Revision of the EU FDI Screening Regulation – Are the new proposals paving the way for a significant expansion of foreign investment control in the EU?

On 8 May 2025, the European Parliament (“EP”) adopted an amendment proposal (“EP Proposal”, see here) for the envisaged overhaul of the regulation on the screening of foreign investments in the European Union (“FDI Screening Regulation”[2]). After a first draft of the new FDI Screening Regulation [1] was published by the European Commission in January 2024 (“EC Proposal”, see our article of 29 January 2025 here), the EP has proposed further revisions which would significantly expand the scope of review of foreign investments within the European Union. On 12 June 2025, the Council of the European Union (“Council”) in turn approved its own amendment Proposal (“Council Proposal”, see here) of the FDI Screening Regulation. The Council Proposal agrees in many aspects with the EP Proposal and stresses the importance of economic security in the European Union but is not as far-reaching.

In this news article, we will set out the key amendments to the FDI Screening Requlation proposed by the Parliament and the Council. They form the basis for negotiations between the Parliament, the Council and the Commission (so-called "trialogue negotiations") and are therefore likely to have a significant influence on the revised FDI Screening Regulation.

I. Mandatory screening mechanisms of EU Member States

In principle, both the EP and the Council support the European Commission’s proposal of a mandatory FDI screening mechanism for all EU Member States and also to cover investments by EU-based subsidiaries of foreign investors in order to prevent circumvention. This is based on a judgement of the European Court of Justice in the "Xella" case, according to which the FDI Screening Regulation does not apply in the case of investments by EU-based subsidiaries of foreign investors as long as this structure has not been used to circumvent investment screening.

As regards the scope of such mandatory FDI screening mechanisms, the EP proposes to introduce a number of new sectors for which FDI screening will become mandatory: (i) transport industries, technologies and infrastructure components of critical importance; (ii) media services; (iii) electoral infrastructure; (iv) critical raw materials; and (v) farming. The EP also intends to broaden the applicability of the mandatory screening mechanism in the areas of semiconductors and artificial intelligence. The Council Proposal, on the other hand, emphasizes that that military and dual-use goods should be included as essential sectors in the national FDI screening mechanisms, as those products and corresponding technology are vital for maintaining security. Member States should maintain the flexibility to include additional industry sectors in their national FDI screening regimes.

Apart from differences concerning the specific sectors to be included in the mandatory FDI screening mechanism, the EP Proposal and the Council Proposal differ mainly with respect to the right of EU Member States to deviate from the definition of sensitive sectors in the FDI Screening Regulation. While the EP Proposal includes very broad definitions of the sensitive sectors in Annex II of the Regulation without leaving a margin for EU Member States to refine these definitions, the Council proposes that EU Member States should have discretion to adopt complementary or more specific provisions in their national FDI screening regimes.

The EP and the Council also take different views with regard to greenfield investments:, According to the EP Proposal, EU Member States shall extend their national FDI screening mechanisms to certain greenfield investments; the Council, on the other hand, suggests that EU Member States should decide individually on mandatory filings for greenfield investments.

II. Power of the European Commission to oppose foreign investments

The EP Proposal would grant the European Commission the power to prohibit a foreign investment even if the host Member State (i.e., the Member State in which the investment takes place) would have approved it. If either the European Commission or another Member State raises “duly justified objections” against a notified foreign investment, the European Commission may either authorize the investment, possibly with mitigating measures, or prohibit it, taking over the screening procedure. Many EU Member States regard this proposal as entailing interference with their competence for national security matters. It should be noted that, in practice, the national security interests of EU Member States vary significantly.

The Council Proposal deviates from the EP Proposal with regard to the power of the EU Commission to oppose foreign investments. While the Council Proposal does suggest that the cooperation between the European Commission and the EU Member States should be made more effective, it does not agree to granting the European Commission the power to ultimately prohibit a foreign investment.

III. Criteria for determining likely negative effect on security and public order

The EP proposes to expand the list of factors for assessing whether a foreign investment is likely to negatively affect security or public order to include, for example, the security of military facilities, food security or the capacity to avoid and address strategic dependencies. Moreover, the EP Proposal also contains additional investor-related criteria, such as whether the investor is based in a third country with strategic deficiencies in its national anti-money laundering regime.

The Council Proposal agrees with including additional investor-related criteria and also largely supports the list of factors proposed by the EP. It even includes factors such as some projects and programmes of Union interest as listed in Annex I and Annex II (e.g. Space Programme, European Defence Industrial Development Programme or European Defence Fund) for assessing whether a foreign investment is likely to negatively affect security or public order.

IV. Potential impact on foreign investment control in Germany and the EU

The proposed changes to the FDI Screening Regulation would have a significant impact on both the German FDI screening mechanism and the review of foreign investments in the EU.

The scope of the German FDI screening mechanism would possibly need to be further expanded in the following areas:

• if the EP Proposal was adopted, the notification obligation would need to be extended to certain greenfield investments;
• the list of sensitive sectors requiring a mandatory notification would need to be updated to include, on the one hand, much broader definitions (e.g., in the area of AI) and, on the other hand, additional sectors not yet encompassed by the German FDI screening mechanism (such as electoral infrastructure). Whether the member states are given the right to specify the broad definitions will - as outlined - be a key subject of the trialogue negotiations.

In addition, the new investor-related criteria as well as the factors for the substantive review which are currently not explicitly set out in the German law would need to be taken into account when assessing a notified foreign investment (although these factors may already be part of the assessment based on the blanket clause that a foreign investment can be reviewed if it negatively impacts public security or public order).

On an EU level, both proposals would result in a greater harmonisation of national FDI screening mechanisms due to the additional sectors requiring mandatory FDI screening as well as clearer guidelines for the substantive review. If the EP Proposal were to be adopted, and the European Commission consequently gained the power to take over certain critical review procedures and issue a final decision, FDI review within the EU (which was so far a purely national prerogative) would enter a new era.

All in all, although the streamlining of the currently fragmented national FDI screening would be very welcomed, the expanded scope of FDI review can be expected to significantly increase the number of transactions in which FDI screening in (several) EU Member States will be mandatory in the future. Investors would therefore need to prepare for increased FDI review in the EU as well as potentially dealing with the European Commission in critical FDI cases. For cross-border transactions, this means a timely assessment of FDI notification requirements across different jurisdictions, coupled with the effective coordination of any mandatory filings.

The trilogue between the European Commission, the EP and the Council is currently ongoing to develop a common position on the recast of the FDI Screening Regulation. Optimists expect the adoption of the new FDI Screening Regulation still during the Danish Presidency in the second half of 2025. Once the new FDI Screening Regulation enters into force, EU Member States will need to implement it, possibly within two years.

 

 

 

 

 

[1] Regulation of the European Parliament and of the Council on the screening of foreign investments in the Union and repealing Regulation (EU) 2019/452 of the European Parliament and of the Council (COM(2024)0023 – C9-0011/2024 – 2024/0017(COD)).

[2] Currently Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union.