Political agreement to strengthen FDI screening across the European Union

On 11 December, the European Parliament and the Council reached a political agreement to strengthen the EU foreign direct investment (FDI) screening system. This represents a significant milestone in light of the proliferation of FDI screening systems and the broader trend of declining foreign investment in the EU since 2022, as highlighted in the European Commission’s latest annual report.

Main elements of the agreement

The revised framework will require all Member States to establish national screening mechanisms covering a minimum scope, including:

• dual-use items on the EU Common Military List/dual-use items and items on the EU common military list;
• entities active in the energy, transport or digital infrastructure sectors and considered critical by the relevant Member State;
• entities that manufacture, conduct research in or develop semiconductors or quantum technologies or artificial intelligence technology;
• entities active in exploration, extraction, processing, recycling, recovery or stockpiling of strategic raw materials; and
• specific categories of financial service providers, such as central counterparties, securities depositories, operators of regulated markets, operators of payment systems or other systemically important entities.

The agreement further envisages that national procedures should follow a two-phase process, with the first phase subject to a 45 calendar-day deadline, aimed at resolving the majority of notified transactions within that period, while only those posing a greater risk to national security or public order would proceed to a more detailed review.

With a view to promoting consistency in the review process and reinforcing the EU cooperation mechanism, foreign investors could be required to submit notifications on the same day across all affected Member States for transactions with a cross-border impact. In addition, Member States examining a foreign investment will be required to explain how they have considered the comments and opinions issued by other Member States or by the Commission, respectively, through the cooperation mechanism.

The future regulation will establish that Member States may review transactions that have already been completed if the authority considers ex post that the investment may affect public security or public order. According to the latest version of the draft Regulation, this power would apply to completed transactions irrespective of whether they were previously notified.

Finally, the agreement foresees the possibility of establishing an EU online filing portal – at the request of at least nine Member States - for submitting notifications to national screening authorities, and mandates the creation of an EU-level database accessible to those screening authorities.

Practical implications

Regulation (EU) 2019/452 (in force since 2020) required the Commission to review its functioning and effectiveness by the end of 2023. Several subsequent developments have further underscored the need for such a review, including the measures set out in the European Economic Security Strategy; the CJEU judgment in Case C-106/22 (Xella Magyarország) of 13 July 2023; the European Commission’s intervention in case M.10494 - VIG / Aegon CEE of 21 February 2022, which highlighted the need to prevent unjustified national vetoes of authorised concentrations, and the broader global trend towards strengthening national economic security against third-country interference in strategic sectors.

The new Regulation seeks to harmonise FDI screening mechanisms at the European level through three key pillars: establishing a mandatory screening mechanism in all Member States; defining a minimum set of activities subject to screening; and unifying procedural deadlines. While existing divergences among national systems are expected to narrow, the differing national security considerations of Each Member State will continue to require a case-by-case assessment of transactions, as these controls generally subject certain investments to prior administrative authorisation.

A key element in the negotiations has been determining the Commission’s role, which could have gained a more prominent position. Ultimately, however, no paradigm shift will occur: the press release confirms that Member States will retain ultimately responsibility and broad discretion - within the limits of EU law - over decisions to authorise, condition or prohibit FDIs. Nevertheless, in line with the “comply or explain” principle already embedded in the 2019 Regulation, Member States will be required to justify their decision not to follow observations from other Member States or opinions issued by the Commission.

As regards its impact on Spain, the future regulation may entail significant changes to the current framework, which has been in force since 2020 and consolidated over the past five years. In light of the terms of the political agreement, legislative amendments in Spain can reasonably be anticipated in the near term to align domestic rules, including the adoption of a two-phase review process and potential adjustments to the list of sectors subject to screening. The latter may include the incorporation of electoral infrastructure to the list of sensitive sectors, certain categories of financial service providers, and the extension of review powers to completed transactions.

In any event, the initiative will harmonise —rather than standardise— FDI screening across the EU. It will therefore remain essential for foreign investors to adopt an early-state strategy to identify potential national notification obligations, to incorporate in transaction documents appropriate timeframes for regulatory clearance, and to ensure the appropriate allocation of foreseeable regulatory risks.

The new regulation is expected to be approved in the first half of 2026, once the Council and the European Parliament have formally adopted it, and it will enter into force 18 months after its approval.