On 8 June 2026, the Council of the EU gave its final approval to a new Foreign Direct Investment (FDI) Screening Regulation (see here), completing the legislative overhaul of the EU’s 2019 framework (the European Parliament had already approved the text on 19 May 2026). The new regulation mandates FDI screening mechanisms in all 27 Member States, introduces a common minimum sectoral scope for mandatory prior authorisation, closes a significant loophole for non-EU investors operating through EU-based subsidiaries, and strengthens the EU-level cooperation mechanism. While these reforms mark a meaningful step toward harmonisation, national differences will persist, and foreign investors will continue to navigate a complex, multi-jurisdictional regulatory environment.
I.Background: Why Was a New Regulation Needed?
The EU’s first FDI Screening Regulation 2019/452 entered into force in April 2019 and became fully operational in October 2020. It represented a landmark step: for the first time, a cooperation mechanism was established allowing Member States and the European Commission (Commission) to exchange information on specific inbound investments, with a view to identifying potential threats to security and public order. Critically, however, it stopped well short of imposing uniform obligations on Member States, which retained broad discretion in designing – or indeed choosing not to establish - their own national screening regimes.
Over the years that followed, several structural weaknesses in the 2019 framework came into sharp focus:
- No mandatory screening obligation. Member States were encouraged, but not required, to adopt a national FDI screening regime. This created a patchwork of coverage across the EU.
- Significant divergences between national regimes. Even where screening mechanisms existed, they varied widely in scope, thresholds, timelines, substantive criteria, and procedural safeguards, making multi-jurisdictional transactions difficult to navigate.
- A gap for non-EU investors using EU intermediaries. The 2019 regulation’s definition of “foreign investor” did not cover investments made by EU-based entities ultimately owned or controlled by non-EU investors. This loophole was further crystallized by the Court of Justice of the EU’s 2023 ruling in Xella, which held that investments by EU entities fell outside the scope of the existing regulation and that national screening mechanisms must respect EU internal market rules such as the freedom of establishment.
- An insufficiently structured cooperation mechanism. The EU-level coordination process lacked the structure needed to ensure meaningful and timely input from other Member States and the Commission.
Against this backdrop, and as part of its broader Economic Security Strategy, the Commission published a legislative proposal in January 2024 to replace the 2019 framework, amended and approved by the European Parliament and the Council of the EU.
II. Key Changes Introduced by the New Regulation
1.Mandatory Screening Mechanisms in All Member States
All 27 Member States are now legally required to operate a national screening mechanism. In practice all had already legislated by the time of adoption (Cyprus being the last to bring its regime into operation in April 2026), so the significance lies less in closing a coverage gap than in setting binding minimum standards and reinforcing consistency of scrutiny across the EU.
2.A Mandatory Minimum Sectoral Scope
One of the most consequential changes is the introduction of a mandatory minimum sectoral scope. For investments in targets active in the following areas, Member States must require prior authorisation:
- Dual-use items (civilian products capable of being repurposed for military use);
- Defense-related products and technology;
- Advanced technologies, specifically semiconductors, quantum technology, and artificial intelligence, including research-only activities. The AI component is deliberately narrow: it covers general-purpose AI models (and AI systems based on those models) that are suitable for space or defense applications or that carry systemic risks under the EU AI Act;
- Transport, energy, and digital infrastructures, but only where assessed as critical following a risk-based assessment by the relevant Member State;
- Critical raw materials, covering exploration, extraction, recycling, recovery, and stockpiling, as defined by the Critical Raw Materials Act;
- Financial market infrastructure and systemically important financial entities, including central counterparties, central securities depositories, operators of regulated markets, operators of payment systems other than central banks, other systemically important institutions, and global providers of specialized financial messaging services; and
- Electoral operations management (voting systems and election-management systems)
Two important limitations apply. First, greenfield investments (e.g. investments through the establishment of new facilities or companies in the EU) fall within the regulation’s scope but are excluded from the mandatory prior authorization requirement. Second, Member States retain the freedom to require prior authorization for investments falling outside this minimum scope and to extend requirements to greenfield investments at their discretion. Material differences between national regimes will therefore persist.
3.Closing the Xella Loophole: Expanded Coverage to EU Subsidiaries of Non-EU Investors
In direct response to the Xella ruling, the regulation redefines a “foreign investment” to capture investments made through EU companies that are ultimately controlled by a non-EU investor. The test is “effective participation” in the management or control of an EU target. This can arise not only through shareholding and voting rights but also de facto, via contracts, board representation or supplier relationships. Precise thresholds (including voting-rights levels) are left to Member States.
This is one of the most practically significant changes for deal structuring. Non-EU investors can no longer assume that routing an acquisition through an EU holding entity will place the transaction outside the scope of FDI screening, at least for the minimum list of sectors. That said, most EU Member States already provided for mandatory screening of such transactions. Member States remain free to go further and screen investments by EU entities where a non-EU investor holds only a minority stake.
4.Call-In Powers for Non-Notifiable Transactions
The new regulation empowers Member State authorities to review transactions that did not require prior authorization:
- For non-notifiable investments, the call-in window is at least 15 months and up to a maximum of five years after completion.
- Where prior authorization was required but not sought, the minimum review window is 24 months post-completion.
