 provides rules governing the processing of personal data (Article 17), evaluation (Article 18), delegated acts (Article 19), exercise of the delegation (Article 20) and the committee procedure for implementing acts (Articles 21-22). Article 22 repeals Regulation (EU) 2019/452 and Article 24 provides that the proposed regulation should enter into force after a transitional period of 15 months. In the transitional period, Regulation (EU) 2019/452 remains in force and continues to apply.
Annex I provides a list of projects and programmes of Union interest. These are projects or programmes covered by EU law which provide for the development, maintenance or acquisition of critical infrastructure, critical technologies or critical inputs which are essential for security or public order. Where the EU target is part of or participates in a project or programme of Union interest, Member States are required to screen and notify the foreign investment concerned to the Commission and other Member States.
Annex II lists the technologies, assets, facilities, equipment, networks, systems, services and economic activities of particular importance for the security or public order interests of the Union. Where the EU target is economically active in an area listed in Annex II, Member States are required to screen the foreign investment. The notification of this foreign investment to the cooperation mechanism is required if the foreign investor or the EU target meets one of the risk-based conditions set out in the regulation. This risk-based filter is appropriate to ensure that the EU cooperation mechanism focuses only on foreign investments that are of potential interest from the security perspective and it does not impose unnecessary burden on national administrations and companies.