EU Foreign Investment Screening Reform: Key Elements of the Newly Published Proposal

On 10 February 2026, the European Parliament, Commission and Council of the European Union (“Council”) have published a Proposal for a Regulation on the screening of foreign investments in the European Union (“Proposal”) which follows the provisional political agreement reached in December 2025. The Proposal is expected to be formally approved in spring 2026 by the European Parliament and the Council and is intended to replace the existing EU screening regulation. Nevertheless, it is important to note that the Proposal is non-binding and may be subject to further amendments before its final approval.

While the the Proposal suggests that the new EU investment screening regulation will not achieve complete harmonisation across EU Member States, it still constitutes a significant evolution in the European Union’s (“EU”) approach towards investment screening. Practitioners, investors and EU businesses alike should familiarise themselves with its key features:

I. Expansion of the “Foreign Investments”-Definition

One of the most consequential changes introduced by the Proposal is the expanded definition of “foreign investment”. Under Art. 2 (1) of the Proposal, a “foreign investment” entails any investment by a foreign investor or through a foreign investor’s subsidiary that aims to establish or maintain lasting and direct links with a Union target, enabling effective participation in the management or control of that entity. The definition of “foreign investor” includes entities established or organised under the laws of a non-EU country, as well as natural persons who do not hold the nationality of an EU Member State (Art. 2 (6) of the Proposal). The Proposal also covers “beneficial owners” which are broadly defined as anyone owning or controlling the foreign investor, benefiting from the investment, or on whose behalf the investment is made or control is exercised (Art. 2 (6a) of the Proposal).

Crucially, the Proposal now captures investments made by EU entities that are controlled by non-EU investors. This development directly addresses a loophole that became apparent following the European Court of Justice’s (“ECJ”) ruling in the Xella-case. There, the ECJ held that EU entities fell outside the scope of EU investment screening. Other European institutions viewed this gap as a material risk to the effectiveness of the EU investment screening regime, and the Proposal intends to close it decisively.

Certain matters, however, remain within the competence of individual EU Member States. In this regard, the Proposal explicitly states that EU Member States may “adopt national provisions that are complementary to or are more specific” than its provisions provided that they do not undermine the objectives of the regulation (Art. 3 (1) of the Proposal). Matters covered by the competence of EU Member States include the (i) specific criteria for identifying foreign investments, (ii) the applicable voting rights thresholds, and (iii) the question of whether greenfield investments fall within scope. Currently, some EU Member States already maintain broader investment screening regimes that capture investments by EU investors in which non-EU investors hold only minority shareholdings, and they will be permitted to continue doing so as Art. 4 of the Proposal speaks of “minimum requirements”.

II. Exemptions to the Proposal

There are two important exemptions to the scope of the Proposal. First, the Proposal sensibly excludes certain internal restructurings from its scope, provided that two conditions are satisfied: (i) the beneficial owner of the company must not change; and (ii) no new entity from a third country that was not already present in the upstream ownership chain may be introduced (Art. 1 (5a) (ii) of the Proposal).

The Proposal also excludes foreign investments made in connection with the EU’s resolution tools for failing banks or insurance companies, recognising that such situations demand rapid decision-making (Art. 1 (5a) (i) of the Proposal).

III.  Screening Sectors

A central feature of the Proposal is the establishment of sectors in which all EU Member States must require prior authorisation for foreign investments.

The mandatory sectors, as laid down in Art. 4 (4) of the Proposal, include EU targets that, among others, develop, produce or commercialise items on EU Common list of dual-use items or the EU Common Military List; those engaged in the production, research or development of semiconductor or quantum technologies, research into artificial intelligence meeting specified criteria; entities active in critical transport, energy or digital infrastructure; undertakings involved in the exploration, extraction, processing, recycling, recovery or stockpiling of critical raw materials.

The delineation of these mandatory sectors proved contentious during the legislative process, with negotiations between the Commission, Parliament and Council yielding a list that is shorter compared to the more expansive proposals initially advanced. But in this way, EU Member States will retain the flexibility to maintain or introduce more extensive national approval requirements. The Federal Ministry for Economic Affairs and Energy (“BMWE”) also operates on the premise that, within the framework of national law, it is entitled to “specify” e.g. the filing obligations imposed by the EU in each sector.

