Europe’s New Foreign Investment Screening Proposals: A Patchwork Quilt Emerges With Some Loose Threads

Mandatory notification requirements for foreign direct investments (FDI) have rapidly expanded across Europe and the world over the last decade. In the European Union (EU), a patchwork of superficially similar, and yet quite different regimes, has emerged as most Member States have adopted their own legislation.

The European Commission (the Commission) is set to change that by proposing to reshape the previous relatively loose cooperation mechanism. The emerging tapestry, whichever shape it will ultimately take, does not promise to become a masterwork of needlework. Instead, it will likely be a loosely sewn, yet more coherent and streamlined, quilt of national regimes.

Background

Unlike merger control, there is no centralized EU one-stop-shop for FDI reviews which are largely grounded in national security; for these, exclusive competence rests with each Member State. Previously, the EU had put in place a limited cooperation mechanism regime which enables information exchanges between Member States and the Commission and which empowers the Commission to issue non-binding opinions in cross border cases.¹ In 2024, the EU’s cooperation mechanism applied to 477 cases out of around 3,136 reviews conducted by EU Member States.²

Under the current mechanism, Member States continue to enjoy significant flexibility in how they operate their own FDI screening regimes. To date, Croatia and Cyprus are the only Member States which are yet to adopt their own regimes. Among the 27 existing FDI regimes, meaningful differences remain and the role of the Commission in securing broader European interests remains limited.

With this in mind, the Commission is keen to amend the existing framework to streamline and harmonize the current patchwork of national FDI regimes (the Proposal). This requires a legislative dance (the so-called Trilogue) with other institutions, in particular the European Parliament (the Parliament) and the Council of the European Union (the Council), the latter being the representative body of Member States’ governments.

The Proposal

In September 2025, sources confirmed the aim of reaching a final political agreement within the Trilogue by the end of 2025, with the new EU FDI legislation (the New FDI Screening Regulation) coming into force next year. The New FDI Screening Regulation would still leave decision making powers on individual cases with Member States, but it seeks to reduce the current divergence in Member States’ approach.

Five Key Changes

The Proposal contains the following five key changes:

1.  Mandatory FDI screening regime in all Member States

2.  FDI regimes to apply to indirect and possibly greenfield investments

3.  An expanded list of sectors subject to FDI screening

4.  A more unified substantive test for approval

5.  Significantly harmonized procedures and timelines

For each of these five key changes, we set out below the likely direction of travel in the political negotiations ahead.

I. Mandatory Screening: All Member States To Adopt an FDI Screening Mechanism

A central tenet of the proposed New FDI Screening Regulation is the introduction of a binding requirement for all Member States to adopt and maintain a national FDI screening mechanism. All three institutions appear to agree on the need for a mandatory FDI screening mechanism at the national level in all Member States and only two Member States still need to implement their own FDI regimes: Croatia and Cyprus.³

II. New Minimum Requirements for National FDI Screening Regimes

There is more debate around the minimum requirements on scope and procedure that each Member State’s FDI screening mechanism must contain.

A. Indirect Investments by Foreign Investors Through the Use of EU Entities

The Proposal extends the scope of foreign investment screening to indirect foreign investment: there is a consensus within the three institutions that Member States must be empowered to review investments by EU-based companies that are ultimately controlled by non-EU investors.

This change follows the EU Court of Justice’s decision in Xella,⁴ in which an attempt by Hungary to review such an indirect investment was struck down. This change would ensure that foreign investors structuring their investments through EU subsidiaries do not escape national FDI screening.

B. Greenfield Investments

The Proposal also envisages to extend the FDI screening mechanisms to greenfield investments, that is where foreign investors establish new operations, either alone or as a joint venture, in a Member State. In this respect, there is divergence between the three institutions: the Commission is proposing to include greenfield investments in the scope of national screening to empower Member States to screen such investments if they determine that the investments may affect public security or public order. The Parliament would like greenfield investments exceeding €250 million to always require prior authorization. In contrast, the Council does not want to include greenfield investments in the minimum scope and favors leaving the decision entirely to the individual Member States. Statements issued by the Commission and Member States’ FDI authorities in September 2025 stress the importance of reaching an agreement on this, as well as ensuring rules are enacted in a way that prevents circumvention through the use of corporate and financial restructuring schemes.

