Foreign investment controls: The “foreign investor” test and “protected entity” test in the EU and the UK | In Principle

Foreign direct investment contributes to the growth of the economies where foreign money is invested, but can also undesirably interfere with resources of strategic importance to the functioning of the host country. In difficult times, security issues come to the fore at the national and EU levels, and protectionist tendencies rise. In recent years, the best example is implementation of regulations on control of FDI in the laws of various European countries (as reflected in the latest update to the procedural guidelines issued by the Polish competition authority).

In recent years, additional mechanisms have been introduced to protect European economies and markets from undesirable foreign investments (as we discussed in the article “Control of concentration of undertakings receiving foreign subsidies: New powers of the European Commission”), in response to economic expansion by some countries and investors. Primarily, this has to do with the leading contemporary totalitarian power, the People’s Republic of China (and the quasi-totalitarian Russian Federation). They take advantage of the opportunities provided by the functioning of the free market to expand their influence around the world, particularly in European countries with developed market economies. Investors from such countries have sought to take control of companies, technologies or assets of vital national security importance in European jurisdictions. Frequently, such investments have proved successful for dubious investors, to the obvious detriment of host states. But the controls also protect European economies from competition from other highly developed countries and companies from those countries.

The increasingly uncertain international situation has also undoubtedly contributed to the rapid development of these regulations. The immediate catalyst was the Covid-19 epidemic, which originated in China and affected the functioning of the global economy and national economies on a scale not seen in decades; and from 2000 onward, Russia’s increasingly aggressive policy toward its neighbours, culminating in its full-scale invasion of Ukraine in 2022 and the war now underway just across the European Union’s eastern border.

In this article, I compare legal solutions for control of FDI in selected EU countries and the UK. For this analysis, the main source of data was a multi-jurisdictional study on FDI regulations prepared for the Antitrust Alliance, an international organisation of independent law firms practising in the competition area (including Wardyński & Partners).

Development of FDI regulations in EU member states

State control of inbound foreign investment has a long tradition in European countries. Protectionist measures have been introduced with varying degrees of intensity depending on the socio-economic and political situation. The possibility of monitoring the influence of foreign capital within a country and blocking certain investments due to the interests of the host country is an emanation of the sovereignty of each country.

However, control of foreign investment is also driven by a conflict of values evident especially in states with a market economy model based on free competition mechanisms (including competition by foreign capital). In addition to the free market, countries must also take into account other objectives and values vital to their functioning and the well-being of their citizens. Primarily, such values protected and guaranteed by the state are security and public order in the broadest sense, but also protection of competition, consumers, social rights, and the environment. (For example, Art. 31(3) of the Polish Constitution allows limits to be imposed on the exercise of constitutional rights and freedoms “only when necessary in a democratic state for the protection of its security or public order, or to protect the natural environment, health or public morals, or the freedoms and rights of other persons.”) Implementation of these objectives and values requires a departure from the market paradigm.

We also face an identical conflict of values at the EU level. While the Maastricht Treaty of 1992 recognised the free movement of capital as a Treaty freedom, the freedoms of the EU internal market are not absolute. Under the EU treaties, these freedoms can be restricted (by the EU or member states) in particular when justified by the public interest (e.g. Art. 36 and 52 TFEU).

And it is important to note the specific position of member states operating within the international structure of the EU, to which member states have delegated some of their sovereign powers. In this structured economic and political organism, there are two tiers of regulation—in addition to national laws, there are also EU provisions applicable to the entire community of member states.

Individual countries have applied legal mechanisms to control foreign investments as diverse as the purposes they are intended to serve. In particular, these are solutions to control the movement of capital, the transfer of companies across national borders, or cross-border mergers of companies, in the broader public interest. Generally, in the first decades of the EU’s existence, national solutions included narrow sectoral regulations. Restrictions were imposed for example on foreigners wishing to purchase real estate, invest in media companies (particularly print and television), purchase energy assets, or operate or invest in the telecommunications or defence sectors (in Poland, see for example the Act on Acquisition of Real Estate by Foreigners; Art. 40a of the Broadcasting Act; Act on Special Powers of the Minister for Energy of 18 March 2010; and the preamble to the Act on Control of Certain Investments of 24 July 2015). For a while, a common solution was the “golden share,” a mechanism allowing the state to retain control over strategic companies undergoing privatisation.

