New EU-Regulation On The Screening Of Foreign Direct Investments – Setting The Ground For A Uniform European Investment Control?
On 14 February 2019, the European Parliament approved a new regulation (Verordnung) establishing a uniform framework for screening of foreign direct investments. This is the European Union’s response to the perceived threat of steadily increasing investments into the European Union in strategically important industries and key technologies, in particular from the People’s Republic of China. Such investments from the People’s Republic of China have risen to approximately USD 40 billion in just a few years, accounting for around 7.5% of global direct investment in the European Economic Area. The aim of the regulation is to create a European cooperation mechanism under which member states and the European Commission will jointly evaluate foreign direct investments and exchange information on investment projects. However, the final decision on whether or not to approve a particular investment remains with the national authorities of each member state. The new regulation does not significantly change the control of foreign direct investments in Austria; however, it could set the ground for a future joint European approval procedure.
New EU framework for the verification of foreign direct investments
The European Union is generally open to foreign direct investments. Despite certain sector-specific initiatives, there is still no comprehensive legal framework for screening of foreign direct investments. Against the background of a changing world order, however, the European Union now apparently sees the need for a coordinated monitoring and review process for foreign direct investments into the European market. The new regulation shall create a uniform procedural framework in order to better evaluate the possible effects of foreign direct investments on the security and public order of the European Union and its member states. The regulation does not impose an obligation for member states to introduce investment controls, but establishes the framework within which member states may provide for a review mechanism. Currently, only about half of the member states even have a national review mechanism in place (including Austria, Germany, Italy, Spain, and the Netherlands). The overriding objective of the new regulatory framework is to increase the transparency of direct investments from third countries and to strengthen the member states’ intervention authorities.
Key elements of the new EU-regulation
Key elements of the new EU-regulation include:
- the non-binding identification of aspects that may be taken into consideration in the national review process of foreign direct investments; in particular member states and the European Commission may consider potential effects on (i) critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defense as well as sensitive facilities and investments in land and real estate, crucial for the use of such infrastructure; (ii) critical technologies and dual use items, including artificial intelligence, robotics, cybersecurity, quantum, aerospace, defense, energy storage, nuclear technologies, nanotechnologies and biotechnologies; (iii) supply of critical resources and food security; (iv) access to sensitive information, including personal data, or the ability to control such information or (v) the freedom and pluralism of the media. In determining whether a foreign direct investment is likely to affect security or public order, member states and the European Commission may also take into account, inter alia, whether the foreign investor is directly or indirectly controlled by the government, including state bodies or armed forces of a third country, including through ownership structure or significant funding;
- the authority of the European Commission to evaluate foreign direct investments and to issue non-binding opinions when an investment may pose a threat to the security or public order of more than one member state, or a project of the European Union (e.g. Horizon 2020 or Galileo);
- the creation of a cooperation mechanism where member states and the European Commission shall exchange information related to specific investments;
- the introduction of minimum requirements that member states must maintain or adopt for screening mechanisms on national level (e.g. the possibility to appeal against decisions);
- the introduction of new transparency and information requirements that must be taken into account by member states that currently do not have national screening procedures for foreign direct investments; and
- the introduction of a European expert group that meets regularly to consider issues relating to foreign direct investment into the European Union and provides advice and expertise to the European Commission.
Effects on Austria
Austria is one of the 14 member states (including Germany, Italy, Spain, and the Netherlands) that already has a screening procedure for acquisitions of companies active in sectors concerning the public safety and order. Under section 25a of the Austrian Foreign Trade Act 2011, certain acquisitions from certain third countries are subject to the ex-ante approval from the Federal Minister of Economics, Family and Youth (BMWFJ). In short, the approval is required in order to acquire a controlling influence in an Austrian company active in a sector concerning the public safety and order within the meaning of Articles 52 and 65 (1) of the Treaty on the Functioning of the European Union. This mainly includes the Austrian defence equipment industry and security services, as well as national public service and crisis prevention, encompassing energy and water supply, telecommunications, transport, and infrastructure for education, training, and healthcare. Thus, the current Austrian regulatory framework already covers parts of the new EU legal requirements and will only have to be expanded/adapted. Specifically, it will be necessary to consider the positions of, albeit of non-binding nature, the European Commission and other involved member states as part of the Austrian approval process. This will have to be factored into the transaction planning, in particular from a timing perspective as it will extend the approval process.
It is worth mentioning that Germany tightened its national control procedures and lowered the relevant control threshold in certain sectors to 10% at the end of 2018. This may trigger a debate in Austria on tightening the current Austrian screening procedures.
The Council of the European Union approved the new regulation on 5 March 2019. The new European framework will enter into force in April 2019 but will only apply 18 months thereafter.
 EPRS, European Parliamentary Research Service, ‘Briefing: EU Legislation in Progress’, February 2019.
 Since 2018 generally referred to as Federal Ministry for Digital and Economic Affairs.