C. Sectors Covered by the Proposal

The Proposal sets out a minimum list of sectors to be included in the national FDI screening regimes.

The Commission and the Parliament are keen to expand the list of sectors subject to mandatory screening: they propose that the New FDI Screening Regulation require national screening mechanisms to extend to a list of “programs of Union interest,” as well as investment in multiple critical sectors ranging from space and defense programs to also include new and critical technologies like AI, quantum computing, critical medicines, financial entities, and payment infrastructures.

By contrast, the Council (i.e., Member States) are advocating for a more limited approach, hence retaining broad discretion with Member States on which sectors to include in their national legislation.

III. Substantive Assessment of Foreign Investments

The New FDI Screening Regulation also proposes the introduction of a more unified substantive test for assessing whether foreign investment should be approved. The approach would focus on two main criteria: (1) the type of foreign investment and the security interests associated with the investment as such, and (2) the security risk associated with the foreign investor. If achieved, this could afford investors more predictability and legal certainty.

In addition, the institutions are discussing ways to improve the cooperation mechanism, notably to ensure that security concerns in Member State(s) other than those where the investment was notifiable are sufficiently taken into consideration by those Member State(s) competent to review.

In any event, Member States would, however, remain fully in control over the process and the substantive decision regarding foreign investments in their national territory.

A. Security Risks Associated With the Type of Foreign Investment

The Commission proposes that Member States should consider whether an investment would risk negatively impacting (1) critical infrastructure, (2) the availability of critical technologies, (3) the continuity of supply of critical inputs, (4) the protection of sensitive information, and/or (5) the freedom of the media.

The Parliament and the Council appear to agree on the majority of the criteria proposed by the Commission. However, elements such as the precise definition of “critical infrastructure” currently vary significantly across Member States, leaving open the question how effective the attempt at minimum harmonization will really be.

In addition, the Parliament suggests adding certain vaguer criteria, such as the security, integrity, functioning, and resilience of the internal market, as well as the protection of EU’s financial and economic stability.

B. Security Risks Associated With the Foreign Investor

The Proposal provides that Member States should consider criteria such as whether the investor has been subject to sanctions or has been involved in activities that negatively affect security or public order in the EU or its Member States, and whether the investor is likely to pursue a third country’s policy objectives or facilitate the development of third countries’ military capabilities.

IV. Minimum Harmonization of Procedural Rules

The Proposal seeks to introduce some harmonization of procedural rules by establishing minimum common requirements regarding review periods and information requirements.

A. Requirement To File All FDI Applications Within a Set Time Period

The Commission proposes that the New FDI Screening Regulation introduce a requirement that all FDI applications for cross-border investments are filed on the same day. Most Member States do not have statutory filing deadlines and, like in merger control, investors and their advisors can decide when and in which order filings are submitted. In merger control reviews, national competition authorities manage to cooperate effectively, though informally, without the need to date filings on the same day. Depending on the case, there may be significant logistical and timing burdens on the parties that may make same-date filings difficult to achieve.

The difference in FDI filings compared to merger control processes is the overlay of a formal EU cooperation mechanism on top of national reviews, as well as very different national review timelines.

The Parliament and the Council have therefore proposed a somewhat more flexible approach that now is being discussed in the Trilogue. One option under consideration is that all FDI filings have to be submitted within a set period (e.g., within five business days between the first and last FDI application). But even with some added flexibility, such a requirement is likely to create a significant burden and bottlenecks on investors. Italy and Hungary already have similar provisions imposing short-deadline filing requirements, which are often difficult to meet or coordinate with other jurisdictions’ timelines. Likewise, countries such as Germany and Austria require FDI filings “without undue delay,” which seems unduly vague and uncertain. In practice, binding obligations to file within a set period are difficult to implement. The first iteration of the EU Merger Regulation had such an obligation, which was then disregarded in practice before being removed. In cases involving multiple filings this becomes even more difficult to manage.