The situation began to change several years ago under the influence of the international situation, which forced further legislative steps to tighten FDI controls. The EU and national legislatures began taking a more comprehensive and restrictive approach to these controls. Uniform multi-sectoral regulations were introduced (generally in addition to existing sectoral regulations), typically for a specific but fairly broad group of sectors considered strategic for the functioning of the state.

The impetus for introduction of new national solutions was adoption of the EU’s comprehensive FDI Screening Regulation (Regulation (EU) 2019/452 of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union, which entered into force in April 2019). The majority of EU member states introduced comprehensive national FDI solutions in 2020–2021. (Regulation 2019/452 does not require member states to create national FDI screening mechanisms, but if they do, under Art. 3 of the regulation they must ensure that their controls have specific timeframes, are transparent and non-discriminatory, introduce procedures for recourse against national decisions on FDI control, and provide measures to prevent circumvention of FDI control mechanisms and related decisions.) Instead, the regulation introduced a mechanism for cooperation and information exchange between the European Commission and national authorities overseeing the investment control process in individual member states. (Regulation 2019/452 introduces a cooperation mechanism for foreign investments subject to screening in EU member states (Art. 6) and foreign investments not covered by screening (Art. 7). The principle of mutual cooperation between the European Commission and the member states within these mechanisms allows for protection of common interests. The Commission is the coordinating and initiating body for these interactions.)

Pursuant to the Commission’s latest FDI report (Fourth Annual Report on the screening of foreign direct investment into the Union, issued in October 2024), 23 of the 27 EU member states have adopted or updated cross-sectoral FDI control regulations (mainly between 2020 and 2023). New foreign investment control mechanisms were adopted in Belgium, Bulgaria, Estonia, Ireland, Luxembourg, Romania, Slovakia and Sweden, while the solutions already in place in Denmark, France, Germany, Hungary, Italy, Latvia, the Netherlands, Poland, Slovenia and Spain were updated. A cross-sectoral regulation was adopted before 2017 only in Portugal, and in three jurisdictions (Croatia, Cyprus and Greece) the legislative process for adopting analogous provisions was underway.

Comparison of current FDI regulations in selected jurisdictions

In this article, we examine the impact of these regimes on both active and passive stakeholders, i.e. the foreign investor and the entities protected by FDI provisions.

Entities are generally protected because of:

• The subject of their business (protected industries)
• Ownership of certain assets (e.g. critical infrastructure)
• Generating certain levels of turnover, above the de minimis exemption for FDI control in the given jurisdiction.

Clear, understandable provisions and easily verifiable criteria should help foreign investors evaluate planned transactions in light of the obligations imposed by FDI provisions, encouraging legal certainty and thus reducing investment risk.

A comparative analysis of the scope of these concepts across 16 jurisdictions (selected EU member states and the UK) is presented below. This sample reveals certain regularities found in legislation across various countries with developed market economies.

Active entities: Foreign investors

The table below compares the definitions of a “foreign investor” in 16 jurisdictions in terms of:

• Categories of entities included in the concept of “foreign investor”
• Geographic origin of the investor (how “third countries” are defined, and by implication, when an investor is regarded as “domestic” for purposes of FDI controls)
• Whether transactions carried out via a domestic entity (or entities from jurisdictions that do not trigger FDI controls) are counted as domestic investments (i.e. not subject to heightened state control), or as FDI potentially subject to control.

Foreign investor test

Analysis

The data show that the entities covered by the concept of a “foreign investor” are defined broadly and in a fairly similar manner in the analysed jurisdictions. The term generally encompasses all investors from third countries, both natural and legal persons (regardless of legal form, and thus not exclusively undertakings). As a rule, the determining factor for belonging to a given territory is citizenship or residence (for natural persons) or having a registered office (for legal persons) in that state.

By contrast, the geographic link for distinguishing between domestic and foreign investors (which territories are considered “domestic” and which are “foreign”) is defined in a much more varied way. This component of the definition of a foreign investor significantly affects the determination of whether a foreign investment should be reported to domestic control authorities.

