From Fragmentation to Harmonisation, From Investment to Security? – Entering the Trilogues on the Revision of the FDI Screening Regulation


Transaction lawyers across the EU are by now sufficiently familiar with a third screening tool, alongside merger control and foreign subsidy control: foreign direct investment (FDI) screening. As the Trilogues on the revision of the FDI Screening Regulation start in Strasbourg today, a few thoughts to reflect on the positions of the European Commission, the European Parliament, and the Council.

Our previous blog posts on the revision of the FDI Screening Regulation can be assessed here, here, here, or here.

 

To recap

The 2019 FDI Screening Regulation was the first legal instrument on the EU level for FDI screening. It aimed to:

  • address the (geo)political and economic impact of shifts in global power distribution,
  • respond to international regulatory competition in FDI screening (e.g., from the US, Canada, Australia, and Japan); and
  • tackle problems of decentralisation, fragmentation, and diversity in FDI screening at the Member State level.

Based on Art. 207 TFEU, its main innovation was the establishment of a cooperation framework for FDI screening between the European Commission and the Member States. This cooperation mechanism allows for the exchange of information among Member States. It further enables the European Commission to issue non-binding opinions when an investment threatens the security or public order of more than one Member State or when it could undermine a strategic project or programme of interest to the entire EU. Under the 2019 Regulation, FDI screening remained the exclusive responsibility of the Member States. While the creation of a screening mechanism was voluntary, Member States were required to provide details about the features of existing or new mechanisms. Additionally, they were free to determine the scope, coverage, and procedural requirements of such mechanisms.

A 2022 OECD Report, a 2023 Special Report of the European Court of Auditors, and several annual reports as well as extensive evaluation of the European Commission named shortcomings of the existing 2019 FDI Regulation. Criticism has centred on the lack of FDI screening mechanisms in some Member States. Greece, for example, only joined recently in May 2025, leaving just Cyprus and Croatia without an FDI screening system (with Bulgaria lacking an implementing system and thus being de facto without FDI screening). The scope, procedures, and timelines varied on Member State level – and the Xella problem remained (see our blog here). This situation leaves the EU resembling a patchwork quilt – recall “A Chain Works Just as Well as its Weakest Link”.

 

The European Commission proposal

Consequently, the European Commission proposed a revised Regulation on 24 January 2024, along with five initiatives “to strengthen the EU’s economic security at a time of growing geopolitical tensions and profound technological shifts.“ In an effort to further harmonise FDI screening, the new Regulation is intended to be based on both the common commercial policy under Article 207 TFEU and the internal market under Article 114 TFEU.

To summarise the draft, the European Commission proposes:

  • Mandatory screening for all EU Member States,
  • Minimum sectoral scope listed in Annex I and II, consisting of 1) Projects or programmes of Union interest (e.g. the Union Space Programme, Horizon 2020, IPCEIs, etc.), 2) a common list of dual-use items subject to export controls, 3) the common military list of the European Union, 4) critical technologies, such as advanced semiconductors, artificial intelligence, and quantum technologies (which, according to the Commission, should in the final regulation be more or less aligned with the sectors covered by its Outbound Investment Recommendation of January 2025), 5) Critical medicines, and, 6) critical entities and activities in the Union’s financial system (eg central counterparties, payment systems and institutions, central securities depositories, etc.)
  • Coverage of indirect intra-Union investments, i.e. intra-Union investments by investors ultimately controlled by third-country persons (addressing the Xella problem),
  • Minimum harmonisation of Member States procedures, such as timelines, standstill obligations, two-phase investigations, judicial review of decisions, etc.,
  • Enhanced information exchange and accountability via the cooperation mechanisms, including a duty to state reasons when not following a Commission opinion
  • An own initiative procedure for Member States (for investments in the territory of other Member States) and even the European Commission, where foreign investments were not notified under the cooperation mechanism, if they believe the investment may harm security or public order in that Member State or the EU.

 

The European Parliament’s position

Largely relying on the Committee on International Trade’s report and amendments, the European Parliament adopted its position for the upcoming trilogue on 8 May 2025. The Parliament sees the urgency against the current geopolitical climate and the definite need to stand closely together on European Union level.

