Foreign investment control in the Benelux… Part 3 – Luxembourg launches new foreign investment screening regime

The Luxembourg foreign investment control regime entered into force on 1 September 2023. 

This means that transactions signed as of that date will need to be notified provided they meet the conditions that we describe in our article below.

In 2023, Luxembourg has not disclosed the exact number of notifications it has received. However, the European Commission’s Fourth Annual Report on the FDI screening into the EU (see here for our Linklaters post on this report) reveals that Luxembourg made between 0 and 5 notifications under the EU cooperation mechanism (i.e. there were between 0 and 5 instances in which Luxembourg initiated a screening phase (or phase II)).

Investor scope

Similar to the Belgian regime (but in stark contrast with the Dutch rules), the Luxembourg regime only catches investments by non-EEA investors. The regime targets individuals who are not nationals of an EEA Member State, entities established outside the EEA, and entities whose ultimate beneficial owner is a non-EEA entity or national.

Target scope

The regime applies to companies governed by Luxembourg law (i.e. an entity established in Luxembourg) that carry out “critical activities” in Luxembourg. The regime, however, also covers indirect acquisitions (provided they confer “control”, as explained below). That means investments in a non-Luxembourg entity can also trigger a filing if the target has a subsidiary established in Luxembourg. The substantive test is always limited to the local subsidiary’s activities.

The following sectors fall within the ambit of “critical activities”: 

• the aerospace sector: space operations and the exploitation of space resources; 
• the communications sector: wire, wireless, satellite, postal and courier services;
• the financial sector, and in particular, central bank activities as well as infrastructure and systems for the exchange, payment and settlement of financial instruments (private banking and insurance activities are not covered);
• the energy sector, and in particular, the production and distribution of electricity as well as the distribution of gas, and nuclear and quantum technologies;
• the transport sector, whether by land, water or air;
• the water sector, including water and waste collection and treatment; 
• the health sector;
• the data processing and storage sector, which includes cybersecurity and artificial intelligence technologies;
• the development, exploitation and trade of dual-use items;
• the defence sector;
• the media sector; and
• the agri-food sector: activities related to food safety.

Research activities and production activities related to critical activities are also covered by the regime, as well as related activities that may allow access to the premises where critical activities are carried out (such as a cleaning or security company that has access to the premises of a company that itself has a critical activity) or to sensitive information related to the critical activities.

Transaction scope

The regime applies to investments that lead to a foreign (i.e. a non-EEA) investor acquiring control over the Luxembourg company. This occurs where the foreign investor, directly or indirectly:

• has a majority of the voting rights in the Luxembourg entity;
• has the right to appoint or dismiss the majority of the members of the administrative, management or supervisory body of the Luxembourg company and is a shareholder of this company;
• is a shareholder of this company and, by virtue of an agreement with other shareholders, had a majority of the voting rights in the Luxembourg entity;
• acquires, directly or indirectly, 25% of the voting rights in the Luxembourg company. 

The scope of the regime excludes portfolio investments, i.e. the acquisition of securities with the intention of making a financial investment without taking control of the Luxembourg entity. As such, PE/AIF structures with underlying investments outside of Luxembourg are largely excluded from the scope of the new law (except to the extent that an investment is made in a critical sector in Luxembourg itself).

Process

The new regime creates a mandatory filing obligation to the Luxembourg Ministry of Economy for investments that meet the filing thresholds.

The filing process can consist of one or two stages:

• Notification phase (phase I): Any contemplated investment must first be notified to the Ministry of Economy. By way of derogation, an investor has 15 calendar days to notify when the 25% voting rights threshold is crossed as a result of a new repartition of the share capital (e.g. in case of a capital decrease). Requests for additional information may be addressed to the foreign investor in cases of missing information or if the information provided is deemed insufficient to conduct the assessment. The Ministry of Economy then issues an opinion on whether the investment is liable to threaten national public order or security and whether a screening procedure should be initiated. This decision must be delivered within two months after receipt of the complete notification. 

• Screening phase (phase II): During this procedure, the Ministry of Economy carries out an in-depth assessment whether the integrity, security and continuity of the supply of the so-called “critical activities” might be threatened as a result of the investment. The screening procedure lasts, in principle, a maximum of 60 calendar days from the day it is triggered. However, the Ministries may request further information to assess the investment more thoroughly. Any such information requests will stop the clock until the requested details are submitted to the Ministries.

The initial notification phase review has a suspensory effect. This means that the regime does not allow parties to implement the realisation of the investment ahead of the final decision.

Once a notification is made, the Luxembourg Ministry of Foreign and European Affairs will simultaneously notify the European Commission and other EU Member States of the filing and provide them with all the information contained in the notification so that they can eventually provide comments or request additional details under the EU Screening Regulation (see our earlier post here).

Remedies

Similar to other FI regimes, instead of prohibiting problematic investments, the Ministries can impose conditions for their clearance. Over time, we expect the application of the Luxembourg FI regime to provide more clarity on the nature of potential conditions, but typical FI conditions to be expected include the appointment of trustees, restrictions on access to commercial information and restrictions on (or control over) access to certain sites or works.

An appeal can be brought before the Luxembourg administrative courts against the Ministry's decision.

Enforcement

The regime provides for a series of administrative measures and sanctions in case of non-compliance with the law. 

In particular, where investors implement an investment without prior notification or without having received authorisation from the authorities despite the screening phase having been opened, they may be ordered to modify their involvement or restore the previous situation at their own expense.

In addition, fines of up to EUR 5 million for legal persons and EUR 1 million for natural persons may be imposed in the event of non-compliance. In reality, these caps are quite low when compared to other jurisdictions which impose fines up to 10% of the investor’s annual global turnover or a percentage of the transaction value may be imposed. As such, the actual impact of the fine on large companies is likely to be limited in practice.

Key takeaways for foreign investors

Although the introduction of an FI screening regime constitutes an important political development in a country that has always welcomed foreign investors, we expect the practical impact to be limited. The Luxembourg government has expressed its desire to strike a fine balance between protecting the country’s interests while maintaining Luxembourg as an attractive investment destination. The exclusion of portfolio investments not conferring control from the scope of the regime, as well as the low fine caps, are key examples of this equilibrium.

We nevertheless advise non-EEA individuals and companies contemplating investments in Luxembourg to exercise extra caution:

• Assess at an early stage whether a filing is required for any investments with links to Luxembourg. If so, conduct a careful assessment of whether the deal may potentially impact national security or public order in Luxembourg. 
• The regime brings an additional administrative burden; anticipate potential delays in the implementation of a deal that triggers a filing, especially when national security or public order in Luxembourg is at stake.
• Deal strategy and documentation should cover appropriate FI condition precedents, risk allocation, and co-operation mechanisms.