In 1990, when the Cold War came to an end, the German rock band The Scorpions sang “The world is closing in, did you ever think, that we could be so close, like brothers?” echoing the spirit of globalization in their rock ballad “Wind of Change”. Europe has since then been a place proud of its openness to foreign investment. Although such openness is still reconfirmed by government officials and repeated as a mantra in preambles to relevant legislation, there has been a tendency of late to tighten control on foreign direct investment (FDI) – so are new winds of change in the air?

With the new EU Regulation on FDI in the European Union coming into force on 10 April 2019 and applying from 11 October 2020, we have now entered an era of renewed focus on promoting FDI in Europe while at the same time enabling closer cooperation between Member States in determining screening factors and other specific regulations, particularly on the grounds of national security and public order.

The FDI Regulation intends to protect critical European assets against transactions that would be detrimental to legitimate interests of the European Union or its Member States and to do so has determined screening criteria in critical infrastructure, critical technologies and dual-use items, supply of critical inputs, access to and control of sensitive information, freedom and pluralism of media and extent of control or funding by non-EU government to name a few areas of focus. Each of these areas are expected to be widely interpreted and applied in any EU review of FDI transactions.

In addition, there remains a continuing importance of national laws as Member States continue to be empowered to review and potentially block (or apply conditions) to FDI in various ways.

In Germany, tightening regulations and a sector specific control regime applies if a foreign investor acquires, directly or indirectly, at least 10% of the voting rights in a target operating in the sector of war weapons, IT security or producing certain goods subject to export control. Such transactions may be blocked if it constitutes a danger for important security interests of the Federal Republic of Germany. Relevant transactions need to be notified to the Ministry and cannot be closed prior to any approval.

There are also general investment controls that apply in Germany to investors from outside the European Union (EU) or the European Free Trade Association (EFTA) who acquire, directly or indirectly, at least 10% of voting rights in a critical infrastructure target or at least 25% of voting rights in another target. Such transactions may be blocked if it constitutes a threat to public order or security of the Federal Republic of Germany. Although, relevant transactions can be closed without the Ministry’s approval, the Ministry has a right to review and prohibit the transaction within three months after becoming aware thereof and within five years after signing of the transaction. In practice, parties usually file for a certificate of non-objection from the Ministry in order to gain transaction certainty and only close their transaction after having received such clearance.

Notwithstanding the looming exit of Britain from the European Union (the so-called “Brexit”), the UK restrictions on FDI substantively follow the European rules in that there is increased scrutiny of investments that could impact on national security. Recent changes to the regulations strengthen existing UK measures and expand the UK Government’s power to be able to intervene in certain transactions involving the acquisition of businesses supplying products in the military, dual-use, quantum technology and/or computer hardware section for national security and other public interest concerns. There has also been a lowering of the investment threshold from £70 million to £1 million in the turnover testing of FDI in sensitive sectors.

Spain’s regulation of FDI follows similar principles to promote the freedom of movement of capital although requires notification of investments from tax havens. Despite a liberalised system there are controls over investments that might impact public powers, public order, security and public health. There are also industry specific restrictions covering telecommunications, television and radio, energy, financial institutions and the stock exchanges, air transportation as well as national defence related activities.

Italy has been focused on promoting investment in high-tech start up ventures and has passed laws that provide tax exemptions and other incentives. However, Italy controls FDI based on the reciprocity principle in that international investors are treated the same way as Italians provided their home country has reciprocal treatment of Italians. In addition, there are the golden powers for Italy to review notified investments in areas of strategic importance and national interest covering the energy, transport, communications and defence sectors. The golden sectors were recently extended to “high-tech” companies, such as those dealing with data storage and processing, artificial intelligence, robotics, semiconductors, dual-use technology and space/nuclear technology as well as broadband electronic communication services based on 5G technology, bringing Italy in line with many other EU states.

France has amended and strengthened its rules on FDI of late, extending its control over French companies active in the aerospace sector or carrying out research and development activities in cybersecurity, artificial intelligence, robotics, additive manufacturing and semiconductors. FDI in these sectors are subject to a prior ministerial approval. The same applies to IT hosts for certain sensitive data, particularly in the health sector.

Belgium does not have a specific legislative framework for controlling FDI while practically many of the key industries or sectors are very tightly controlled by local operators, such as in the fixed telecoms and mobile telephone markets.

Despite pan-European or national European regulations being restrictive in certain sectors deemed of strategic importance or of a national interest, the general restrictions are not as nearly restrictive as in other jurisdictions that attract high levels of FDI, such as the United Arab Emirates. In the UAE, unless businesses are established in the free trade zone, foreign investors may not own more than 49% of UAE companies although this may be lessened in certain sectors to allow up to 100% ownership if the UAE Cabinet allows. This concession was a recent amendment to the existing UAE laws controlling FDI.

Given seismic movements in global trade and geopolitics FDI will be a key indicator as to how various countries are responding in these ever-changing times. As a result, governments should closely monitor their relevant regulation of FDI (and that of others) to ensure that it promotes and does not hinder the attractiveness of its economies to the international investment community. That would be a self-defeating act whilst the winds of change continue to blow.

This series of articles look at pan-European (EU) as well as national legislation impacting on FDI in certain European states as well as in the United Arab Emirates (UAE).

This article is excerpted from “Accessing Europe and the Middle East: Foreign Direct Investment Control Considerations”