B. Harmonization of Review Periods

Given the current widely differing deadlines, it is envisaged to introduce a binding harmonized deadline for the initial review of notified investments. The current proposals range from 35 to 45 calendar days, with an additional 30 to 60 calendar days for cases subject to the EU cooperation mechanism.

For non-problematic deals, a unified timetable is helpful to ensure speedy clearances, thus giving investors greater legal certainty and predictability. However, the Proposal does not suggest any specific deadline, let alone alignment, for the in-depth (Phase 2) review periods, where current timelines differ substantially amongst Member States.

C. Streamlining Information Requirements

Currently, only some Member States use the unified Request for Information Form (the EU Form) to request information from foreign investors. In such cases, the EU Form is usually required in parallel to national filing forms. In practice, this means that foreign investors need to prepare and submit two separate filing documents (i.e., the national filing form and the EU Form) with different information requirements.

The Commission envisages streamlining the information required for all Member States with a minimum set of core information in a standardized format (in a manner similar to the current EU Form). Member States will remain free to require further information.

D. Ex Officio Investigations

The Proposal also contemplates ex officio investigation powers that could be exercised by the Commission and Member States for investments falling outside the mandatory filing regime. These powers would allow for a call-in during a period of at least 15 months following the completion of non-notified foreign investments.

We understand that while Member States may very much like to have such powers themselves, Member States have little appetite to give such call-in powers to the Commission.

V. The Cooperation Mechanism and the Commission’s Role

A. The Role of the Commission in FDI Screening Proceedings

A key point of contention between the three institutions is the role of the Commission going forward. The current regime already allows the Commission to issue non-binding opinions to which Member States have to afford “due consideration.” In practice, this has had very limited effect as in 2024 and 2023, the Commission issued an opinion in less than 2% of the almost 500 notified transactions, respectively.⁵

The Commission now proposes that its opinions should become a “strong advisory instrument,” which Member States would be expected to give “utmost consideration.” That would increase the weight the Commission’s opinion has, though ultimately still non-binding.

The Parliament has gone a step further: it proposes that, if a Member State’s draft decision does not adequately address security risks, the Commission may adopt its own decision which, in specific circumstances, would be binding on Member States.

Under the Proposal, the Commission’s power could be exercised only if a narrow set of cumulative legal requirements are met, namely: (1) the Commission concludes that the draft decision does not adequately mitigate risks to security and public order, (2) the Commission’s decision complies with the principle of proportionality, (3) the decision is based on documented risks, and (4) the decision “takes into account all circumstances of the foreign investment.” In such circumstances, the Commission could override Member States’ decisions.

While it may be conceptually possible to articulate such scenarios empowering the Commission to have the final say, this seems quite hard, if not impossible, to implement in practice given that national security decisions are ultimately trade-offs between different political considerations at the Member State level, including trade and geopolitical considerations as well as national politics. This would be hard enough in a decision on whether to block or clear a deal, and it seems even harder in a scenario in which remedies or mitigations are being discussed and which may need to address (slightly) different issues and have different effects in different Member States.

All of this is subject to the Trilogue negotiations, and it is hard to envisage that Member States would cede such powers to the Commission.

B. Disagreement Between the Member States

Similarly, a proposed mechanism to prevent one Member State from approving an investment that a qualified majority of other Member States and the Commission deem to create security risks to the EU’s essential security interests, is proving controversial and may not survive the political haggle in the coming months.

What Is Next?

The Commission expects the Trilogue negotiations to conclude by the end of this year, followed by the EU’s legislative approval process in 2026. The aim is for the legislation to enter into force by the summer of 2026 with a period of 12 to 24 months for Member States to change their national laws. This means likely changes will come into effect in 2027 at the earliest.

© Arnold & Porter Kaye Scholer LLP 2025 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.