Bill no. 7885 establishing a national screening mechanism for foreign direct investments likely to endanger security or public order (hereafter, the “Bill 7885”)
The purpose of Bill no. 7885 is to implement the 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 in the European Union (“Regulation (EU) 2019/452”).
As highlighted in the preamble of the Regulation (EU) 2019/452, the investment activity of foreign investors in the European Union (hereafter, the “EU”) is generally seen as beneficial. However, it cannot be excluded entirely that certain investors (i) aim to acquire participations in companies and entities having their registered office in an EU member state to access technologies, knowledge goods or services, which are essential for the security interest of an EU member state or (ii) intend to receive significant influence over a company or entity having its registered office in an EU member state with strategic importance for the EU or the respective EU member state and which could hence compromise the national security of the EU member state.
Luxembourg legislature focuses on the setup of a national screening mechanism, by reconciling through risk mitigation, the imperative need to maintain Luxembourg’s openness, competitiveness and attractiveness with security interest and public order.
Bill no. 7885 was filed on 15 September 2021 and is currently under review with the competent commissions.
The national screening mechanism applies to foreign direct investments, except for portfolio investments, likely to endanger security or public order in a company governed by Luxembourg law carrying out critical activities in Luxembourg.
A foreign direct investment is defined as “an investment of any kind made by a foreign investor, acting alone, in concert or by interposition, and which serves to create or maintain lasting and direct relations between the foreign investor and the Luxemburgish entity for which the funds are intended, thus allowing the foreign investor to effectively participate in the control of this entity with a view to carrying out an activity in the Grand Duchy of Luxembourg as listed in article 2 of Bill no. 7885” (the “Foreign Direct Investment”).
It has to be noted that “Control” within the meaning of the definition of Foreign Direct Investment means that either (i) the investor has the majority of the voting rights (either by being the majority shareholder or by way of a voting agreement with other shareholders) or (ii) the investor has the right to appoint the majority of the members of the company’s administrative body and at the same time is a shareholder of the company or (iii) the investor holds directly or indirectly more than 25% of the share capital in the company.
Article 2, paragraphs 2 and 3 of Bill no. 7885 enumerate a list of activities which are considered to be “critical”, for example:
- production or distribution of electricity;
- nanotechnology and biotechnology;
- data processing and storage;
- activities linked to national defence.
Mandatory notification and examination by inter-ministerial committee and experts
It is contemplated to create an inter-ministerial committee of screening of foreign investments, consisting of representatives from the Ministry of Foreign Affairs, the Ministry of Economy, the Ministry of Finance and the Ministry in charge of the department of State Intelligence (Service de renseignement de l’État), which will be assisted by a group of experts and which will decide upon the Foreign Direct Investments (hereafter, the “Inter-Ministerial Screening Committee”).
The foreign investor has to notify the Ministry of Economy before the Foreign Direct Investment is made. This “ex ante” procedure supports the objective to find a balance between protecting the best interests of the country and maintaining the attractiveness and openness for Foreign Direct Investments.
The accountability of the foreign investor is a key element of Bill no. 7885. It is assumed that a foreign investor inquires about the local investment requirements before acquiring participations in a Luxembourg company. The foreign investor is obliged to evaluate if their contemplated investment might be considered as relevant for the national security or public law in Luxembourg.
The foreign investor has to provide the following information in connection with the notification:
- owner structure of the foreign investor and the Luxembourg company before the investment, as well as beneficial owners;
- approximate value of the transaction;
- products, services and commercial business of the foreign investor and the Luxembourg company;
- the countries in which the foreign investor and the Luxembourg company operate;
- the financing of the Foreign Direct Investment and its sources; and
- the date on which the Foreign Direct Investment shall be made.
Based on the information provided by the foreign investor, the Inter-Ministerial Screening Committee decides whether a screening procedure shall be executed or not. The Ministry of Economy has to notify the decision to the foreign investor within 2 months after the acknowledgement of receipt of their notification.
If the Inter-Ministerial Screening Committee decides that a screening procedure shall be executed for the Foreign Direct Investment, such procedure shall not exceed 60 days after its initiation.
In order to determine whether a Foreign Direct Investment undermines the national security or public law of Luxembourg, the Inter-Ministerial Screening Committee has to take certain potential effects into consideration, as further detailed in article 9 (1) of Bill no. 7885, for example:
- integrity, security and continuity of critical infrastructure supply;
- access to sensitive information;
- freedom and pluralism of media.
The Inter-Ministerial Screening Committee further can take certain potential effects into consideration, as further detailed in article 9 (2) of Bill no. 7885, for example:
- the fact that the foreign investor is controlled, directly or indirectly, by the government of a third country;
- the fact that there is a high risk that the foreign investor carries out illegal or criminal activities.
The decision of screening is taken by the ministers of Foreign Affairs, of Economy, of Finance and the minister in charge of the department of State Intelligence on the advice of the Inter-Ministerial Committee of Screening.
The authorisation of a Foreign Direct Investment may be subject to one or more conditions.
As long as the screening procedure is ongoing, the Foreign Direct Investment cannot be effected until a decision is taken.
If a Foreign Direct Investment has been made without the required notification or authorisation, the Ministries can order the foreign investor to modify the investment or to have the previous situation restored at his expense.
If the conditions under which an authorisation was granted are not respected by the foreign investor, the Ministries can (i) order the foreign investor to respect the conditions or (ii) order the foreign investor to execute prescriptions in substitution for the unfulfilled condition, including the re-establishment of the situation prior to the non-compliance with this condition or the sale of all or part of their participation.
If the foreign investor does not comply with the order within one month, the Ministries may impose a fine of up to EUR 1 million (in case the foreign investor is a natural person) or of up to EUR 5 million (in case the foreign investor is a legal entity).
Creation of contact point for cooperation between EU member states
Bill no. 7885 also specifies the Ministry of Foreign Affairs as single national point of contact with respect to exchange of information with other EU member states and the European Commission.