New FDI screening law in Luxembourg: what non-EEA investors need to know before investing in a critical sector

The Luxembourg parliament has adopted a new law to screen foreign investments in critical sectors (the FDI Screening Law). The FDI Screening law will apply to foreign investors who want to acquire control of Luxembourg entities operating in sensitive areas in Luxembourg. It will enter into force on the first day of the second month following its publication in the Luxembourg Official Gazette.

The FDI Screening Law is meant to protect Luxembourg from any security or public order risks in relation to critical activities. It should not affect most of the international investors/funds that use Luxembourg for structuring or regulatory purposes, unless they have investments in Luxembourg critical activities.

Under the new regime, foreign investors will have to notify the Ministry of Economy in advance of their planned investment and may be subject to a screening procedure, depending on the potential impact of the investment on the security or public order of Luxembourg. The Ministry of Economy will then have the power to approve, condition or prohibit the investment.

The FDI Screening Law also assigns the Ministry of Foreign and European Affairs a coordination role. The Ministry will have to inform the other EU Member States and the European Commission of any screening procedure that Luxembourg initiates. The Ministry will also have the right to request information from them on any FDI that they plan in their jurisdictions and that may affect Luxembourg's security or public order.

This eAlert provides a brief overview of the main features of the new screening mechanism.

1. The FDI Screening Law will apply to certain types of investments made by non- EEA investors

The screening procedure will apply to any contemplated investment that meets the following three conditions:

• it is made by a non-EEA investor (individual or legal entity) (the Foreign Investor);
• it is made in a Luxembourg entity that performs critical activities within the territory of Luxembourg (the Luxembourg Target); and
• it gives the Foreign Investor effective control of the Luxembourg Target.

Control can be achieved by:

(a) directly or indirectly:

• holding a majority of the voting rights of the shareholders of the Luxembourg Target; or
• having the right to appoint or dismiss the majority of the members of the administrative, management or supervisory body of the Luxembourg Target while also being a shareholder of that Luxembourg Target; or
• (controlling, by virtue of an agreement with other shareholders of the Luxembourg Target, the majority of the voting rights;

(b) or, directly or indirectly, exceeding the threshold of 25% of the voting rights in the Luxembourg Target.

Critical activities include, among others, energy, transport, water, healthcare, telecommunications, artificial intelligence and food safety.

The FDI Screening Law does not screen Foreign Investors who only buy securities without taking control or holding companies without critical activities.

2. The Ministry of Economy must be notified of the planned investment in the Luxembourg Target

A Foreign Investor contemplating an FDI that falls within the scope of the FDI Screening Law must notify the Luxembourg Ministry of the Economy of such intention prior to closing the relevant transaction.

The Ministry of Economy has two months to decide whether the investment can proceed or whether it requires a screening procedure. It must inform the investor of the decision. If it initiates a screening procedure, it has 60 days to assess whether the investment poses a risk to security or public order based on several factors, such as the impact of the investment on the infrastructure's integrity, security and continuity.

The Ministry of Economy then notifies the Foreign Investor of the final decision. It can approve the investment, approve it with conditions, or reject it.

3. Violating the FDI Screening Law may lead to administrative measures and penalties

The FDI Screening Law sets different penalties for breaches of FDI rules, such as ordering the Foreign Investor to change or undo the FDI, suspending its voting rights, or withdrawing approval.

The Foreign Investor may also face fines of up to EUR5 million for not following the orders.