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After over a year of consideration, EU Member States have now found common ground on revamping the EU FDI Screening Regulation, proposing a somewhat lighter version of the European Commission’s (EC) proposed reform of the EU FDI Screening Regulation which came out last year (see our earlier blog).
This marks the next step in the long journey towards a reformed FDI Screening Regulation aimed at addressing the issue of significant divergence between Member States – but a final version of the Regulation is still some time away. The proposal still needs to run the gauntlet of trilogue negotiations, which are expected to start after the summer recess and could last 3-4 months or potentially even longer. This means a final (agreed) text is not likely to reach our eyes before the end of the year and there is certainly risk of slippage into 2026, after which it will be a further two years before the new Regulation comes into force – presumably to give Member States time to update their foreign investment rules to comply.
The Member States’ proposal does, however, shed significant light on the likely movement of the EU FDI Regulation reforms, and what shape the final version may be expected to take. This post looks closely at the key features of the reforms to the EU FDI Regulation, and how these proposals have changed following suggestions by the EU Parliament earlier this year and in light of the updated reforms proposed by Member States this week.
One feature that does not look set to change is the EC’s proposal to widen the scope to capture investments from EU entities whose ultimate owners are non-EU investors. This reform originated as a response to the Court of Justice’s judgment in Xella, and removes the current requirement EU companies controlled by non-EU entities must be an “artificial arrangement” in order to be captured by the Regulation.
Despite this being one of the most contentious reforms, the EU Parliament was also in agreement with extending the scope when it issued its suggested changes to the revised FDI rules earlier this year. The latest version endorsed by Member States also retains the proposed extension of the Regulation’s scope, so this is an area we can expect to see agreement on during the upcoming trilogues.
Considering that the Court in Xella did not depart from its long-established decisional practice on the EU’s four freedoms and, in particular, did not consider the original EU FDI Regulation having altered the interpretation of restrictions on the freedom of establishment and the free movement of capital, it remains to be seen how the new FDI rules, if enacted as planned by the EC and Member States, would be seen by the Court of Justice.
Another (perhaps less surprising) reform the EU Parliament and Member States have agreed on is the requirement on Member States to enact FDI legislation. This proposal comes off the back of years of the EC calling on Member States to set up and enforce FDI screening mechanisms – calls that have become more urgent in light of growing geopolitical tensions and growing technology-based security threats. Following the entry into force of Greece’s new regime just a few weeks ago, there are now just three Member States that are still working on introducing a screening mechanism, namely Bulgaria, Croatia and Cyprus.
However, the revised proposal provides some more flexibility to Member States, allowing them to enact FDI rules that are “complementary to or more specific” than the FDI rules in the Regulation, including to extend the scope of their mechanisms to capture investments in sectors not covered by the Regulation.
The reforms proposed by the EC promised greater harmonisation and procedural alignment, but had one key gap: they did not impose a uniform deadline for Member States to issue their screening decision. This meant that while there might be uniformity for the start date and key steps in the process, there was no uniformity in the end date, so timelines were still likely to be unpredictable in multi-jurisdictional deals.
The changes put forward by Member States appear aimed at fixing this, with updated reforms requiring an initial review be completed within 45 days of a filing being made to a screening authority, after which a more in-depth review can take place if needed. These 45 days are broadly aligned with what we observe in practice for straightforward cases in most Member States, if decisions are not already adopted quicker than that. The updated reforms do, unfortunately, not propose a deadline for completion of in-depth review though, meaning that some uncertainty around deal timelines will remain, especially in deals where a ‘phase 2’ investment review is likely to be required. It would be a welcome adjustment in the trilogue if a maximum review period were also to be defined for such complex assessments to avoid open-ended reviews. However, already the changes currently foreseen can be expected to give increased predictability for review timeframes in the vast majority of cases, and it is likely to be a welcome one for investors seeking certainty around deal timeframes, should it survive the trilogues.
Following concerns that critical cases were being “missed” because of a lack of alignment between Member States with respect to sensitive sectors (although we note that no evidence for such gap has been presented so far), the original EC proposal listed specific types of transactions that national screening mechanisms must review (Article 4(4)). While this has been retained, the scope of what needs to be reviewed has been significantly slimmed down and refined in the updated reforms.
