Summary of Key Changes
The EU's new regulations on foreign investment review officially came into effect on July 16, representing the largest reform since the establishment of the cooperation mechanism in 2020. There are three main changes in the new rules:
1. All 27 member states are now required to establish foreign investment review mechanisms (some countries previously did not).
2. A common minimum scope for review has been set, covering sensitive areas such as semiconductors, quantum technology, and strategic raw materials; member states can expand on this basis.
3. Information sharing and cooperation among member states have been enhanced to prevent companies from "evading regulation."
For companies, they must deal with four layers of regulation: FDI review, the "Industrial Acceleration Act," foreign subsidy regulations, and anti-monopoly reviews. Chinese companies should pay particular attention to four risk areas: timing of evaluation, business scope, ownership structure, and information disclosure.
1. The Most Significant Change: From Voluntary to Mandatory Review
The previous regulations (effective in 2020) only advised member states to establish review mechanisms, and some countries (such as Cyprus) did not implement them at all, allowing companies to choose the easiest targets for investment. The new rules require that all 27 member states have national-level review mechanisms with a scope that cannot be less stringent than the EU's minimum standards. In other words, while the previous EU foreign investment review system was inconsistent, it has now become a unified and stricter one—regardless of which member state you invest in, you must meet these new requirements.
2. Review Scope: Which Industries Will Be Under Increased Scrutiny?
The new rules specify key areas that require mandatory review, including:
- Dual-use technology (military and civilian);
- Semiconductors, quantum technology, and certain AI applications;
- Strategic raw materials (such as lithium and rare earths);
- Electoral infrastructure and financial market infrastructure.
Member states can add additional industries to the scope, but they cannot reduce it. For example, Germany may review data centers, and the Netherlands may include AI projects.
It's important to note that greenfield investments (e.g., Chinese companies building new factories in the EU) are not exempt from review by default. However, the EU's "Industrial Acceleration Act" introduced in March includes battery, electric vehicle, photovoltaic, and key raw materials industries within its scope of review. Therefore, even if a project is newly established, it may still be subject to scrutiny.
3. Strengthened International Cooperation: Easier to Avoid Regulation
Previously, companies could potentially apply for investment in one country without the other countries being aware, allowing them to bypass regulation. The new rules enhance information sharing: when a member state reviews an investment, it will notify the other member states. For instance, if a Chinese company invests in a semiconductor project in France, German regulators may ask why they did not apply for review.
For example, if a Chinese company acquires a chip company in a small EU country, previously, only that country's review would be necessary; now, the small country will inform larger chip-producing countries like Germany and the Netherlands, which may request additional information or require a re-review. The chances of finding loopholes in the new regulations are decreasing.
4. Pitfalls for Companies: Four Common Mistakes Made by Chinese Companies
Lawyers have identified four common mistakes made by Chinese companies:
1. Late Evaluation: Treating FDI review as a mere formality, waiting until the transaction price and timing are fixed to conduct an evaluation, only to find out that the review cannot be passed and making changes is impossible.
2. Inadequate Business Assessment: Focusing only on the main business of the target company while ignoring minor details, such as a small business having a government contract or selling dual-use parts, which could trigger a review.
3. Misunderstanding the Impact of Minority Ownership: Some companies think that holding 10% of shares or indirectly controlling a company exempts them from review, but in many countries, even a 10% stake requires reporting, especially if one has a seat on the board or veto power.
4. Complex Information Disclosure: The review process requires providing detailed information about the ultimate beneficiaries, government connections, and financing sources. Preparing this information can take several months, which may delay the transaction.
5. Multiple Layers of Regulation: A Single Transaction May Require Multiple Approvals
The EU now applies four layers of regulation to investments in strategic industries:
- FDI review (for national security);
- The "Industrial Acceleration Act" (for greenfield investments in strategic industries);
- Foreign subsidy regulations (to check for government subsidies);
- Anti-monopoly reviews (to prevent monopolies).
For example, a Chinese company investing in an electric vehicle factory in the EU would need to apply to the FDI authorities of the member states, the European Commission (for subsidy review), and anti-monopoly agencies. Missing any one of these steps will result in delays.
In summary, the new EU regulations aim to tighten foreign investment oversight by unifying the process, expanding the scope of review, and enhancing cooperation among member states. Chinese companies seeking to enter the EU market should be more cautious, conducting thorough risk assessments, considering all aspects of their business, avoiding complex ownership structures, and ensuring adequate time for information preparation to avoid costly delays or project failures.