A. The schedule for the proposed regime of screening foreign direct investments (FDI) in Luxembourg
As in Switzerland, the legislative process for the adoption of a regulation of foreign direct investments ("FDI") is underway, with the adoption of a text that is expected to become law toward the end of 2022 or early 2023.
On 16 July 2021, the Ministers approved Draft Law No. 7885/01 on the establishment of a national screening mechanism for foreign direct investments that may affect national security or public order (the "Draft Law") for the purpose of implementing Regulation (EU) 2019/452 of the European Parliament and Council of 19 March 2019 establishing a framework for the screening of FDI in the European Union (the "FDI Regulation"), which became applicable in October 2020.
On 15 September 2021, the Draft Law was tabled in Parliament.
On 15 April 2022, opinions given by various advisory bodies on the Draft Law were officially submitted to the Parliament: opinions of the independent Luxembourg Audiovisual Authority, the Luxembourg Funds Industry Association, the Chamber of Commerce, the National Commission for Data Protection and, above all, the Council of State. The comments received will probably require the revision of several articles of the Draft Law, some of which have been found to be contrary to the Constitution and the principle of separation of powers. The final text may also be subject to amendments.
The Grand Duchy is therefore lagging behind other European Union ("EU") countries in transposing the FDI Regulation. As at 3 December 2021, 18 of the 27 Member States had put in place FDI screening mechanisms. Amongst others, Germany, France, the Netherlands, Spain, Poland and Italy have already transposed the FDI Regulation into national law. For countries outside the EU, many have adopted equivalent regulations, such as the USA, China, the UK, Turkey and Norway.
B. The context and objectives of an FDI screening mechanism in Luxembourg
The explanatory memorandum of the Draft Law refers to the risk of certain critical infrastructures for the country falling under the control of foreign governments, which could jeopardise national security and public order. In this respect, it is noted that new types of investors have emerged, such as state-owned enterprises linked to foreign governments, which may wish to acquire strategically important EU companies in order to gain access to and influence technologies, information, goods and services that are essential for a country's security. Examples include the robotics, energy and (air)port infrastructure sectors. It was also noted that there was a "lack of respect for the principle of transparency by foreign investors".
The diplomatic tensions that have followed Russia's invasion of Ukraine in February 2022 are a reminder of the need to preserve the continuity of gas and oil supplies in the EU. Similarly, the Covid-19 health crisis has underlined the importance of protecting strategic assets such as healthcare capacity (e.g. production of medical or protective equipment) or related activities such as those of medical research institutes.
The Draft Law is premised upon the balance between
(i) the need to protect national security and the independence of the country's strategic industries and
(ii) the objective of preserving and guaranteeing the attractiveness of Luxembourg as an investment environment open to foreign investment and capital.
As the Chamber of Commerce points out, the Draft Law "must be seen in the context of maintaining an attractive framework for foreign direct investment in Luxembourg". It also indicates that "the financial centre and international capital exchanges are at the heart of the Luxembourg economy and constitute its main asset. It is therefore essential that the Screening Mechanism does not jeopardise the country's competitiveness in attracting foreign direct investment".
For the Chamber of Commerce, the FDI screening mechanism must respect 3 principles:
(i) not be a brake on investments in the Luxembourg economy,
(ii) ensure the protection of Luxembourg and European citizens in an efficient way, and
(iii) be in compliance with the multilateral agreements in force.
C. The main provisions of the FDI draft regulation in Luxembourg
The purpose of the Draft Law is twofold. It aims:
(i) "to establish a national screening mechanism for foreign direct investment (FDI) that may undermine security or public order" and,
(ii) to create "the framework for cooperation with the European Commission and other European Union Member States, in accordance with Regulation (EU) 2019/452".
The key points are as follows:
- Compulsory ex-ante notification regime, i.e. before the investment is made, but no suspensive effect once the notification of the FDI is made;
- Coercive regime: violation of the provisions (lack of notification, non-compliance with the conditions of the authorisation, etc.) can lead to coercive measures such as an injunction to comply with a measure within a certain period of time or even the withdrawal of the authorisation;
- Administrative fines: in case of non-compliance with the conditions of the authorisation or with FDI screening decisions, fines of up to €1M for a natural person and €5M for a legal person can be imposed;
- The competent authorities to issue screening authorisations are the Minister of Economy or the Minister of Finance (both cannot act jointly according to the Council of State);
- Investigation deadlines 1st phase: a maximum of 2 months to decide whether or not to open a screening phase and 2nd phase: a maximum of 60 days for the screening analysis and to issue the screening decision.
