On July 14, 2023, Luxembourg adopted a new law introducing an FDI screening mechanism that may affect security or public order.

The law entered into force on September 1, 2023.

Summary of major changes in 2023

It is the first time in Luxembourg that a national screening mechanism has been put in place for FDI

The law implements in Luxembourg European Regulation (EU) 2019/452 of the European Commission and the Council on March 19, 2019 regarding establishing a framework for screening FDI in the EU

Who files?

Foreign investors are required to make a notification to the Luxembourg Ministry of Economy prior to making an FDI.
A foreign investor is defined as an individual or a legal entity who is not a national of either an EU Member State or a state party to the agreement on the European Economic Area (EEA) that is intending to make or has made an FDI.

Types of deals reviewed

The screening mechanism applies to FDIs made by foreign investors.

An FDI is an investment of any kind made by a foreign investor that aims at creating or maintaining long-term and direct relationships between the foreign investor and the Luxembourg entity receiving the funding, thus allowing the foreign investor to effectively participate, alone, in concert or through interposition, in the control of that entity that carries out a critical activity in Luxembourg.

The notification requirement applies to FDIs, other than portfolio investments, which are likely to be detrimental to security or public order, in an entity incorporated under Luxembourg law carrying out critical activities in Luxembourg.

The following activities are deemed critical: dual-use goods; energy; transport; water; healthcare; telecommunications; data processing storage; aerospace; defense; finance; media; and agrifood.

Research and production activities directly connected to the above ancillary activities that may grant access to sensitive information directly connected to the above; or access to places where the activities listed above are carried out are also deemed critical.

The law does not provide for a minimum investment threshold, meaning that all investments, irrespective of their size, may be subject to screening.

Scope of the review

The foreign investor must notify the ministry of: the ownership structure of the foreign investor; the approximate value of the FDI; the operations of the foreign investor and the Luxembourg entity; the countries in which the foreign investor and the Luxembourg entity conduct business; the financing of the FDI and its source; and the date on which the FDI is planned or has been made.

The ministry will then decide whether a screening is required. The decision to proceed with a screening is notified to the foreign investor within two months.

If the ministry decides to proceed with a screening, the following factors will be considered: the integrity, security and continuity of supply of critical infrastructures, whether physical or virtual, linked to a critical activity; the sustainability of activities related to critical technologies and dual-use goods; supply of essential inputs, including raw materials, and food safety; access to sensitive information, including personal data, or the ability to control such information; and freedom and pluralism of the media.

The following factors may also be taken into account: if the foreign investor is directly or indirectly controlled by the government of a third country; if the foreign investor has already been involved in activities that undermine security or public order in a member state; and if there is a serious risk that the foreign investor is engaged in illegal or criminal activities.

The FDI cannot be made before a screening decision authorizing the investment is taken by the ministry.

Review process timeline

As a matter of principle, the review process of the notification must not exceed two months from its submission; and in case of initiation of the screening, the process must not exceed 60 calendar days. The ministry may request additional information throughout the screening procedure, which will be suspended until such additional information is provided.

Following the screening process, the ministry will notify its decision to the foreign investor. If the FDI is authorized, such authorization may be subject to conditions set by the ministry.

Decisions of the ministry regarding FDIs may be appealed to the Administrative Court. The appeal must be lodged within one month of the date of notification of the decision, failing which it will be time-barred.

How foreign investors can protect themselves

Foreign investors must carefully assess in advance whether the FDI is likely to be subject to the Luxembourg screening mechanism. Accordingly, at an early stage of the contemplated transaction, it is critical to adjust appropriately the transaction documentation and timing for completion, as well as to be assisted by local counsel in the notification process with the Luxembourg Ministry of the Economy.

Investors may also try to restructure their investments such that they qualify for the portfolio investment exemption. According to the law, a portfolio investment is an acquisition of securities made with the intention of completing a financial investment that does not enable the foreign investor to exercise, directly or indirectly, control of the entity governed by Luxembourg law. Thus, investing in an investment fund managed by an asset manager alongside other investors should exempt investors from the requirements under the law.

Alternatively, the foreign investor may seek to ensure that it will not control the relevant entity, as control is one of the triggers for FDI notification.

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