IV. Factors for Substantive Review

The Proposal maintains the established standard for substantive review, namely whether the foreign investment is likely to negatively affect “security or public order”. In its Art. 19, the Proposal sets out a range of factors that EU Member States shall “in particular” consider, including whether the investor is likely to pursue a third country’s policy objectives, facilitate the development of a third country's military, or use the investment to support internal repression.

Additional considerations include whether the investor has previously been subject to adverse screening decisions, is sanctioned, has engaged in illegal activities including sanctions circumvention, is established in a jurisdiction with deficiencies in anti-money laundering regimes, is subject to third-country legislation requiring intelligence sharing without due process, or maintains an opaque ownership structure.

The Proposal also contains an extensive list of security interests that EU Member States and the Commission must particularly consider in their assessments. They do, however, not result in a mandatory filing. The list includes the availability of critical inputs, security of critical infrastructure, continuity of supply of critical inputs, protection of sensitive information, media freedom and pluralism, electoral processes, public health, food security and the security of military and sensitive public facilities.

V. Call-in Rights for National Competence Authorities

Beyond the mandatory sectors, the Proposal requires all EU Member States to possess a call-in right for any foreign investment in their territory.

A national competent authority (“NCA”) – in Germany the BMWE – can screen or adopt a screening decision even if an investment did not require prior authorization for a period starting at 15 months and lasting up to 5 years after the investment is completed (Art. 4 (2) (c) of the Proposal). If an investment was subject to prior authorization but either was never filed or was only filed after completion, the NCA has at least 24 months after completion to examine it and adopt a screening decision (Art. 4 (2) (d) of the Proposal).

VI. (Partially) Harmonised Timelines

The Proposal also introduces a harmonised two-phase screening procedure across all EU Member States (Art. 4 (2) (a) of the Proposal). Phase I consists of an initial review period of 45 calendar days, during which the relevant authority must determine whether an in-depth investigation is warranted. This deadline is non-extendable. Phase II, comprising the in-depth investigation itself, does not have a prescribed deadline under the Proposal, leaving the specific timeline to be determined by individual EU Member States. Therefore, timelines for investment screening procedures will continue to differ among EU Member States.

For transactions requiring filings in multiple EU Member States, applicants are encouraged to submit their filings on the same day across all relevant jurisdictions (Art. 7 (a) of the Proposal). EU Member States must then coordinate with one another regarding notification through the cooperation mechanism and should endeavour to align their final decisions, particularly with respect to any mitigating measures.

VII. Clear Guidance on the EU Cooperation Mechanism

The Proposal also provides clearer guidance on when transactions must be notified through the cooperation mechanism (Art. 5 of the Proposal).

Mandatory notification is required for investments by state-controlled or state-owned investors, sanctioned investors, or investors previously subject to prohibition or found to have violated mitigation measures, where such investments relate to the mandatory sectors. Notification is also required where an EU Member State opens a Phase II investigation or plans to impose mitigating measures, prohibit or unwind a transaction in Phase I, provided the target is active in a project or programme of Union interest or is part of a group with subsidiaries in other EU Member States.

In practice, this means that filings by non-EU state-owned investors in sensitive sectors will routinely require notification to the cooperation mechanism, regardless of whether the investor originates from a friendly country or not.

VIII. Investment Screening in the EU: Way Forward

While the Proposal stops short of fully harmonizing investment screening across all EU Member States by opting instead for minimum standards that individual EU Member States can build upon, the Proposal (once adopted as regulation) is nonetheless likely to advance the EU investment screening landscape. After formal approval of the Proposal and its publication, an eighteen-month transitional period will be triggered so that the new EU investment screening regulation is likely to become a fully operative regulation at the end of 2027 or the beginning of 2028. Germany, for instance, has already signalled its intention to implement the new investment screening regulation prior to the end of the transitional period.

In light of such dynamic regulatory landscape, businesses and investors would be well advised to monitor developments closely and to consider how the new requirements may affect their activities and transaction planning.