In this aspect, the following ways of defining the concept of foreign investor can be distinguished in the analysed jurisdictions:

1. The broadest definition (covering the largest range of potential investors) was introduced in the Netherlands and the UK. Pursuant to the FDI control provisions in these jurisdictions, any entity, whether foreign or domestic (Dutch or British, respectively) is considered a foreign investor.
2. A traditional definition (slightly narrower than the one above) applies in France. Indeed, entities from all other countries except France are considered foreign investors. Interestingly, French entities residing or registered outside of France for tax purposes are also considered foreign investors.
3. Some definitions recognise as “domestic” territory other countries belonging to a single supranational organisation. In six of the surveyed jurisdictions, entities from outside the EU are considered foreign investors (Belgium, Czechia, Estonia, Germany, Spain and Sweden). In three jurisdictions, the “domestic” area includes, in addition to the EU, other countries in the European Economic Area (i.e. Liechtenstein, Norway and Iceland), and in the case of Denmark (in principle) and Finland, also Switzerland (member states of the EU + the European Free Trade Association). Poland stands out in this group of states, as the geographic connector for defining a domestic investor is expanded the most—in addition to EU and EEA countries, it also includes OECD member states (the UK, Switzerland and eight non-European countries—the Organization for Economic Cooperation and Development comprises 30 countries, of which Australia, Canada, Japan, Mexico, New Zealand, South Korea, Turkey and the US are not members of the EU or the EEA). A contrario, entities from outside the OECD are considered foreign investors. Thus from this perspective, Polish laws defines a foreign investor in the most limited way among the jurisdictions identified here. As 10 of these 16 jurisdictions (including, as an extreme case, Poland) use a similar method of defining the origin of a foreign investor (generally outside the EU, the EEA or the EFTA), this is something of a standard in these jurisdictions.
4. Mixed definitions, combining the classic definition (point 1) and definitions narrowing the concept of a foreign investor to entities originating from outside countries affiliated with one or more international organisations (point 3). We encounter such cases with Lithuania and Hungary, where two categories of foreign investors were introduced. In Lithuania, there is a group of “closer” foreign investors (i.e. from outside Lithuania, but from the EU, the EFTA, NATO or the OECD) and third-country investors, i.e. “further” foreign investors from states not affiliated with these organisations (and this category is treated more rigorously in the Lithuanian FDI control provisions than the category of foreign investors in the strict sense). In Hungary, entities from outside that country are considered foreign investors for the most significant investments (transactions involving acquisition of control and investments exceeding de minimis thresholds), and for other investments subject to oversight, only investors from outside the EU, the EEA or Switzerland are considered foreign investors.

In all the analysed national provisions, the principle was introduced to extend FDI control to transactions formally carried out by domestic entities, but over which decisive influence (directly or indirectly) is exercised by entities qualified as foreign investors (indirect investments). In determining whether the activity of direct investors is influenced by third parties, evaluation criteria are used deriving from notions commonly applied in antitrust, trade or tax law, such as control, dominance, or beneficial ownership. Such provisions are intended to prevent foreign investors from circumventing FDI controls.

Protected entities and protected activities (strategic sectors for state security)

The table below describes the protected entities in each country (i.e. those with special status for protecting state interests). Additional determinants for protected entities are:

• Carrying out certain activities (in sectors of particular importance to state security)
• The de minimis threshold for foreign investments
• Whether investments involving only acquisition of assets from protected entities are subject to FDI control.

Protected entity test

Analysis

In the studied jurisdictions, protected entities are defined in two ways. In most jurisdictions (11 of 16), this concept refers exclusively to undertakings, or a certain subset of undertakings (e.g. companies). In five cases, a broader definition of protected entity was used, which can be any entity (regardless of whether it has the status of an undertaking in the given legal system) engaged in activity covered by investment protection (as a rule, this is a category of entities with legal personality). This is the case in Denmark, France, Latvia, Portugal and the UK.

A domestic entity is usually understood to mean an entity with its registered office in the host country (in 11 of 16 jurisdictions). By contrast, in five cases (Czechia, Estonia, the Netherlands, Portugal and the UK), any entity engaged in activity within protected sectors or holding assets within sectors deemed strategic in the given state is considered a protected entity.

Inherent in the definition of a protected entity is a determination that it operates in a sector strategic to state security. Here, two main trends can be noted.

