4th Annual Report on the EU FDI Screening Regulation

On 16 October 2024, the European Commission published its Fourth Annual Report on the EU Foreign Direct Investment (FDI) Screening Regulation (Regulation 2019/452/EU). The report highlights the increasing number of notifications and that more sectors being considered as high risk for potential review.

Key takeaways

• Despite the global decline of FDI flows, investments into the EU increased in 2023 compared to 2022. However, net inflows remained negative: EUR 50 billion, compared to EUR 135 billion in 2022.
• The number of notifications to EU Member States and the European Commission within the framework of the EU cooperation mechanism has increased by 18% since the framework was put in place in 2020.
• 24 Member States have FDI screening mechanisms in place; the remaining three (Croatia, Cyprus and Greece) have taken concrete steps to introduce screening mechanisms.
• A broader range of sectors is being targeted for foreign investment review.
• The European Commission only undertakes a detailed assessment in exceptional cases (only 8% of cases notified in 2023).

Background

In recent years, awareness of the national security implications of FDI has increased and led to the proliferation of regulatory regimes around the world. This trend is reflected in the EU's efforts to establish greater harmonisation, including the European Commission's proposal from January 2024 to revise the FDI Screening Regulation, and in the Member States' new and extended screening practices.

Against this background, the European Commission has released its fourth Annual Report on the EU FDI Screening Regulation covering 2023. The report highlights the European Commission's ongoing efforts to collaborate with Member States in identifying and addressing investments from third countries that may pose a threat to EU security or public order. It also shows the increasing number of notifications and the expansion of high-risk sectors. In addition, Member States continue to introduce or extend their FDI regimes. 

Key trends

Proliferation of regimes and notifications 

Despite the global decline of foreign investments, investment into the EU increased in 2023 compared to 2022. This increase is accompanied by an increase in the number of notifications under the EU cooperation mechanism (67 more compared to 2022). 

In 2023, eight Member States also introduced new screening regimes (which entered into force 2023 or early 2024). The European Commission therefore concludes that the framework is being successfully adopted by Member States. The increase in notifications cannot be explained by the higher number of investments or the adoption of screening mechanisms by more Member States alone: it also reflects the expanded scope of the national screening mechanisms.

Broader range of sectors at high risk of review

While the manufacturing (23%) and information and communication technologies (21%) sectors remain at the top of the notified transactions list, the wholesale and retail (14%), financial services (11%) and the energy (6%) sectors were increasingly targeted by FDI screening. Defence and critical technologies remain pivotal but the report highlights that Member States are increasingly scrutinising transactions in sectors that were previously considered less sensitive. According to the European Commission, this is also a reflection of the tense geopolitical context. 

Six countries account for 90% of all notifications under the cooperation mechanism, highlighting the uneven distribution of Member States using the cooperation mechanism. This reflects the lack of a common minimum sectoral coverage and procedural rules across Member States.

Only few cases in Phase II

Of the 488 cases notified, 92% were closed in Phase I and only 8% required a detailed security risk assessment by the European Commission. This represents an increase in non-critical cases compared to the previous year, where 87% were found non-critical. The European Commission issued opinions in less than 2% of the cases. Manufacturing remained the most significant sector for Phase II cases (nearly 40%, down from nearly 60% in 2022). The primary factor necessitating an in-depth Phase II assessment was the relevance of the target for critical technologies, which triggered further assessment in 51% of the cases. Among these, defence-related activities made up 26%, aerospace 22%, and semiconductors 17% of the Phase II notifications. However the report shows a much more diverse sectoral distribution in Phase II compared to 2022, again illustrating heightened sensitivity of foreign investments potentially affecting Member States' national security.

How can we help

The fourth Annual Report on the FDI Screening Regulation underscores the EU's commitment to a comprehensive approach to economic security. The increased scrutiny across various sectors and the high notification rates in certain Member States reflect regulators' proactive approach, highlighting the importance of thorough due diligence and a deep understanding of the broader scope of FDI screening mechanisms given the increasingly complex regulatory landscape.

Ashurst has broad experience in this area, across a wide variety of sectors. We regularly manage FDI analysis and processes across multiple jurisdictions, assessing the sensitivities of the activities at stake, ensuring filings are executed in a coordinated and consistent manner, assisting our clients during the negotiations of commitments or conditions that can be imposed by governments. We do this as part of our transactional advice or as stand-alone advice, and in combination with our review of merger control regimes, ensuring a smooth and efficient one-stop shop for clients, working with trusted local counsel where required. 

With teams across Europe (notably in London, Paris, Luxembourg, Brussels, Frankfurt, Munich, Madrid and Milan), we are able to provide comprehensive full-service support on a wide range of FDI issues at all stages of the process, and offer jurisdiction-specific expertise at a national level.