Consequently, but overall surprisingly, the Parliament wants to go even beyond the Commission’s proposal by:

  • Widening the sectoral scope to include media services, critical raw materials, the transport industry and infrastructure, electoral infrastructure, and very large farms (>10.000 hectares), as well as expanding the definition of some sectors mentioned in the Commission draft, such as artificial intelligence or semiconductors,
  • Increasing the harmonisation of national procedures, including mandatory screening of certain greenfield investments,
  • Granting the Commission investigation and decision-making powers on its own initiative in cases where an investment is suspected of affecting the security or public order of more than one Member State or in cases of disagreement between Member States regarding potential security or public order risks,
  • Introducing a single EU e-portal for all filings at national level.

 

The Council’s position

The Council adopted their negotiating mandate last week, on 11 June 2025. Naturally, an instrument dealing with economic and national security is quite close to the hearts of the Member States. Due to the differing systems and experiences at the Member State level, the Council pulled back to some extent from the European Commission’s draft, maintaining its spirit, but clearly falling short of the far-reaching position taken by the European Parliament. The Council largely focuses on establishing a minimum necessary standard while encouraging Member States to go further within their national systems.

In their mandate, the Council includes:

  • Continued mandatory screening, including the screening of indirect intra-Union investments,
  • A limitation of the scope to 1) projects or programmes of Union interest (with the removal of certain items, such as Horizon programmes), and 2) critical technologies, such as advanced semiconductors, artificial intelligence, and quantum technologies (with some changes to the definitions),
  • An emphasis on the exclusive and final decision-making power of the respective Member States, cancelling any own-initiative procedure by other Member States or the Commission,
  • A proposal for a database maintained by the Commission, containing the outcomes of assessments under national screening mechanisms.

 

Comments

After the kick-off meeting of the Trilogues today, where common ground will be established, the three institutions now face tough negotiations in the coming months. Although the upcoming Danish Council presidency aims to conclude the negotiations by the end of its mandate later this year, the significant differences, especially between the co-legislators, will make finding a compromise a challenging endeavour.

All three legislative institutions recognise the underlying principle of open strategic autonomy that has guided the FDI Screening Regulation from the outset: while Europe needs foreign investment and seeks to remain a reliable destination for it, protecting vital security interests, both of the Member States and of the EU as a whole, is essential. The urgency is clear, and the lessons of history are well understood, given the recent loss of reliable partners and the wars both within Europe and on its doorstep. Still, the investors whom the EU continues to consider reliable need predictability – and they need it sooner rather than later. Even with an agreement by year’s end, a new FDI Screening Regulation is unlikely to be fully operational before 2027, more likely 2028.

Looking at the different mandates of the three institutions, we encounter the classic subsidiarity challenge in the European Union: what is best left to the Member State level and where does harmonised EU action adds value? In the context of FDI screening, this raises a further issue: Member States have – and should retain – the responsibility to safeguard their national security under Article 4(2) TEU and to protect their essential security interests under Article 346 TFEU, which is closely tied to their national sovereignty.

At the same time, Member States may have different interpretations of what constitutes a security risk, creating potential vulnerabilities for other Member States and for the Union as a whole. And here we arrive at the crucial point: what are the common security interests of the Union as a whole? How many Member States must be affected, and what types of security risks are included to mandate action on Union level? The European Union still lacks a clear definition and shared understanding of the concept of common EU security interests. Without it, a truly multi-level European screening mechanism (similar to EU competition and merger control) – where national security interests are screened at the Member State level and common EU security interests at the EU level – remains a distant goal. For international investors, however, the internal market is the EU’s key asset and an attractive investment opportunity. Protecting the internal market as a viable investment ground would be the logical response and should be at the heart of the upcoming negotiations.

 

**

This blogpost includes insights gathered at the 2025 BDI/CELIS German Chapter Investment Screening Conference, 20th Annual Conference of the GCLC on “Present and future role of competition policy and the EU’s open strategic autonomy“, the 2nd Conference on Economic Security and Market Regulation, and the 3rd Annual Conference on Investment Control in Austria and the EU. However, all thoughts shared here are my own and cannot be contributed to anybody else.


Share this content:

I am a passionate blogger with extensive experience in web design. As a seasoned YouTube SEO expert, I have helped numerous creators optimize their content for maximum visibility.

Leave a Comment