On one hand, protected sectors may be defined by identifying them in detail (a closed list) and possibly specifying additional criteria that must be met. This is the approach, for example, in the current Polish act as amended in 2020, which lists more than 20 types of activities covered by FDI protection. It is similar in Latvia, where the different types of strategic activities are defined in great detail, introducing additional criteria (e.g. a threshold of installed energy capacity at electricity producers, the size of agricultural or forest holdings, or the length of a thermal network).

The second method of defining sectors is more general (less precise), covering a very wide range of activities. Such a broad definition leaves a lot of room for interpretation and discretion on the part of the authority. This is the approach for example in France (sectors considered sensitive for reasons of public safety and order, or with operations related to national defence) and in Finland (manufacturing and supply of key goods and services related to the statutory duties of state authorities and necessary for ensuring public order and security).

Regardless of the adopted method for defining strategic sectors, the scope of protected activity can be defined relatively narrowly by identifying only a few protected areas (e.g. in Czechia and Lithuania), or broadly (e.g. in Estonia, Hungary, Poland, Spain, Sweden and the UK). As a rule, protected activities are defined broadly. Despite the differences in indicating a number of strategic sectors for each state, there is a canon of activities considered sensitive to public security in all these jurisdictions, such as:

• Cybersecurity (including software and digital technologies)
• Defence (including dual-use products/technologies)
• Energy
• Financial
• Food
• Healthcare
• Telecoms
• Transport
• Critical infrastructure more broadly.

Another criterion for protected entities is the turnover generated by the entity (or its protected assets). Sometimes, instead of turnover, another financial criterion is used, e.g. the minimum value of the investment in protected goods. Such criteria set a de minimis threshold and were adopted in some jurisdictions to obviate controls of foreign investments of minor importance and negligible impact on state security.

The jurisdictional overview above shows that eight of the countries do not apply the de minimis construction at all, while another four (Denmark, Estonia, Hungary and Latvia) include such exemptions as an exception to the rule and only for selected branches.

Four jurisdictions establish a de minimis threshold as a rule. In the case of Belgium, two turnover thresholds are set for protected entities (EUR 100 million or EUR 25 million per year), depending on which strategic sectors are affected by the investment. Spain sets a standard threshold of EUR 5 million in annual turnover, while in the case of public companies listed in Spain, the company must have a value exceeding EUR 500 million to be subject to FDI scrutiny.

Only Poland has a set uniform annual turnover threshold for protected entities of EUR 10 million (except for a list of specific companies, currently 17, found in a government regulation to be of special importance to national security). Meanwhile, in Lithuania, the value of the foreign investment must exceed 10% of the protected entity’s annual revenue for the de minimis threshold to be exceeded (although this criterion does not apply to investments relating to nuclear energy).

All of the surveyed national FDI provisions indicate that foreign investments in assets (and relating to critical infrastructure) should be treated on a par with investment in protected entities (in all jurisdictions, without exception, share deals are subject to FDI control, in addition to asset deals). If asset deals were ignored, investment control regulations would not be very effective in ensuring public safety.

Summary: FDI control in Poland compared to other countries

According to the European Commission’s latest FDI Report, in 2023 a total of 1,808 foreign investment authorisation cases were processed in EU member states (both upon application and at the authority’s own initiative). Of these, 56% were subjected to formal review proceedings and 44% were found to be ineligible for consideration. For the vast majority of cases accepted for hearing (85%), unconditional approval was granted for the investment. This means that such transactions were approved without the need of any further action by the investors. In 10% of the cases, permission was granted subject to meeting conditions or applying mitigating measures. National FDI control authorities blocked transactions in only 1% of all cases in which decisions were issued. Additionally, 4% of applications were withdrawn by the investors before a decision was issued. In 2023, the main foreign investors in the EU27 were from the US (about 30%) and the UK (about 25%).

Against this background, what is the decision-making practice of the FDI control authority in Poland—the president of the Office of Competition and Consumer Protection (UOKiK)? (In the case of the specific companies listed as vital to national security, the Minister of State Assets and the Minister of National Defence are the control authorities.) From introduction of a comprehensive, cross-sector control mechanism in Poland in July 2020, through May 2024, UOKiK conducted 15 foreign investment control proceedings (according to an UOKiK communiqué of 9 May 2024). To date, the authority has not issued a single ban on conducting a foreign investment in Poland. In 2023 alone, UOKiK conducted four investment control proceedings, in which two cases resulted in issuance of a no-objection decision (UOKiK Activity Report for 2023).