Scope of application of the FDI regime:
- Be a foreign investor: an individual or an entity under foreign law that is not a national of the EU or a State party to the European Economic Area agreement.
- The national screening is applicable to FDI that are likely to undermine national security or public order in a Luxembourg entity carrying out "critical activities" in Luxembourg, i.e. the sectors listed are exhaustive: dual-use goods (civil and military), energy, transport, water, health, communications, data processing and storage, aerospace, defense, finance and media. The Council of State has added the food security sector.
- Only FDI that allow foreign investors to exercise "control" over the Luxembourg-based entity are concerned. If an investment in an activity under the scope of the law does not provide for control over the Luxembourg-based entity, the investor does not need to notify. The Council of State added the possibility of "participating in the management" of the entity operating in Luxembourg. To define control, the Council of State suggests not to refer to the threshold of 25 % of the share capital, but to the threshold of 25 % of the voting rights (which allows the inclusion of profit equity not connected to capital but allowing for voting rights).
The Draft Law provides for a 3-step screening mechanism:
- Assessment by the foreign investor as to whether it is concerned by the notification obligation of its FDI: does the investment relate to one of the critical activities concerned and does it enable the acquisition of control over the Luxembourg entity? If applicable, filing of the notification of the FDI;
- After notification, examination of the FDI authorisation request and ministerial decision on whether or not a screening procedure is necessary;
- In case of a decision to open a screening procedure, investigation and screening decision: the FDI is either authorised, authorised under conditions, or rejected, with regard to its potential impact on internal security or public order, on the basis of the screening factors listed in the FDI Regulation.
D. Improvements to be made to the Draft Law
The Draft Law contains a certain number of imprecisions and vague provisions which need to be clarified for legal certainty.
1. The need for more precise definitions for a better understanding of the scope of the FDI screening mechanism
“related activities" to "critical activities" for which an FDI must be notified: Article 2 refers to "related activities likely to allow access" respectively to "sensitive information directly related to the activities" or "to the places where the activities (...) are carried out". Clarification or definition of the terms "related activities" would provide greater legal certainty and it is not sufficient to explain the term by giving the example of a cleaning or security company as mentioned in the explanatory memorandum.
the notion of "control" should also be better defined. In addition to the reference to the threshold of 25% of the voting rights, the Council of State usefully proposes to indicate whether it is a question of direct or indirect control.
For FDI, the Council of State has proposed a more precise definition which is also more in line with the text of the FDI Regulation.
For "portfolio investments", which are excluded from the scope of the law under preparation, the Council of State has also proposed a more precise definition by referring to the absence of effective influence on the management and control of the company subject to an FDI.
2. A better framework of time limits in case of screening of an IDE
The Draft Law allows, as an exception, the foreign investor to proceed with the notification of his/her FDI project 15 days after the crossing of the 25% threshold "following events modifying the distribution of the capital" without specifying these events. It is also useful to specify when the 15-day period starts.
The 2-month periods in phase 1 and phase 2 do not seem mandatory. No provision is foreseen if the time limits are not observed by the Minister who has to decide on the opening of a screening phase or a screening decision. In the first case, the Chamber of Commerce proposes a regime of tacit authorisation once the 2-month deadline has lapsed.
3. A more precise definition of certain screening factors to be taken into account and the relevant circumstances to be considered by Ministers
The Council of State criticised the nature of the screening criterion relating to "the integrity, security and continuity of supply of critical infrastructure" which is less precise than that of the FDI Regulation.
It also noted that when considering an administrative sanction or coercive measure against a foreign investor, some of the relevant circumstances to be taken into consideration are not defined with sufficient clarity.
4. Proposal to suspend the voting rights of a foreign investor who does not comply with the notification and authorisation rules
Regarding administrative measures and sanctions, the State Council proposes to suspend the voting rights of foreign investors who have carried out an FDI without notification or authorisation or who do not comply with the conditions attached to the ministerial authorisation.
E. Conclusion
The substantive and formal comments made on the Draft Law imply a redrafting of the text, which will delay its adoption, probably not before the end of 2022.
As for the application of FDI screening measures by Luxembourg, it is expected that FDI prohibition measures will be very rare in practice, but that conditional authorisations will be preferred.
Finally, the conditions attached to authorisation decisions should be more related to measures concerning the securing of supplies and the distribution chain, the maintenance of IP rights, technology, employment and production capacities in the Grand-Duchy than to structural measures of disinvestment or disposal of assets or measures affecting the governance of entities under Luxembourg law.
Etienne de Crépy, Partner
