Luxembourg Law on Foreign Direct Investment Screenings

What is the impact for your investment in the Grand Duchy of Luxembourg?

On 13 June 2023 the Luxembourg parliament (Chambre des Députés) approved bill of law 7885 (the "Bill") which provides for the establishment of a mandatory notification procedure for direct investments made by foreign investors operating in so-called critical activities in Luxembourg. The Bill was dispensed from a second vote in Parliament by the Conseil d'Etat on 20 June 2023. It will come into force on the first day of the second month subsequent to its official publication.

As part of the reshape of the legal framework of the acquisition of companies in Luxembourg, after the Foreign Subsidies Regulation and before a national merger control, the Bill implements into Luxembourg law the foreign investments screening framework of Regulation (EU) 2019/452 of 19 March 2019 and establishes a national framework for the screening of such investments.

1. What is the main obligation for investors under the Bill?

The Bill requires any foreign investor, being a natural person or a legal entity that is neither a national of a European Union Member State or of a Member State of the European Economic Area, to notify the Ministry of Economy in Luxembourg of any Foreign Direct Investment (FDI) prior to its implementation.

Unfortunately, the Bill does not provide for a specific rule with respect to the point in time when the notification must be made. Both the wording of the Bill and the parliamentary works only refer to the fact that the foreign investor must notify the Ministry of Economy before the implementation of the FDI (avant la réalisation de l'investissement direct étranger). However, guidance can be taken from the fact that the notification must include a series of specific information items such as, among others, the ownership structure of the foreign investor and the relevant Luxembourg entity, the approximative value of the FDI as well as the source and way of funding of the FDI and the intended implementation date.

From a practical perspective one could anticipate that the notification could be made between signing and closing of the acquisition and be structured as a condition precedent under the share purchase agreement as is customary for merger control notifications.

2. When does the notification requirement arise?

The notification requirement arises when

(1) a direct foreign investment, 

(2) which is carried out in a critical activity, and 

(3) which enables the foreign investor to take control of the relevant Luxembourg entity,

is intended to be made. 

• Direct foreign investments

A direct foreign investment is defined as any investment which is made for the purposes of establishing or maintaining an ongoing and direct relationship between the foreign investor and an entity incorporated under Luxembourg law allowing the foreign investor to participate alone, in concert or by way of an intermediary in the control of that entity.

• Critical activities in Luxembourg

The foreign direct investment must relate to a critical activity in Luxembourg. Such critical activities are among others, particular activities in the energy, transport, water, healthcare, telecommunications, airspace, defence sectors as well as certain key financial sector activities such as activities of the central bank or relating to Luxembourg's financial infrastructure (including payment and settlement systems). 

• Control over the Luxembourg entity

Finally, control in the Luxembourg entity is considered to be obtained when the foreign investor directly or indirectly

- has the majority of the voting rights in the Luxembourg entity;

- has the right to appoint or to revoke the majority of the members of the relevant administrative, management or supervisory body of the Luxembourg entity while at the same time being a shareholder of the entity; or

- can control the majority of voting rights based on an agreement with others shareholders while being a shareholder of the entity. 

Furthermore, control will be deemed to have been obtained whenever the foreign investor holds directly or indirectly more than 25% of the voting rights in the Luxembourg entity. 

This general rule will in particular be important in scenarios in which the exceeding of the threshold has occurred due to events which lead to a modification of the distribution of the capital of the entity.

Acquisitions of securities which do not grant the investor any direct or indirect control over the target and which are being made with the intention to effect a financial placement are explicitly excluded from the scope of the Bill (portfolio investments). This means that in particular non European equity/alternative investment funds do not fall under the scope of the Bill. 

3. What steps are triggered by the notification?

The notification triggers a pre-assessment phase (examen de la notification) which can be followed by a more in-depth screening procedure (procédure de filtrage) that will lead to an official screening decision (décision de filtrage). In particular this means the following:

• Pre-assessment phase

Once notified of the FDI the Ministry of Economy will decide if a fully-fledged screening procedure must be launched. The foreign investor must be informed of any such decision within two months following the receipt of the notification. The purpose of this preparatory assessment state is on the one hand to enable the Ministry of Economy to pre-examine the cornerstones of the intended project and to verify whether critical activities in Luxembourg might be negatively impacted and on the other hand to provide the foreign investor with the guarantee that there will be a decision whether or not a full screening procedure must be launched within two months of the receipt of the notification.

The notification examination does, however, not suspend the investment process and the investor is consequently allowed to take further steps to implement the investment. This has been explicitly stated in the relevant parliamentary works of the Bill. It might however be preferable to wait with the implementation of any major steps until the result of such pre-assessment has been obtained. 

• Screening procedure

Should a full screening procedure be initiated it will subsequently be assessed in detail whether the FDI is likely to affect the security or public order in Luxembourg. The Bill in this respect provides five main so-called screening factors (facteurs de filtrage)  which are to help determine whether this should be the case.

These main screening factors are the following:

- the integrity, security and continuity of the functioning of Luxembourg's critical infrastructure;

- the continuity of activities related to critical activities and dual-use items within the meaning of Regulation (EC) 428/2009;

- the supply of essential materials including main resources for food security; 

- the access to or the possibility to control sensitive data; and

- the freedom of media and the existence of media pluralism.

During the screening procedure the contemplated transaction may still go ahead but must in any event not be fully implemented before the Ministry of Economy has taken a final decision. Such final decision must be notified to the foreign investor before the expiry of a sixty day period starting with the launch of the screening procedure. 

• Screening decision

As a result of the screening procedure the Ministry of Economy can either prohibit the FDI or issue an authorisation based on specific conditions which will need to be fulfilled by the foreign investor. 

The issue of any such conditional authorisation will require the foreign investor to demonstrate to the Luxembourg authorities the proper implementation of the relevant conditions and ensure their due compliance. 

4. Are there any sanctions under the Bill?

Finally, the Bill provides for several sanctions which range from ordering an investor to modify the terms of the investment or to unwind it entirely if no notification was provided or if the investment was not approved at the end of the screening procedure. 

Furthermore, the imposition of fines in case of non-compliance with specific orders and injunctions will also be possible.

• Key takeaways : what is the impact of the Bill on Luxembourg as a structuring jurisdiction ?

Luxembourg being a primary point of entry for foreign inbound European investment and global fund structuring it is key to determine whether the Bill will have an impact for foreign investors structuring their investment through a Luxembourg entity.

Even though the scope of the Bill may seem broad at first glance, the impact should be limited for international investors as most of their transactions should be likely to be considered out of scope investments:

• Luxembourg funds involving multiple investors and managed by an asset manager should be exempted under the portfolio investment exemption; and
• Investments performed by entities incorporated under Luxembourg law operating outside of the Grand Duchy of Luxembourg should also be excluded from the scope of the Bill.

Should you require any assistance or further information on these new developments please do not hesitate to contact our Luxembourg Ashurst team.