On 14 July 2023, Luxembourg adopted the law on (i) the establishing of the national mechanism for the screening of foreign direct investments (“FDI”) which are likely to affect the security or public order and (ii) the implementing of the Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 which empowered the Member States to assess the FDI into the European Union on the grounds of security or public order and to adopt measures tackling specific risks.

Undoubtedly, the FDI are of utmost importance for the global economy and are seen as one of the key drivers of the economic development, however this law aims at screening certain few foreign investors, such as the state-owned companies linked to foreign governments, who would not acquire/control of a company for pure economic reasons, but rather to gain access to technologies, information, goods or services essential to a Member State’s security. Therefore, the FDI allowing a foreign investor to take control of a Luxembourgish company (“LuxCo”) which carries out “critical activities”, shall fall under the screening obligations, as detailed below.

The circumstances triggering the screening, may be summarized and defined, as follows:

A FDI is an investment of any kind made by a foreign investor (from a third country i.e. outside of the European Union/European Economic Area), acting alone, in concert or through an intermediary, aiming to establish or to maintain lasting and direct links between said foreign investor and a LuxCo to whom the capital is made available and enabling effective participation in the management or control of said LuxCo.

The foreign investor will exercise control of the LuxCo, if one of the following conditions are met: (i) it holds the majority of the voting rights of the shareholders/partners of the LuxCo; or (ii) it has the right to appoint or revoke the majority of the board/management/ supervisory board’s members of the LuxCo and it is at once a shareholder/partner; or (iii) it is a shareholder/partner in the LuxCo and controls, pursuant to an agreement with other(s) shareholder(s)/partner(s), a majority of the voting rights of the shareholders/partners of the LuxCo; or (iv) it exceeds, directly or indirectly, the thresholds of 25 % ownership of the share capital of the LuxCo.

The screening mechanism applies if the Luxco carries out “critical activities”. Several activities per sector would be “critical activities” if they are carried out for example in the production/exploitation/sales of dual goods sectors, as well as the activities carries out in the energy, transport, water, health, communications, data processing or storage, aerospace, financial, media and agri-food sectors, or the research and production activities directly related to “critical activities” or the linked activities likely to allow access to sensitive information directly related to “critical activities” of to the premises where such activities are carried out.

The first stage of the screening mechanism will be in the hands of the foreign investor, who starting from 1 August 2023, must (i) notify the Ministry of Economy of his or its intention to invest in one of the activities falling within the scope of the law and (ii) receive an authorization from said authority before making/implementing the FDI. This is a so-called ex ante procedure, which takes place before the investment is carried out. The choice of an ex ante procedure rather than an ex post procedure stems from the desire to strike a balance between protecting the country’s best interests and maintaining its attractiveness and openness to FDI.

By derogation from the ex ante procedure, a foreign investor, who exceeds the thresholds of 25 % ownership of the share capital of the LuxCo, as a result of an event altering the share capital repartition in the LuxCo, during implementing the FDI, must notify the Ministry of Economy, within 15 calendar days as of the occurrence of said event.

The foreign investor’s notification should include, inter alia, the following information: (i) the ownership structure of the foreign investor, as well as of the LuxCo, (ii) the approximate amount of the FDI, (iii) the products, services or trading activities of the foreign investor, as well as of the LuxCo; (iv) the countries where the foreign investor and the LuxCo carry out trading activities; (v) the funding and the sources of the FDI, etc. The Ministry of Economy may ask the foreign investor to provide any missing information or any additional information.

In determining whether a FDI is likely to affect security or public order, the Ministry of Economy will consider the FDI’s potential effects (the so-called “screening factors”) on, amongst others : (i) the integrity, security and continuity of the supply of critical infrastructures, whether physical or virtual, linked to “critical activities”, (ii) the sustainability of activities related to critical technologies and dual-use goods, (iii) the supply of essential inputs, including raw materials and food safety, (iv) the access to sensitive information, including personal data, or the ability to control such information, and (v) the freedom and pluralism of the media.

In addition, the Ministry of Economy may also consider, in particular (i) whether the foreign investor is directly or indirectly controlled by the government, including state bodies or armed forces of a third country, including through ownership structure or significant funding, (ii) whether the foreign investor has already been involved in activities affecting security or public order in a Member State; or (iii) whether there is a serious risk that the foreign investor engages in illegal or criminal activities.

Upon the assessment of all circumstances, information contained in the notification and screening factors, the Ministry of Economy can either authorize the FDI, prohibit it or authorize it subject to the fulfilment of certain conditions. In the latter case, the foreign investor shall report on the implementation.

Moreover, the Ministry of Economy can apply administrative measures (such as the voting rights be suspended or the obligation of the foreign investor to alter the transaction or to restore the economic situation prior the implementation of the FDI) and financial sanctions (i.e. fines up to EUR 5,000,000 for foreign investors being legal entities), in case a FDI has been implemented without the ex ante notification or authorization has been obtain prior the implementation of a FDI or where the conditions set forth by the authorization have not been met by the foreign investors. 

The law will enter into force on 1 September 2023.