INTRODUCTION
The EU FDI screening mechanism, in place since October 2020, allows member states to screen, monitor, and mitigate foreign investments that pose risks to security or public order. It facilitates information sharing between countries and the Commission regarding sensitive investments, particularly in critical technologies, infrastructure, and raw materials. While most EU countries now have national mechanisms, the system focuses on coordination rather than a centralized EU veto.
Under the new FDI screening mechanism, Member States remain responsible for the “review of foreign investments under their own national regime”. [1]The New Regulation makes it mandatory for all the EU Member States to adopt a screening regime. Following final agreement (late 2025/2026), Member States will have 18 months to harmonize national regimes, with full application expected by Q1 2028.
IN DEPTH
Key aspects of the New EU FDI Regulation:
- Minimum Scope of Sectors: The Regulation requires screening in key sectors, including dual-use items, strategic technologies (AI, quantum, semiconductors), critical raw materials, critical infrastructure (energy, transport, digital), and electoral infrastructure. The mandatory sectors, laid down in Article 4(4) of the EU FDI screening Regulation, sets a mandatory minimum scope for screening, and enables Member States to retain the flexibility to maintain or introduce more extensive national approval requirements.
- Expansion of Coverage (Closing Loopholes): The rules will now capture investments made by EU entities that are under the control of a non-EU investor, effectively addressing risks identified in past case law.
Procedurally, a major impact of the Screening Regulation is the EU Cooperation Mechanism created by Article 7 of the EU FDI Screening. Article 7 of the EU FDI Screening Regulation (2019/452) allows Member States with national screening mechanisms to take measures to prevent circumvention, covering “artificial arrangements”. This enables countries to act when an investor is ultimately controlled by a third-country entity, despite using an EU-based vehicle to avoid scrutiny. This development addressed a loophole the European Court of Justice (ECJ) found in the Xella Case. There, the ECJ held that EU entities fell outside the scope of EU investment screening.[2]
The Harmonized Two-Phase Screening Procedure
Article 4(2) of the EU FDI Screening Regulation introduces harmonized two-phase screening procedure, including a mandatory Phase I review of 45 calendar days. This reform mandates all Member States to have national screening mechanisms, specifically focusing on critical technology, raw materials, and infrastructure.
Phase 1 of this mechanism is defined as an initial review period of 45 calendar days. This enables the relevant competent authority (NCA) to determine whether an in-depth investigation is warranted. During this period, the authority screens foreign investments to identify potential risks to security or public order, including checking if the investment falls within the new mandatory sectors (e.g., AI, semiconductors, critical infrastructure). At the end of Phase I, the authority decides to either clear the investment or proceed to a deeper Phase II investigation.
Phase 2 is triggered if Phase I identifies potential security or public order risks, such as whether the investor pursues a third country’s policy objectives through investment; facilitate a third country’s military capabilities, whether it is subject to EU sanctions and the reasons therefore, and other factors. The specific duration for Phase II is not fixed by the proposal, leaving timelines to be determined by individual EU Member States.
CONCLUSION
In conclusion, the objective of the EU’s Foreign Direct Investment Regulation is to make sure that the EU is better equipped to identify, assess and mitigate potential risks to security or public order, while remaining among the world’s most open investment areas.[3] According to the Council’s press release, the revised regulation will enhance the EU’s cooperation mechanism by requiring greater accountability from member states conducting investment screenings.[4]
[1] https://www.clearygottlieb.com/news-and-insights/publication-listing/the-rise-of-the-new-eu-fdi-screening-regulation
[2] https://www.noerr.com/en/insights/eu-foreign-investment-screening-reform-key-elements-of-the-newly-published-proposal
[3] https://policy.trade.ec.europa.eu/enforcement-and-protection/investment-screening_en
[4] https://www.skadden.com/insights/publications/2026/01/eu-advances-update-to-fdi-regulation
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