Tug-of-War? Determining the mandatory scope for the new FDI Screening Regulation

Part 2 in the CELIS blogseries on the revision of FDI Screening Regulation 2019/452.

Authors:  Andrew Hill (AmCham EU, Brussels), Floor Doppen (University of Antwerp), Leonard von Rummel (Partner, Blomstein)

Introduction

When the European Commission published its proposal for a revision of the FDI Screening Regulation (‘the Regulation’), observers quickly identified the delineation of the minimal sectoral scope for mandatory authorisation as one of the key discussions. For this reason, we are kicking off our in-depth series by exploring what is arguably one of the most impactful and controversial aspects of the Regulation.

The minimum mandatory scope for foreign investment screening across Europe aims to specify which sectors are guaranteed to receive aligned and coordinated investment screening under the Regulation in all Member States. This scope is outlined in Annex I and Annex II of the Commission’s proposal. While co-legislators agree that a mandatory scope is needed to fulfil the EU’s and Member States’ economic security and harmonization objectives, they disagree on how it should be designed and which sectors should be included.

The design of the list has major implications both for the EU’s economic security objectives as well as for Member States’ and companies’ capacity to comply with the Regulation. An overly broad scope risks overwhelming screening teams with low-risk cases, detracting resources from high-risk investments and increasing costs for screening authorities and companies alike. Conversely, a too narrow scope may leave certain sectors unscreened, or lead to the unilateral adoption of divergent legislation if multiple member states end up screening technologies beyond the confines of the mandatory scope.

Naturally, the debate is highly political. Lawmakers feel the responsibility to balance national security with practical considerations for companies or screening authorities. Politically, they may feel pressure to respond to the needs of strategic industries or key constituencies.

Luckily, given the structure of the mandatory scope, much of the debate has technically revolved around the analysis and comparison of a few texts: the Dual-Use Regulation and the Common Military List (‘export controls framework’) as well as the critical technologies defined in the 2023 Commission Recommendation on critical technology areas for the EU’s economic security for further risk assessment with Member States (the ‘critical technologies list’)^[1]. These texts form the basis for most of Annex II of the proposal.

The presence of these three lists has led to significant analysis of their overlap, as well as fundamental questions on how to design and update a minimum mandatory scope that ensures both a level-playing-field and sufficient reactivity to evolving risks. This blog analyses the public positions of the Commission, Council and Parliament and points out some of the key questions and divergences which observers should watch for during the negotiations.

Why does the scope matter so much?

Co-legislators are balancing three core considerations in their negotiations over the scope:

• Effectiveness: A mandatory scope is necessary to meet (economic) security objectives and ensure that certain transactions are effectively screened across the entirety of the EU, so that they don’t fall through the gaps that arise between different Member State jurisdictions.
• Efficiency: The mandatory scope should ensure that screening authorities can actually screen all notifications submitted to them in a timely fashion, by choosing a targeted and well-defined group of technologies that limits the notification of transactions with low national security or public order nexuses.
• Level Playing-Field: A mandatory scope should be designed in a way that brings sufficient convergence around the breadth of the scope to prevent significant fragmentation within the Single Market, that could undermine competitiveness and feed into regulatory arbitrage.

The discussion around effectiveness and efficiency involves both national security and proportionality, respectively. Foreign investment screening is not effective if it does not require the notification of investments into a sufficient number of sectors across all Member States. However, it is not efficient if it requires so many pre-emptive notifications that it prevents screening authorities from efficiently screening them, both limiting the amount of resources that can be devoted to adequately screening high-risk cases (impacting effectiveness), and deterring investment due to protracted review periods.

At present, investment screening suffers from the latter inefficiency, with many transactions unnecessarily notified. As reflected in Commission statistics, out of the cases notified to the Commission in 2023, 92% of cases were closed in Phase 1, 8% were closed in Phase 2, and the Commission only issued an opinion in <2% of cases. Statistics vary at the national level, with Germany only issuing restrictive measures on 3% of cases in 2024, and Belgium only opening a Phase 2 investigation in 7% of cases between 2023-2024. France is a notable outlier: in 2023 (latest figures available) 52% of decisions for applications for authorisation were approved, of which 44% were subject to conditions.

Weaknesses in the scope can also create level playing-field concerns. Inserting broad definitions with unclear criticality thresholds would leave significant room for divergent implementation that would perpetuate complexities for investors navigating different frameworks, leading to over-notification. However, not providing enough guidance on the scope in the Regulation would also create divergence should the Regulation miss key sectors which multiple Member States choose to screen. Additionally, a static list that is not regularly updated may also limit the effectiveness of the Regulation overtime and create divergence between Member States who can more easily adapt their legislation to address new risks.