Fewer sectors requiring authorisation…
In the original proposed reforms, Article 4(4) required authorisation for foreign investments in targets that ‘participate’ in a specific type of programme or project (Annex I) or sector (Annex II). Annex II contained a long list of sectors, including dual-use items, military tech and equipment, critical technologies, critical medicines, and financial infrastructure. It included rather broad definitions and, in many instances, went further than current Member State regimes and the general expectation was that it would result in a material increase in filings to be made.
The updated reforms remove the requirement for authorisation for foreign investment in targets active in the Annex II list of sectors, paring this back so that screening mechanisms would only be required for investment in targets active in items listed in Annex I and the EU Common Military List.
… but extended list of sectors relevant for assessment of impact on security and public order
Annex II is not entirely done away with, however. The sectors in Annex II must be considered when the authority assesses whether a foreign investment is likely to negatively affect security or public under Article 13. And Annex II has been updated to provide greater detail on what technology areas are of particular importance, including in relation to semiconductors and generative AI, giving it the potential to capture more than in the reform’s first iteration.
Greenfield investments out of scope – unless Member States want to include them
The reforms proposed by the EC did not expressly state that greenfield investments were in scope, but their inclusion was implied by the EC’s proposal, which noted that “greenfield foreign investments should fall within the scope of this Regulation” and “Member States are therefore encouraged to include greenfield foreign investments in the scope of transactions covered by their screening mechanisms”. The EU Parliament agreed with this, proposing that screening of greenfield investments be expressly included in the list of minimum screening requirements at Article 4(2).
However, this was ultimately removed in the updated proposal agreed by the Council which states that greenfield foreign investments do not fall within the minimum scope of screening mechanisms, but Member States are free to decide whether or not to include such investments in their screening mechanisms. Given the opposing views, it will be interesting to see where the Regulation lands on this point following the trilogue negotiations.
More flexibility in multi-country transactions
The original reforms contained a detailed set of procedures for multi-jurisdictional transactions. These reforms were aimed at synchronising timelines and providing for cooperation between Member States – and also meant more information disclosure requirements for investors. This procedure has been retained in the version proposed by Member States, but with more flexibility for both applicants and screening authorities.For example:
Shorter timelines
Despite allowing for more flexibility in multi-jurisdictional transactions, timelines have been shortened for many of the key steps (for example, Member States have 15 days instead of 20 to give comments on a notified foreign investment to the notifying Member State). There is also now (as mentioned above) a general deadline for Member States to complete their initial review.
Disclosure requirements
The EC’s proposal to require significantly more detail about investors and the investment has been expanded on in the iteration from Member States. The updated proposal would require even more types of information be provided, including: (i) information about the beneficial owner of targets; and (ii) information about the other legal entities in the target’s corporate group and their business operations in other Member States.
Should this be retained post-trilogues, it is not likely to be a welcome development for investors – especially where capturing target information is difficult (such as in less friendly deal situations).
The EC proposed introducing an “own initiative” procedure, which would have allowed both Member States and the EC to review unnotified foreign investments that may affect security or public order.
In a notable turnaround, this proposal has been removed in the latest iteration from Member States, despite apparent EU Parliament support for the “own initiative” procedure in its review of the reforms. The updated reforms now provide for Member States to issue “duly justified comments” and the EC to then issue a “duly justified opinion”, to which Member States must give “due consideration”.
What’s next?
We are one step closer to having a final (updated) EU FDI Regulation, but the journey is far from over. The Regulation will need to be negotiated by representatives of the EU Parliament, the Council and the EC. These trilogue meetings can take 3-4 months for more complex situations and are not expected to start until after the summer holiday period (i.e. September). This means we may see a political agreement being reached in trilogue meetings at the end of the year, at the earliest.
Once an agreement is reached, the text will need to be finalised by lawyers, translated, and published in the Official Journal of the EU for entry into force 20 days later. Provided the trilogues finish in December, we could see this happen in Q1 of 2026.
But don’t expect to see changes quite yet. Once the reforms are adopted, it will take a further 24 months before the updated FDI Regulation comes into force – significantly longer than the 15 months originally proposed, and a delay that is already prompting criticism, in light of the world’s precarious geopolitical environment.
While this ‘pause’ is likely needed to give Member States time to update or enact FDI legislation, it does raise questions about whether reforms to the EU FDI legislation can be expected to match the fast-paced geopolitical and technological changes that national security laws seek to protect against.