Foreign direct investments: focus on the Luxembourg Bill No7578

Note on foreign direct investments

Pursuant to 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 (“FDI”) into the European Union (the FDI Regulation), which entered into force on 10 April 2019 and applies to transactions as of 11 October 2020 in all EU Member States directly, the Luxembourg Parliament proposed on 19 May 2020 a bill of law (bill n°7578) aiming to introduce a foreign direct investment control regime (the Bill) for Luxembourg.

The FDI Regulation contributes to the European Union’s growth by, inter alia, enhancing competitiveness and bringing in capital, however and as stated by the European Commission, FDI may create a risk to security or public order in EU Member States or in the European Union as a whole. This is particularly the case with takeovers of European companies that operate critical and strategic infrastructure in fields such as health, water, aerospace and transport. The lack of transparency in the identification of the tax investors or where such investors have direct or indirect links to a foreign government or public body make such takeovers particularly sensitive.

The Covid-19 crisis exacerbated the need for a legal framework enabling the State to ensure the survival of companies on its territory as well as the protection of Luxembourg’s industries, technologies, strategic interest and primary needs by means of filtering mechanism designed to verify that these investments do not run counter to the interests of security and public order of the country concerned; the other EU Member States and the European Union itself.

Impact of the FDI Regulation and summary of the Bill

The Bill of law defines “foreign investment” as the fact for an investor to acquire a “significant influence” over a company, part of a company, or a group of companies established in Luxembourg. The term “significant influence” is itself defined as the fact of holding directly or indirectly, alone, together or through a chain of control, at least 10% of the shares or voting rights in a company established in Luxembourg.

The Bill defines foreign “investor(s)” as:

a) any natural person who is a national of a country which is not an EU Member State or EEA;
b) any undertaking established outside the territory of the European Union or EEA; and
c) any undertaking established in an EU Member State or EEA over which one or more persons referred to under point a) and b) above exercise control.

The Bill provides for a three stages in the procedure being (i) notification, (ii) pre-assessment and (iii) authorisation or prohibition.

The notification stage

The investor wishing to make foreign investment shall notify the Minister of Economy ahead of the acquisition.

The notification to the Minister shall include:

• the ownership structure chart of the investor and of the company in which the foreign investment is contemplated to be made, including information on the ultimate investor and equity participation;
• the approximate value of the foreign investment;
• the products; services and business operations of the investor and the company in which it is contemplated to be made;
• the EU Member States in which the investor and the company, in which the foreign investment is contemplated to be made, carry out their business activities;
• the funds and sources of the funds for the financing of the foreign investment; and
• the expected date on which the foreign investment is contemplated.

Such notification shall be signed by any authorised signatory and where the foreign investment concerns one ore more persons belonging to a chain of control, the notification may be filed by one of the them on behalf of all the investors part of the chain.

The Bill further refers to the possibility of having a Grand-Ducal Regulation determine a template to be used by investors for the notification and for the documents to be annexed.

Pre-assessment stage

The pre-assessment of the foreign investment by the Minister to determine the likelihood of such investment to affect security and public order or essential national or European interests, is based on objective criteria and subjective criteria.

The objective criteria include, without limitation, the potential effects on:

a) critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure and sensitive facilities, as well as land and property essential for the use of such infrastructure;
b) critical technologies and dual-use items, including technologies relating to artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies, as well as nanotechnology and biotechnology;
c) the supply of essential inputs, including energy or raw materials, and food or health security;
d) access to or control of sensitive information, including personal data; and
e) freedom and pluralism of the media.

The subjective criteria may also be taken into account and include, without limitation:

a) whether the investor is directly or indirectly controlled by a government, including public bodies or armed forces, of a third country, including through ownership structure or significant financial support;
b) the fact that the investor has a history of involvement in activities that undermine national or European security and public order or its essential interests; or
c) the fact that there is a serious risk that the foreign investor is engaged in illegal or criminal activities.

The pre-assessment stage may not exceed thirty (30) days which may be extended by one (1) month once in order to allow the Minister to revise his initial assessment in the light of comments or opinion received from other EU Member States and/or the European Commission.

Authorisation or prohibition stage

Once the pre-assessment phase is completed, the Minister shall inform the investor of his decision within three (3) months - which can be extended by one (1) month - following the day the notification file is complete.

After this period and in the absence of a response from the Minister, the investor is authorised to proceed with the notified investment.

There are mainly three possible outcomes:

1. the Minister authorises the investment;

2. the Minister specifies the terms and conditions on which the notified investment can be made; or

3. the Minister prohibits the investment.

In addition to the above, the Minister may also:

a) suspend the voting rights to the shares or units subject to the Minister’s authorisation;
b) prohibit or restrict the distribution of dividends or remuneration attached to the shares or units subject to the Minister’s authorisation;
c) temporarily suspend, restrict or prohibit the free disposal of all or part of the assets owned by the company subject to the foreign investment; or
d) appoint an agent to ensure the protection of national interests in the company subject to the foreign investment. This agent may oppose any decision of the company's organs that could harm these interests.

Sanctions

The Bill provides for (i) administrative sanctions and (ii) criminal sanctions.

With respect to the administrative sanction, if a foreign investment has been made without being notified or without having the required authorisation, the Minister may order the investor to:

1. file an application for authorisation;

2. restore the previous situation at its own expense; or

3. modify the foreign investment.

The Minister may impose a penalty on the injunctions in order to encourage the investor to comply with them. The amount of the penalty payment per day for the established breach may not exceed EUR 1,250, without the total amount imposed for the established breach exceeding EUR 25,000.

With respect to the criminal sanction, an imprisonment of five to ten years and a fine of up to:

• twice the amount of the foreign investment;
• 10% of the annual turnover excluding tax of the company carrying out the activities covered by the investment,
• five million euros by a legal person investor,

or one of the above penalties only.