A Further Step Towards EU Coordinated Foreign Direct Investment Screening The Outcome Of The Trilogue

A further Step towards EU coordinated Foreign Direct Investment Screening

The Outcome of the Trilogue

Economic security has become an essential part of the EU's trade policy – a core and exclusive EU competence. The European Commission has even renamed its Trade Directorate the Directorate-General for Trade & Economic Security. An important element of economic security is of course control over foreign investment in EU companies. The EU Treaty, however, guarantees free movement of capital with the whole world and provides that "national security remains the sole responsibility of each Member State".

As we have previously explained, the EU established a regime to encourage coordination of foreign direct Investment ("FDI") screening for security risks in 2019 and proposed to improve this regime in 2024 by making it mandatory for Member States to establish a screening regime, partially harmonising these national regimes (specifying a minimum sectoral scope) and improving the EU-wide cooperation mechanism, including an enhanced role for the Commission in issuing opinions. It also proposed to extend the scheme to FDI conducted through a subsidiary of a foreign investor already established in a Member State, in effect reversing the limitations revealed in the Xella judgment of the CJEU.

The proposal for the enhanced regime has been winding its way through the legislative process. The European Parliament and the Council as co-legislators both proposed changes to the proposal. The European Parliament adopted a report making a large number of proposals and in particular increasing the ambition of the measure, for example by providing for an even greater role for the Commission to intervene in cases where the Member States had conflicting positions and where EU projects or programmes were affected. The Council, on the other hand, made changes in the opposite direction, and in particular reinforced Member State autonomy in deciding on investments or their respective territories. (The Economic and Social Committee, which was consulted, also urged more ambition in harmonising thresholds and a greater role for the Commission.)

In order to come to an agreement on a legislative text to be adopted by the co-legislators, the Parliament and the Council meet to negotiate compromises and are helped in this task by the Commission (whose agreement to any modification of the original proposal is needed in order to allow the Council to adopt the text by qualified majority voting). These negotiations are known as "trilogues" and there have been three rounds of such negotiations on the revision of the FDI screening regulation.

Final adoption of the text is still some weeks away since it needs to be refined and finalised in all 24 EU languages. The final text is not yet available even in the language in which it was negotiated. However, the Council's press release reveals the following:

• All Member States will be required to have FDI screening mechanisms. Currently only Cyprus has yet to adopt one.
• These national rules will be partially harmonised to ensure more consistent screening across the EU. Currently, there are substantial divergences in scope and procedure.
• The common minimum scope includes:
  • dual-use items and military equipment
  • hyper-critical technologies, such as artificial intelligence (aligned with the EU AI Act definitions and focused on general-purpose AI with relevance to space or defence), quantum technologies and semiconductors
  • critical raw materials
  • critical entities in energy, transport and digital infrastructure (but subject to individual Member State assessments of what is "critical")
  • electoral infrastructures (e.g. voter databases, voting systems, electoral management systems)
  • A limited list of financial system entities, including only central counterparties, central securities depositories, operators of regulated markets, operators of payment systems (excluding central banks) and systemically important institutions.
• Coordination between national authorities and the Commission will be improved in particular by improving transparency. However, coordination will remain "proportionate" meaning that each Member State remains responsible for FDI in its territory and the Commission will not have powers to arbitrate disagreements or take binding decisions itself. Importantly, a screening Member State will be required to explain how comments received have been considered, "without prejudice to sensitive national security considerations".
• The improvements in procedure are described as relating to the "streamlining" of processes and "interoperability".
  • There will be a new shared database to prevent circumvention and make exchange of relevant experience easier between authorities.
  • An optional single portal for the electronic filing of foreign investments may be set up in the future if at least nine member states request it
• The agreed text is also said to include clarification of the risk factors relevant for assessing foreign investments.

Importantly, the revised FDI screening mechanism will cover investments made by EU-based investors that are ultimately controlled by individuals or entities from non-EU countries.

The resulting text seems closer to the Council's vision of what should be included than that of the European Parliament. However, according to the Parliament's press release, the compromise included the adoption of a joint declaration by the Commission and the Parliament "recognising the need for further action to impose conditions on foreign investment to avoid, in particular, the creation of strategic dependencies within the Union."

The new FDI Regulation will start to apply 18 months after entry into force.

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