5.Two-Phase Review and Harmonized Phase I Timeline
National screening mechanisms will now need to incorporate a two-phase review structure:
- Phase I (Preliminary Review): the competent national authority must complete its preliminary review within 45 calendar days from filing. This is a minimum harmonized standard.
- Phase II (In-Depth Investigation): if Phase I reveals that the investment is likely to negatively affect public order or security, an in-depth review must be opened. However, Phase II timelines remain a matter for each Member State. Overall review durations will therefore continue to vary significantly across jurisdictions.
One important nuance: the EU-level cooperation mechanism has its own response deadlines that may, in certain cases, push overall timelines beyond the 45-day Phase I window — effectively making a Phase II review unavoidable even for investments that might otherwise have been cleared in Phase I.
6.Strengthened EU-Level Cooperation Mechanism
The new regulation restructures and reinforces the EU cooperation mechanism, while preserving ultimate decision-making authority at the national level.
Mandatory notification to the cooperation mechanism is now required in the following cases:
- Where the target’s activities fall within the minimum sectoral scope and the foreign investor is State-controlled, subject to EU sanctions, or was previously involved in a blocked or conditionally authorized investment with non-compliant conditions; or
- Irrespective of sector, where the host Member State initiates an in-depth investigation, or intends to impose mitigating measures or prohibit a transaction in exceptional circumstances, provided the target is active in a Union-interest project or has subsidiaries in at least one other Member State; or
- Where a Member State considers that a foreign investment within its screening scope could negatively affect another Member State’s security or public order.
8. Mitigating Measures
The regulation includes an illustrative list of mitigating measures that authorities may impose as conditions of authorization:
- Governance changes and modifications to voting rights;
- Restrictions on access to sensitive information and technologies;
- Continuity of supply commitments and sourcing requirements;
- Cybersecurity protocols; and
- Obligations to store and process specific data within the EU.
The Commission’s new power to propose specific mitigating measures adds a meaningful supranational dimension to what was previously a purely bilateral negotiation between investors and host Member State authorities.
Importantly, proportionality will now be a legally binding standard such that conditions, prohibitions and unwinding orders will need to respect this principle.
9.Transparency and Procedural Rights
The new regulation requires Member States to publish clear and regularly updated guidance on the scope of their screening mechanisms, notification thresholds, and timelines. Parties must be given a genuine opportunity to be heard before a prohibition or conditional authorization is issued. A novel feature also allows stakeholders to confidentially submit information on investments under review which can be relevant both for transaction targets and third parties wishing to flag concerns.
III. Interaction with Other EU Instruments
The new FDI Screening Regulation operates alongside and does not replace several other EU instruments which remain relevant to foreign investment:
- The Foreign Subsidies Regulation and the Anti-Coercion Instrument remain in force as parallel elements of the EU’s Economic Security Strategy.
- Where a foreign investment also constitutes a reportable transaction (a “concentration”) within the scope of EU merger control, both regimes continue to operate in parallel.
- Most significantly, the proposed Industrial Accelerator Act (IAA), published by the Commission on 4 March 2026, introduces a further layer of review for high-value foreign investments in certain strategic sectors (initially electric vehicles, batteries, solar, and critical raw materials). Under the draft IAA, investments exceeding EUR 100 million that result in a foreign investor acquiring 30% or more of the share capital or voting rights of an EU target may be subject to screening where the investor’s home State holds more than 40% of global production capacity in the relevant sector. If enacted, this could create a dual screening obligation for qualifying transactions, adding yet another layer of regulatory complexity.
IV.Practical Implications for Investors
The new regulation will advance harmonization in meaningful ways. At the same time, the preservation of host Member State decision-making authority and the absence of harmonized Phase II timelines mean that the EU (still) falls well short of a centralized screening regime (like CFIUS). The practical implications for investors are significant:
- Pre-transaction due diligence is essential. Early identification of FDI screening requirements, including the new coverage for EU subsidiaries of non-EU investors, will be critical to deal planning.
- Multi-jurisdictional filings must be coordinated simultaneously. The obligation to endeavor to file on the same day across all relevant Member States requires robust cross-border coordination among legal and regulatory teams.
- Phase II timelines remain fragmented. A potential mismatch between the 45-day Phase I window and the timeline for the EU-level cooperation procedure could push some deals automatically into Phase II. Parties should build in a meaningful regulatory buffer into transaction timelines.
- Call-in powers create residual uncertainty. For transactions below screening thresholds, the absence of a mandatory voluntary filing option means that investors cannot obtain formal clearance and must manage residual call-in risk for extended periods post-closing.
- The Commission’s new role in shaping remedies. The Commission’s power to propose specific mitigating measures introduces a supranational dimension to remedy negotiations. Investors should anticipate and prepare for engagement at both the national and EU level.
V.Timing and Next Steps
Following signature and publication in the Official Journal of the EU, the regulation will enter into force 20 days after publication. Member States will then have 18 months to adapt their frameworks, with full transposition expected by end-January 2028. The 2019 regulation will continue to apply to investments filed or completed before the new rules take effect, and the new call-in powers will not apply retroactively, giving certainty to deals currently in progress. Because so much detail is left to national implementation, investors should monitor implementing legislation closely in each relevant jurisdiction, or they could simply ask us and benefit from our know-how and expertise in this area!
Further contributions to this article by Charles Corbusier.
