CMS Expert Guide to Foreign Investment Screening Laws in Luxembourg

The Luxembourg foreign direct investment (“FDI”) regime is provided for in the law of 14 July 2023 establishing a national screening mechanism for foreign direct investment likely to undermine security or public order, which came into force on 1^st September 2023. This law has been supplemented by a Government decree of 28 July 2023 determining the composition and operation of the interministerial investment screening committee.

Further, Regulation (EU) 2019/452 (EU FDI Screening Regulation) is applicable in Luxembourg.

The Luxembourg FDI law provides for a screening mechanism for investments of any kind that may affect national security or public order, made by a foreign investor in a Luxembourg entity conducting activities in a critical sector in the territory of Luxembourg with the aim of establishing or maintaining direct and lasting relations with such entity, and thus enabling the foreign investor to participate alone, in concert or through an intermediary in the control of the Luxembourg entity.

Investments made in a Luxembourg entity are caught if, as a result of the transaction, a foreign individual or a foreign law governed entity, who is not a national of an EU Member State or of a European Economic Area country (“foreign investor”), acquires, either directly or indirectly, the control of such Luxembourg entity, by one of the following means:

• having the majority of the voting rights of the shareholders or associates of an entity incorporated under Luxembourg law;
• having the right to appoint or remove the majority of the members of the administrative, management or supervisory body of an entity governed by Luxembourg law and, at the same time, being a shareholder or associate of that entity;
• being a shareholder or associate of an entity governed by Luxembourg law and controlling, by virtue of an agreement with other shareholders or associates of that entity, the majority of the voting rights of the shareholders or associates of that entity; or
• crossing the threshold of 25% of the voting rights of an entity incorporated under Luxembourg law.

Portfolio investments in Luxembourg entities, i.e., acquisitions of securities in a Luxembourg entity aimed at making a financial investment without taking control of such entity, are expressly excluded from the scope of the Luxembourg FDI law.

Intra-group restructurings and greenfield investments are not excluded from the scope of the Luxembourg FDI law.

The Luxembourg FDI law lists several activities which are considered as critical and fall into 12 different sectors: development, exploitation and trade of dual-use goods; energy; transport; water; health; communications; data processing or storage; aerospace; defence; finance (central bank and clearing activities); media; and agribusiness (food safety).

In addition, research activities and production activities directly linked to the activities listed above, related activities likely to allow access to sensitive information (including personal data) directly linked to the activities listed above, as well as related activities likely to allow access to the premises in which the activities listed above are carried out, shall also be considered as critical activities.

The Luxembourg FDI law imposes a mandatory notification of any FDI made in a Luxembourg entity and meeting the conditions detailed in paragraph 2. Such notification shall be made by the foreign investor before completion of the envisaged investment.

However, as an exception to such prior notification, the foreign investor is granted a period of 15 calendar days following completion of the transaction to proceed with the notification in the event that the threshold of 25% of the voting rights of an entity governed by Luxembourg law is exceeded as a result of events modifying the distribution of capital.

Despite the notification, the investor may continue with the preparatory steps for the realisation of the contemplated investment, but the transaction may not be closed prior to clearance.

During the screening procedure, the Minister of Economy will consider the potential effect of the FDI on the integrity, security and continuity of supply to critical infrastructures (whether in physical or virtual form), the sustainability of activities relating to critical technologies and dual-use goods, the supply of essential inputs (including raw materials) and food safety, the access to sensitive information (including personal data) or the ability to monitor such information, and the freedom and pluralism of media.

He may also take into account whether the foreign investor is directly or indirectly controlled by the government of a third country (including public bodies or the armed forces), whether it has already been involved in activities undermining security or public order in another Member State, and whether there is a serious risk that the investor is carrying out illegal or criminal activities.

The Luxembourg FDI screening is carried out by the Luxembourg Minister of Economy (the “Minister”), who is assisted by an interministerial investment screening committee. Such committee is composed of four members, being representatives of the Ministry of Economy, the Ministry of Foreign and European Affairs, the Ministry of Finance and the State Intelligence Service.

The foreign investor is responsible for the notification.

Following submission of a notification, the Minister has two months to decide whether the FDI shall be subject to a screening procedure or not, and to inform the foreign investor accordingly.

When a screening procedure is initiated, the Minister has then 60 calendar days to assess if the investment is likely to affect security or public order, and to notify the foreign investor in writing of the approval, with or without conditions, or rejection.

During these two phases, the clock is stopped each time the Minister requests to be provided with additional information, until such information is received.

No fees are imposed for the notification of a transaction or the screening procedure.

FDI proceedings are not public and the Minister does not publish any information on the cases or its decisions.

If an in-scope FDI is made without prior notification or without clearance, it will be possible for the Minister to suspend the exercise of voting rights attached to the FDI and to the securities held by the foreign investor until the situation has been regularized, and to require the foreign investor to modify the transaction or undo the investment at its own expense.

If the authorisation has been granted subject to conditions which have not been complied with, the Minister may:

• order the foreign investor to comply with the conditions within a given period; or
• order the foreign investor to execute within a given period substitution measures for any obligation that has been breached, including the restoration of the situation prior to non-compliance with such obligation, or the transfer of all or part of the activities; or
• suspend the exercise of voting rights attached to the FDI and to the securities held by the foreign investor until compliance and implementation of the conditions; or
• withdraw the clearance granted to the FDI.

Non-compliance with these measures within one month of notification carry a fine of up to EUR 1 million if the foreign investor is a natural person, and up to EUR 5 million if it is a legal entity.