Which investments fall under the scope of the EU regulation on the screening of foreign direct investments?

Investments by foreign investors, whose ultimate beneficial owners are located outside the European Union, have been under significant scrutiny for the past decade. In response to threatening geopolitical shifts in an uncertain post-COVID era and in view to strengthen the European internal market, the European Union adopted in 2019 “Regulation 2019/452 establishing a framework for the screening of foreign direct investments into the Union” (the “FDI Regulation”).

Under the FDI Regulation, EU member states are permitted to establish their own national screening mechanisms envisaged to monitor and screen foreign investments resulting in the acquisition of control in national companies which are active in certain sensitive sectors (i.e., energy, telecommunication, healthcare, etc.). Following the FDI relegation, the Belgian legislator established a national screening mechanism, which has been in place as of 1 July 2023.

Although the FDI Regulation was adopted more than five years ago, the extent of its scope of application remains uncertain in practice. While the FDI Regulation aims to facilitate a framework for member states to screen foreign investors directly, actual foreign investments are often executed through EU subsidiaries owned indirectly by these foreign investors. Consequently, the question has arisen whether such foreign indirect investments are also covered by the FDI Regulation.

In a groundbreaking judgment of 13 July 2023 (C-106/22 – Xella Magyarország Epítőanyagipari Kft ./Innovációs és Technológiai Miniszter), the Court of Justice has explicitly stated that the foreign indirect investments are excluded from the FDI Regulation as EU subsidiaries do not qualify as “foreign investors” as prescribed by the personal scope of the regulation. The strict exclusion of foreign indirect investments from the FDI Regulation was heavily criticized by Advocate General Ćapeta. According to the Advocate General, the FDI Regulation has always been intended to prevent foreign investors from acquiring control in EU companies which are active in sensitive sectors. In the line of the Regulation’s objective, he continued, member states should be able to screen (potential) harmful foreign investments irrespective of the structuring of such transactions.

In that regard, the Court added that the inapplicability of the FDI Regulation doesn’t mean that foreign indirect investments in sensitive sectors should always be tolerated. Member States can still decide to screen such investments, but they must take the fundamental freedoms – and more specifically the freedom of establishment – into account if they intend to restrict certain foreign indirect investments. To that end, member states should always justify that the underlying restriction is necessary in view of its national security and/or “ordre public”, is non-discriminatory and proportional.

Despite the fact that member states can still screen foreign indirect investments under the pretext of an exception to the freedom of establishment, it is clear that this judgment significantly undermines the scope and the rationale of the FDI Regulation. However, as member states (including Belgium) continue to screen foreign indirect investments, the European Commission stated in an official statement of 24 January 2024 that it seeks to extend the formal scope of the FDI Regulation. As a result, foreign indirect investments would finally be included in the FDI Regulation.