As we will discuss below, a key area for this discussion revolves around how suitable the export control framework would be as the sole basis for mandatory notification. In brief, aligning with the export control framework is appealing to those who see procedural efficiency and a level-playing-field for a core set of technologies and items as vital to economic security. Content-wise, it is robust, well-understood by investors and screening authorities, and strikes a balance between the breadth of transactions covered and their relevance. Structurally, it is updated regularly in a well-agreed-upon way. Its nature may change as well, should it become the majority basis for mandatory scope under the Regulation. However, to others, alignment around the export controls framework would not provide the dynamism necessary to address rapidly-changing risks and open the door to divergence around technologies not sufficiently covered by today’s export controls framework.

The co-legislators may view these three considerations in relation to the youth of the Regulation and of many national regimes. The different legislators have different priorities and considerations to take into account, and tug into varying directions when it comes to determining the scope and navigating the unholy trinity of effectiveness, efficiency and a level playing field.

A tug-of-war?

The co-legislators’ positions juggle these three key considerations. Their positions on the scope broadly align with the trends identified in our first blog post, with the Commission setting baseline alignment with EU priorities, the Parliament seeking to expand the scope to new sectors, and the Council seeking to consolidate the scope to ensure maximum clarity and facilitate implementation domestically.

The Commission Proposal

The Commission’s proposal aligns the mandatory sectoral scope with 6 lists across Annexes I and II:

• Projects or programmes of EU interest (Annex I)
• The export controls framework (Annex II paragraphs 1 and 2):
  • Common list of dual-use items subject to export controls
  • Common Military List of the EU
• The critical technology list comprising 10 emerging technologies (Annex II paragraph 3)
• Critical medicines (Annex II paragraph 4)
• Critical entities and activities in the Union’s financial system (Annex II paragraph 5)

These were seemingly proposed to lay out a framework for discussion rooted in the export controls framework, economic security strategy, and key infrastructure areas.

Most amendments have concentrated on Annex II, and very specifically on the critical technology list, with both the Parliament and the Council leaving the reference to the export controls framework intact. Stakeholders had specifically criticised the critical technology list for its overlap with the dual-use list and lack of sufficient precision or legal clarity. In fact, many of the sectors in the critical technology list overlap with the Dual-Use list.

For instance, many of the items under Annex II paragraph 3 point e, ‘Advanced connectivity, navigation and digital technologies’ are covered by Part IX – Category 7 and Part X – Category 8 of Annex I of the Dual-Use list. Point f’s ‘Advance sensing technologies’ under a variety of codes relating to electro-optical, radar and sensing technologies, and point g’s ‘Space & propulsion technologies’ under Part XI – Category 9. Analyses of the other points produce similar results – coverage of the critical technologies under the well-understood export controls framework.

Importantly, many Member States already screen many of the sectors that are part of the export controls framework in their own domestic legislation. Introducing broad definitions that duplicate technologies covered by the technology list, could create significant divergence in implementation. Sensitive technologies, as defined by the Dutch Screening legislation (wet Vifo, Art. 8 §1 (a) and (b)), refers explicitly to the export control framework. Similarly, the Belgian screening legislation singles out the export control framework to delineate part of their screening competences (Samenwerkingsakkoord, Art. 4 §2 2°(b)). In Germany, only parts of the Dual-Use Regulation are screened[2] as well as all goods of the (German) military list are encompassed (which has a broad overlap with the common military list of the EU). For them, the Regulation as the Commission proposed it would expand their scope.

Besides these overlaps, stakeholders identified difficulty with complying with the critical technologies list on the basis of its drafting. While the export controls framework is well-understood, the critical technology list lacks the elements of a well-designed list: Namely, criticality thresholds and precise definitions of technologies. For instance, many companies use AI in many processes and technologies (a practise that only stands to increase). Understanding to what extent the use of ‘AI-enabled systems’ under point I for robotics and autonomous systems triggers notification is an uncertain activity and advisers will often advise caution, leading to too many pre-emptive notifications.

The Parliament

The Parliament was originally divided on this stakeholder feedback, as seen in amendments to the ITRE and IMCO Opinions, they ultimately opted to expand the list and amend the original definitions. The Parliament mandate, then, made several changes to the Annex II paragraph 3 critical technology list, including:

• Aligning the definitions of the quantum, AI and semiconductor technologies with those used in the Outbound Investment Screening Recommendation;
• Adding more sub-technologies to the critical technology list listed in Annex II paragraph 3;
• Including, under Annex II paragraph 5, references to broad lists of ‘transport industries, technologies and infrastructure of critical importance’ related to aerospace, maritime, rail and automotives; and
• Expanding investment screening to media services, critical electoral infrastructure, critical raw materials, and farmland.

