The European Commission’s (the Commission) EU Foreign Direct Investment Screening Regulation (the Regulation) entered into force on 11 October 2020, creating an FDI cooperation framework between the Commission and EU Member States (see more details here). Almost exactly three years later, the Commission has published its Third Annual Report on the Regulation covering the FDI regimes of 18/27 of the EU Member States in 2022 (though 90 percent of the 423 notifications submitted to the Commission in 2022 were from just six countries: Austria, Denmark, France, Germany, Italy and Spain).

The EU: an attractive FDI destination?

In 2022, €1,216bn of FDI flowed into the EU, a 14.3 percent decrease compared to the previous year. This fall in FDI is broadly reflective of a global dampening of dealmaking (especially in the second half of 2022), resulting from the economic slowdown and the rising cost of financing due to higher interest rates. It was also reflected in the overall number of national procedures initiated decreasing from 1,563 to 1,444. The EU suggests that the region remains open to investment. However, inverse to the amount of FDI entering the EU and the volume of transactions reviewed, the number of cases which underwent formal FDI rose from 29 percent to 55 percent between 2021 and 2022 (and from 20 percent in 2020). It is worth noting that the Commission puts a significant disclaimer on these reported numbers as the considerable differences in FDI procedures in the Member States mean that the basis on which they report their cases is likely very different. For example, what it means for a case to be “formally screened” is defined differently in the different Member States.

What has driven this increase in formal screening? The Commission would argue that the proliferation in EU FDI regimes and national capabilities, combined with a renewed focus on security on national and supranational levels, together with the geopolitical climate are primarily responsible. However, EU Member States’ FDI regimes are broadly drafted, often viewed as catching transactions unnecessarily or unintentionally—such as internal restructurings—due to innate textual ambiguities. The fact that only 45 percent of notified transactions were not formally screened underlines this point.

Looking ahead

• Potential reform of the Regulation – first announced in June 2023, the Commission is planning to propose revisions to the Regulation by the end of 2023. The Commission is likely to argue that these revisions – expected to be significant if a stakeholder questionnaire distributed earlier this year is anything to go by – are necessary to reflect the evolving geopolitical landscape and governments’ changing approaches to protecting national security and other national interests. The Commission’s proposals may cover the introduction of universal approaches to timelines, procedures and/or sensitive sectors. 
• Potential tension between the Commission and Member States – the mooted amendments are likely to focus on the Commission’s ability to unify the approach of Member States’ FDI regimes. To date, the Commission has not shied away from criticizing the inconsistencies and often perceived ineffectiveness of Member States’ FDI regimes in its reports and communications. However, it is unclear whether Member States will agree to far-reaching reforms (including giving the Commission a greater role) which may be perceived as encroaching on their sovereignty, as well as how any tensions might impact the EU elections in 2024. 
• Continuing close scrutiny of investments made by hostile actors, particularly those by entities connected to the Russian and Belarussian governments in EU critical assets.
• Increased coverage of national FDI regimes among EU Member States – by the end of the year, 22/27 Member States are expected to have active FDI regimes in place. In Belgium, Estonia and Luxembourg, FDI regimes have entered into force this year (for the Belgian regime see our article on developments in FDI regimes in Belgium, the Netherlands and Spain in this issue) while the Swedish regime is due to become effective on 1 December 2023. Bulgaria, Croatia, Cyprus, Greece and Ireland are currently working on draft legislation.
• A potential EU outbound investment screening mechanism – the Commission is due to publish proposals aimed at addressing security risks relating to outbound investments by the end of this year. This development reflects increasing concern regarding outbound investment as shown by the U.S. developments covered in our article U.S. Outbound Investment Executive Order focuses on next generation technologies in this issue.

With thanks to Freshfields Alastair Mordaunt, Uwe Salaschek, Iona Crawford and Matthias Wahls for contributing this update.

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