MEPs back tougher foreign direct investment rules for Europe

MEPs voted by a significant majority to approve an agreement with member states to revise and expand existing EU foreign direct investment (FDI) rules, introducing mandatory screening of foreign investments in sensitive sectors – including AI, financial services, semiconductors and the defence industry – to stop potential security risks across the continent.

The new law will also apply to transactions conducted within the EU where the investor is owned by non-EU individuals or companies, preventing such deals from circumventing the screening framework, as may have been possible under the existing rules.

Andreas Haak, a national security expert with Pinsent Masons in Germany, said the reforms would mark a significant shift towards a more integrated EU investment screening framework. He explained that the planned obligation for all members to implement screening regimes would substantially reduce existing regulatory gaps across the EU.

“At the same time, we are seeing a clear trend towards further tightening at national level – including in Germany – meaning companies will face more comprehensive and more sophisticated screening across the board,” he added.

“The practical implications are clear: a significantly broader range of transactions will become notifiable, including deals that previously fell outside the scope of review.”

In 2024, national screening authorities across the EU reviewed over 3,000 investment transactions, and the new regime is expected to capture a significantly greater number. At the same time, the revised framework introduces filtering criteria designed to ensure both national authorities and the Commission focus on transactions that are potentially sensitive.

In total, 508 MEPs voted in favour of the new regime, with 64 voting against it and 90 abstaining.

The new rules will make it easier for the Commission to review deals across the EU to identify and manage potential risks to security or public order, while continuing to encourage foreign investment. As part of the process, some procedures for national screening will be streamlined to reduce complexity, with greater cooperation between screening authorities in member states and the European Commission to improve cross-border investigations.

Under the reforms, incoming investment into specific sectors around defence and dual-use manufacturing, AI and quantum computing, financial services and critical raw materials will require mandatory screening, with the creation of a shared database for screening authorities across the EU.

The reforms will also introduce enhanced transparency obligations for member states, requiring the publication of guidance on the scope of their screening mechanisms, as well as annual reporting.

National governments of EU countries will still retain final approval for investment, and can impose their own conditions, but the European Commission will have a greater role for scrutinising deals with a broader security implication for the continent.

Paul Williams, investment screening expert with Pinsent Masons, said the revised rules were reflective of an increasing global trend.

“Geopolitical tensions and global trade developments in recent years have led to various jurisdictions implementing new FDI regimes, such as the UK, numerous EU member states, and indeed the EU’s own framework regulation that is currently being revised,” he said

“Jurisdictions outside Europe with more established FDI regimes, such as Australia, have likewise continued to refine their rules in response to evolving international conditions.”

The EU’s original FDI rules – which are currently in force but will eventually be replaced by the new regime – were introduced in October 2020. Geopolitical developments since then, including the Covid-19 pandemic and the Russia/Ukraine war, have hastened the need for further reform.

European Parliament rapporteur Raphaël Glucksmann said the new law would end “a chapter of European naivety” in how it dealt with potential bad actors.

“Certain foreign states are seeking to weaken us,” he added.

“We are turning the page on the wilful blindness of member states that allowed foreign actors to seize control of sensitive sectors of our economy. But our work on foreign investment is not finished – the fight for Europe's independence and sovereignty continues, now with the proposed Industrial Accelerator Act.”

The new FDI rules are yet to receive formal approval from the Council – which is expected this summer – after which they will enter into force and apply following an 18-month period.

Tadeusz Gielas, competition law expert with Pinsent Masons, said: “FDI rules may often need to be considered alongside competition regimes such as merger control and, in some cases, the EU’s foreign subsidies regulation may also apply.

“Careful deal planning and legal analysis at the outset can help manage regulatory risk for M&A transactions that may face scrutiny under such regimes.”

Earlier this year, the European Commission also put forward separate proposals for an Industrial Accelerator Act, which would complement the revised EU FDI regime and allow the introduction of further conditions on certain foreign investment in some strategic sectors such as steel, cement, aluminium, automotive, net zero technologies, and possibly other energy-intensive sectors such as chemicals.