In 2023, Poland accounted for only 0.2% of all cases covered by control proceedings within the EU27. However, the percentage of decisions issued by UOKiK on reported foreign investments was similar to the level for all decisions issued in FDI control cases in EU countries during this period. The very small number of control proceedings in Poland results directly from the definition of “foreign investor” and “protected entity” in the Act on Control of Certain Investments.

Against the backdrop of other European solutions, the Polish provisions stand out in several areas. First, the Polish definition of a foreign investor is the most liberal of all the national solutions analysed here. The Polish act excludes the most countries of origin of investments as not subject to FDI control. Investments originating from such countries are effectively equated with domestic investments. Unlike the other analysed jurisdictions, FDI control in Poland does not cover investors from, for example, the UK or Turkey, or, from outside developed countries in Europe, investors from Australia, Canada, Japan, South Korea, or the US. Lithuania applies solutions somewhat similar to those in Poland. At the other extreme are regulations (e.g. in the Netherlands and the UK) recognising as a foreign investor, in principle, all entities, regardless of whether they originate from the host country or from abroad.

Second, the Polish provisions recognise as protected entities only undertakings operating in protected sectors (much like the solutions adopted in most of the analysed jurisdictions, apart from Denmark, France, Latvia, Portugal and the UK).

However, a de minimis threshold is included in the Polish act, exempting an investment from notification if the protected entity does not reach an annual turnover of more than EUR 10 million in Poland. This de mininis exemption means that by definition, a significant number of transactions are not monitored by UOKiK. On one hand, this limits the investment control to significant transactions that could have an obvious impact on national security, but on the other hand, FDI control may not extend to a number of important investments, e.g. involving startups introducing new technologies or innovations that could have a significant impact on security in many sectors.

Upcoming changes: Proposal for a new EU regulation on FDI screening and its impact on the existing FDI arrangements of member states

The foregoing analysis confirms that currently EU member states have considerable freedom in introducing and applying their own policies and regulations through which they can control and restrict foreign investments they deem undesirable. But this freedom is diminishing with continuing EU integration and assumption by EU bodies of more and more of the individual competencies of member states. This process is also underway in the area of FDI controls, as the European Commission has issued a proposed regulation establishing a new framework for the EU’s foreign investment control system (the proposal of 24 January 2024 is at the legislative stage of first reading in the European Parliament).

The proposal would change the Commission’s existing approach to national FDI control systems. First, it would oblige all EU member states to maintain their own foreign investment control systems. Second, it introduces minimum standards common to the entire EU (resulting in unification of mandatory FDI control mechanisms at the level of the member states). Such changes will have to be introduced by member states within 15 months after the new EU regulation comes into force.

The planned EU regulation would introduce mandatory standards for the concepts discussed in this article, i.e. who is regarded as a foreign investor and which entities and sectors are protected.

With regard to the origin of foreign investors, investment control at the national level will be extended to investments by all entities originating from outside the EU. This means that unlike the current Polish system (investors from outside the OECD), the new national provisions will also have to apply to investments originating from countries such as Canada, Norway, South Korea, Switzerland, the UK or the US.

In terms of protected entities and sectors, member states will be required to extend investment control to such areas as advanced semiconductors, artificial intelligence, biotech, quantum technologies, advanced sensory and robotic technologies, energy technologies, as well as certain activities key to the functioning of the EU financial system. (A detailed list of technologies, assets, plants, facilities, equipment, networks, systems, services and economic activities of particular importance to security or public order of the Union is set forth in Annex II to the proposed regulation.) For this reason, Polish lawmakers will need to revise and expand the current catalogue of protected economic sectors.

Consequently, there will soon be changes in the control of foreign investments at the EU level and in member states, including Poland (perhaps as early as next year, and certainly in 2026, as the current provisions on cross-sectoral controls remain in effect until 24 July 2025, under a Covid-19 relief act from 19 June 2020). The number of FDI applications processed by UOKiK is expected to increase significantly.

Andrzej Madała, Competition & Consumer Protection practice, Wardyński & Partners