With regards to Annex I, the final Parliamentary position broadened it to include reference to the European Defence Industrial Programme, once adopted, as well as Projects of common interest and projects of mutual interest.

In sum, the Parliament’s amendments maintain the Commission’s original idea and made efforts to expand the scope to explicitly cover more technologies and infrastructure which they deem necessary for EU’s security priorities. However, these amendments do carry forward the concerns about the Commission’s scope—namely, overlap with the Dual Use list, broad definitions and uncertain criticality thresholds potentially impacting the efficiency of future screening as well as creating room for unlevel playing fields due to diverging implementation of the sectoral scopes as a result of broad definitions of certain critical technologies.

The Council

The Council focused on building a strong initial foundation for the Regulation, acknowledging the overlaps between Annex II paragraph 1 and 2 (the exports control framework) and the rest of the scope. Accordingly, they sought to bring more legal certainty to investors by aligning the scope for mandatory authorisation with the export controls framework and moving the remainder of Annex I and II into criteria for risk assessments. Specifically, the export controls framework is moved into the body of the text to Article 4 paragraph 4 (a) and (b) as the sole mandatory scope and what remained of Annexes I and II became part of the list of considerations Member States and the Commission shall take into account for their risk assessments of specific investments. Annex II is referenced when it comes to determining the effects of investments on the availability of technologies, and Annex I when the text specifies the effect of certain investments on projects and programmes of EU interest (Art 13 §1 (a) and (b)).

On the one hand, the Council’s decision to move the critical technologies list to the risk assessment can be interpreted as a limitation of the mandatory sectoral scope as advanced by the Commission and the Parliament. On the other hand, strictly aligning the mandatory scope with the export controls framework facilitates implementation for Member States later on, and acknowledges that duplicating the definition of technologies covered by the export controls framework could create confusion for investors and limit efficiency of screening. However, due to the substantial overlap between Annex II paragraph 3 and the export controls framework the scope’s coverage of critical technologies is not as limited as one might think. Further, the decision could reflect a confidence in the continued ability of the export controls framework to evolve to address complementary risks.[3]

The Council’s decision to remove Annex I from the basis of mandatory notification as well as the financial and critical medicine lists does limit the scope significantly. The Council also deleted references in Annex I to a few Union programmes deemed less relevant to national security, including Horizon 2020, the digital Europe Programme, the EU4Health Programme and Important Project of Common European Interest (IPCEI). For Annex II, the Council deleted any reference to the Commission Recommendation on critical technology areas, and deleted the mention of critical medicines, and critical entities and activities in the Union’s financial system. Most likely in response to the Parliament’s expansion of Annex II, the transport sector, media, food security, public health and critical entities were added to the list of risk assessment criteria in Art. 13.

Conclusion

Both proposals from the co-legislators represent different priorities in the trilogues. The Parliament proposes a maximalist approach prioritising coverage (effectiveness) over efficiency, while the Council proposes a more targeted approach prioritising laying a strong foundation for cooperation while sacrificing some of the breadth in certain areas. Both institutions represent legitimate priorities to better investment screening and likely anticipate the need for compromise.

The debate around the minimum sectoral scope will be one of the most politically sensitive and impactful aspects of the trilogues. The co-legislators will be tasked to carefully compare the positions to ensure that the scope is robust enough to safeguard Europe’s security interests while ensuring that it is responsive to resource restraints and competitiveness concerns.

Ultimately, the credibility and functionality of Europe’s Investment Screening Framework will depend on the decisions made during the trilogues. A carefully calibrated scope can lay the foundation for an effective, coherent, and resilient mechanism that reinforces both economic openness and security across the EU. For now, it still seems like we can brace ourselves for a tug-of-war between the Parliament position and the Council one.

Stay tuned for our next blog! After a well deserved summer break we will return in September and will examine key definitions in the Regulation!

^[1] The Commission’s proposal also includes critical medicines and financial systems lists which have been less discussed.

[2] Goods of category 0 and positions 1B225, 1B226, 1B228, 1B231, 1B232, 1B233 or 1B235 as well as goods of categories 7A, 7B, 7D, 7E, 9A, 9B, 9D or 9E.

[3] Oftentimes it is through FDI that foreign actors seek to gain access to products that are restricted through export controls ‘control-hopping’ instead of the classic ‘tariff-hopping’.