Up & Coming – Luxembourg's Foreign Investment Control Regime

Recently, a bill ("Bill") was introduced in Luxembourg’s parliament seeking to set up a national screening mechanism for foreign direct investment in Luxembourg.[1]          

Foreign Investor and Foreign Investment

The Luxembourg regime introduces a mandatory notification and pre-approval requirement for certain foreign direct investments made by foreign investors who are nationals of non-EEA member states or entities established outside the EEA[2].

Which activities are covered?

The regime applies to target entities established under Luxembourg’s laws that carry out certain activities designated as "critical activities" under the Bill.[3] These include activities, inter alia, in the energy sector; the transport sector; the water sector; the health sector; the communications sector; the financial sector, etc.

The Bill also states that all research and production activities that have any relevance to the "critical activities" should also qualify as "critical activities". In addition, the same approach applies to the activities, which allow access to the premises where "critical activities" are carried out.

Which transactions are covered?

Investments made by foreign investors, which allow them tocontrol a Luxembourg company operational in the aforementioned critical activities or related activities, are covered under the regime. The control is deemed to be acquired when a foreign investor:

• acquires a majority of voting rights in the Luxembourg company;
• acquires the right to appoint or dismiss the majority of members of administrative, management or supervisory body of the Luxembourg company and is a shareholder / partner of this company; or
• acquires a share interest exceeding 25% in the Luxembourg company, directly or indirectly.[4] 

Importantly, the national screening mechanism does not apply to portfolio investments, which imply passive investments in securities made with the expectation of earning a return without the intention to control the Luxembourg company.[5]

What are the obligations under the filing process? Does the Bill prescribe timelines?

The FDIs that meet thresholds must be notified to Luxembourg’s Ministry of Economy before the foreign investment takes place.[6]

The Inter-Ministerial Investment Screening Committee advices the Ministers on whether the notified FDI should be subject to a screening procedure. Whether they decide to initiate a screening procedure or not, the Minister of Economy notifies the investor of the decision made within 2 months of acknowledgement of the notification.

In case they decide to initiate a screening procedure, the FDI may not be completed until a screening decision authorising the FDI has been made.

The Ministers will use different "filtering factors" to determine whether the FDI is likely to affect security or public order. Consideration is particularly given to potential effects on integrity, security and continuity of supply of critical infrastructures (physical or virtual) related to the critical activities; sustainability of activities related to critical technologies and dual-use items; supply of essential inputs including raw materials and food security; access to sensitive information, including personal data, and freedom and pluralism of the media.

Ministers would also assess whether the foreign investor is controlled by a government / public bodies / armed forces of a third country; or has already been involved in activities undermining security and public; or if there is a serious risk of the foreign investor engaging in illegal activities.

Sixty calendar days are permitted to complete the screening procedure, once initiated. A decision to approve the FDI can be conditional, determined in light of filtering factors in order to keep security / public order intact. The investor may challenge the decision in accordance with general administrative law procedures.

What administrative measures / sanctions can be taken?

The Bill provides for various sanctions, depending on the seriousness of the relevant breach. In case the FDI has been made without prior notification and the respective approval, the foreign investor may be ordered to modify or unwind the FDI at its own cost. In addition, in case of eventual non-compliance, fines of up to EUR 1 million and EUR 5 million on natural persons and entities respectively, can be imposed.

Cooperation mechanisms with other EU members

Once a screening procedure is initiated, the Ministers must simultaneously notify the other EU Member States and the European Commission ("EC"). The Bill also states that if the investment is planned or carried out in another EU Member State, which may cause security / public order concerns in Luxembourg, the Ministers can request information from such Member State and can even request opinion / comments from the EC or the Member States.

Conclusions

Following the global trend, Luxembourg became another EU jurisdiction to have tightened the rules.

The Bill introduces Luxembourg’s FDI regime for the first time. It applies to FDIs in a Luxembourg company carrying out critical activities that may adversely affect national security or public order. Given the broad scope of the Bill and a series of administrative measures and sanctions in case of non-compliance, potential non-EEA investors are advised to carefully assess whether their proposed investments are likely to undergo a screening mechanism, and if so, whether the expected timelines account for such a process.

[1]     The Bill can be accessed here.

[2]     Including entities, whose ultimate beneficial owner is a non-EEA entity or national.

[3]     Art 2(2).

[4]     Art 3(3).

[5]     Art 2(1) and Art 3(4).

[6]     Unless the foreign investor crosses 25% shareholding threshold (due to modified distribution of the capital), in which case a foreign investor has 15 calendar days to notify; see Art 5(2).