The new Foreign Direct Investments regime

The Luxembourg Parliament recently passed a law on June 13, 2023 (the "Law") which establishes a screening mechanism for Foreign Direct Investments (“FDI”) in Luxembourg. This mechanism, similar to those implemented by neighbouring European countries, grants the Luxembourg Ministry of the Economy the authority to review foreign takeovers of critical assets. The purpose of this mechanism is to safeguard national security interests, by incorporating the provisions of Regulation (EU) 2019/452, which empowers Member States to assess investments based on security and public order considerations and to take necessary measures to address specific risks.

Definition of an FDI

In accordance to the Law, an FDI refers to an investment made by any investor originating from a third country outside the EU/EEA (the “Foreign Investor”). This investment would allow the Foreign Investor, either alone or through collaboration or an intermediary, to exercise control over an entity incorporated/organised and existing under the laws of the Grand Duchy of Luxembourg (the “Luxembourg Entity”).

The Law defines control as the Foreign Investor directly or indirectly holding the majority of voting rights in the shareholders or partners of the Luxembourg Entity, having the right to appoint or remove a majority of directors or board members while being a shareholder or partner, exercising majority voting rights through an agreement with other shareholders or partners, or surpassing a twenty-five per cent (25%) threshold of voting rights in the Luxembourg Entity.

Sectors concerned by the Law

It should be noted that the Law does not apply to portfolio investments where the acquisition of securities does not grant the Foreign Investor control over the Luxembourg Entity.

The screening mechanism is triggered when the Luxembourg Entity engages in critical activities, which are defined by the Law.

These critical activities span various sectors such as:

• energy;
• transport;
• water;
• health;
• communications;
• data processing or storage;
• aerospace;
• defense;
• financial;
• media; and
• agri-food sectors.

Additionally, research and production activities directly related to critical activities, as well as activities that provide access to sensitive information or premises related to critical activities, fall within the scope of critical activities.

Obligations of the Foreign Investors

Foreign Investors must notify before the FDI under the Law. They must inform the relevant Ministry of their FDI and obtain authorization before proceeding with the investment. In specific cases where a Foreign Investor surpasses the twenty-five per cent (25%) voting rights threshold due to capital distribution events, they have a fifteen (15) days window to notify the transaction.

Powers and role of the Ministry under the Law

The Ministry is obligated to issue a decision within two (2) months of receiving the Foreign Investor's notification, unless additional information is requested, which would temporarily suspend the procedure until the information is provided.

The Ministry evaluates the potential impact of the FDI on security or public order using designated screening factors. These factors include the integrity, security, and continuity of critical infrastructure supply, sustainability of activities related to critical technologies and dual-use goods, supply of essential inputs, access to sensitive information, and freedom and pluralism of the media. Based on the assessment, the Ministry may authorize the FDI, prohibit it, or approve it subject to certain conditions. If conditions are imposed, they must be designed to prevent any compromise of security or public order, and the Foreign Investor is required to report on their implementation.

Sanctions

The Law empowers the Ministry to impose administrative measures and sanctions in cases of non-compliance. These measures can be enforced if the FDI is implemented without prior notification or clearance, or if the Foreign Investor fails to comply with the conditions imposed by the Ministry within the specified timeline. The Ministry is required to contact the Foreign Investor in writing, providing a warning and a fifteen (15) days opportunity for the Foreign Investor to present their observations. Afterward, the Ministry has thirty (30) days to implement the measures deemed appropriate, unless an imminent threat to security or public order exists.

The Law also grants power to the Ministry to suspend voting rights related to the FDI, to order the modification or restoration of the transaction at the Foreign Investor's expense, or rescinding the authorization if screening procedure conditions are not met.

Failure to comply within one month can lead to fines of up to EUR 1,000,000 for natural persons and up to EUR 5,000,000 for legal entities. The amount of the fine is determined based on several factors, such as the seriousness and duration of the infringement, the Foreign Investor's responsibility and financial situation, advantages received, damages incurred by third parties, and any prior infringements committed. The Foreign Investor may appeal a fine within one month of receiving the decision.

The Law is expected to take effect on 1 September 2023 and Foreign Investors planning an FDI with potential security or public order implications after this date should account for the notification deadlines, the Ministry's review and potential imposition of conditions.