Newsflash | National screening mechanism for foreign direct investments

Jul 20, 2023

On 19 July 2023, the Law of 14 July 2023 establishing a national screening mechanism for foreign direct investments likely to undermine security or public order for the purposes of implementing Regulation (EU) 2019/452 of 19 March 2019 (the “Regulation”) establishing a framework for screening foreign direct investment in the Union, as amended (the "Law") was published in the Official Gazette (Journal Officiel).

The Regulation provided a framework for the introduction of national screening procedures with the aim of upholding security and public order and introduced co-operation arrangements between member states and the European Commission. It left it to member states to define when a screening procedure is to be triggered and set out the specific reasons and timeframes for the screening as well as the administrative framework.

The Law establishes the specific legal rules for the screening of foreign direct investments in Luxembourg.

I. Scope of application

The national screening mechanism applies to foreign direct investments leading to control of a Luxembourg entity carrying out critical activities in Luxembourg that are likely to have a negative impact on security and public order (excluding financial portfolio investments that provide no means of control). Whilst the Regulation defines a foreign direct investment by reference to an “effective participation in the management and control” of a company, the Law stipulates that the foreign investor must have the aim of taking “control” (as defined below) of the Luxembourg company.

For the purpose of this Law, “foreign direct investments” means:

all types of investment,
carried out by a foreign investor (i.e. who is not a national or entity of an EU Member State or a state belonging to the European Economic Area),
acting alone, in concert or through an intermediary, and
which serves to create or maintain lasting and direct links between the foreign investor and the Luxembourg entity,
thus enabling the foreign investor to participate effectively in the control of an entity that carries on critical activities (as defined in the Law) in the Grand Duchy of Luxembourg.

The “critical activities” include, inter alia, certain activities in the energy sector, the transport sector, the health sector, the communications sector, the data processing or storage sector and the financial sector and include related research and production activities and activities likely to give access to sensitive data and facilities. The bill of law stated as an example the taking of control of a firm offering security services or of a firm providing cleaning services.

Control means :

the fact to directly or indirectly
- have a majority of the voting rights of the shareholders or partners of an entity governed by Luxembourg law; or
- have the right to appoint or remove the majority of the members of the administrative, management or supervisory body of an entity governed by Luxembourg law and to be at the same time a shareholder or partner of that entity; or
- be a shareholder or partner of an entity governed by Luxembourg law and to control, by virtue of an agreement entered into with other shareholders or partners of that entity, the majority of the voting rights of the shareholders or partners of that entity;
or pass, directly or indirectly, the threshold of holding 25% of the voting rights of a Luxembourg entity

II. Screening procedure

The foreign investor is under an obligation to notify investments falling within the definition of “foreign direct investments” to the Minister for the Economy (the “Minister”) before the foreign investment is implemented.

Exception: the foreign investor has a period of 15 calendar days in the event that the foreign investment will exceed the threshold of a 25% holding in the capital of an entity governed by Luxembourg law as a result of events modifying the distribution of the capital.

The Minister will first decide within a period of two months whether the direct foreign investment will be subject to a screening procedure. During this period, the investor may continue with his preliminary steps for the implementation of the investment.

Once the Minister has decided to submit the foreign investment to a screening procedure and informed the investor accordingly, the duration of the screening procedure may not exceed 60 calendar days. The foreign investor is not allowed to implement the investment until a final decision has been taken by the Minister.

The Minister will take into account screening factors such as the integrity of, the security of and the continuity of supply to critical infrastructures, the sustainability of activities relating to technologies and dual-use goods, the stability of supply chains, access to sensitive information or the ability to control such information, media freedom and pluralism, etc. He may also consider whether the foreign investor is directly or indirectly controlled by a foreign government, whether the investor has already engaged in activities endangering security or public order in other member states and whether there is a serious risk that the investor will exercise illegal or criminal activities.

III. Administrative measures and penalties

Penalties for failure to notify or authorise

If a foreign direct investment has been made without a notification having been made or authorisation obtained under the screening decision, the Minister may:

suspend the exercise of voting rights linked to the foreign direct investment;
order the foreign investor to modify the transaction or to restore the previous situation at its own expense.

Penalties for non-compliance with authorisation conditions

If the conditions attached to the authorisation are not complied with, the Minister may:

order the foreign investor to comply with the conditions set out in the authorisation within a time limit;
order the foreign investor to fulfil, within a set time limit, requirements in substitution for the obligation not fulfilled, including the restoration of the situation prior to the non-compliance with this obligation or the transfer of all or part of the activities ;
suspend the exercise of voting rights linked to the foreign direct investment ;
withdraw the authorisation.

Non-compliance with the administrative measures ordered by the Minister may lead to the imposition of fines of

a maximum amount of EUR 1,000,000 if the foreign investor is an individual and
a maximum amount of EUR 5,000,000 in the case of a legal entity.

The investor has a right of action against the imposition of the fine before the administrative court within one month of notification of the decision.

IV. Data protection

The Law also governs the processing of personal data collected during the national screening procedure for foreign direct investment and the rights of the persons concerned.

V. Co-operation between member states and the European Commission

The Luxembourg minister of foreign and European affairs (the “Foreign Minister”) will notify the other EU member states and the European Commission if a screening procedure is commenced in Luxembourg.

If a screening procedure is commenced in another member state that is likely to impair the security or public order of Luxembourg, the Foreign Minister may ask the EU member state in which the investment is to be made for information relating to such investment (even if the member state concerned does not commence a screening procedure).

The Foreign Minister may, in cases where the investment is with reason considered likely to have a negative impact on security and public order in Luxembourg, ask the European Commission to provide an opinion and the other member states to provide comments.