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Network News • 15-07-2020

Gearing Up For New Screening Measures For FDI

Author: Jurgen Dalli – Junior Legal Associate, PKF Malta
Published on Malta Chamber of Commerce Blog – 15th July 2020

Foreign Direct Investment or better known as FDI basically comprises an investment affected by either a legal or a natural person in one jurisdiction into corporate interests situated offshore. Mostly, this occurs when an investor sets up operations offshore or acquires foreign assets in a foreign entity. Nonetheless, FDIs are not to be treated as portfolio investments since in the latter the investor only acquires equities.

The EU takes a similar approach and argues that an FDI entails an “investment which establishes or maintains lasting and direct links between investors from 3rd country nationals including State entities, and undertakings carrying out an economic activity in a Member State”.

On the 25th of March of 2020, the EU released new FDI measures. Whilst the EU encourages foreign investment and in many ways, foreign investment falls within the remit of the freedoms of the Union, the novel virus pandemic proved to have pervasive ramifications on the economy, thus, the European Community felt the need to implement new FDI screening measures which will become fully applicable from 11th October 2020, however, Regulation 2019/452 has entered into force on the 10th April 2019. Hence, the UK will not be considered an EU member for the purpose of these new measures. The primary scope behind these implementations rests on information sharing in order to promote safer practices and ease foreign direct investment.

These measures will apply holistically and independently of the value of the transaction; however, its ambition is not to scare away foreign investment but to ensure the safety of each Member State within the community. Malta enjoys an advantage in this situation because it has established a national FDI office thereby allocating screening privileges to the national authority. Nonetheless, the national FDI office must adhere to a host of conditions. Therefore, it goes without saying that holding companies do not fall within this remit and are automatically barred. The last requirement is that the activity in question necessitates some discernment.

In a nutshell, the Regulation can be dissected into six implementations. This framework will allow for a cooperating mechanism where Members of the Union and the Commission itself will interchange data and raise fears vis-à-vis particular undertakings in the form of investments.

The Commission will be vested with the prerogative of issuing opinions when a particular investment constitutes a threat to the security, order, or interest to the multiple Member States, or else, where investment may hinder a project appertaining to the EU as a unit, a case in point being Horizon 2020 or Galileo. This Regulation is not only intended for information sharing but also promotes experience sharing and the unification of states on common concerns.

This Regulation will set up a host of requirements for Members of the community who want to maintain or adopt a screening mechanism at a national level with the final say laying with the Members of the Union whether an investment should materialize or not. Another implementation of this instrument is taking into account the need to operate under short business-friendly deadlines and robust confidentiality needs. Lastly, one must issue basic requirements for the Member States that wish to implement a screening mechanism domestically, especially; transparency and non-discrimination between 3rd parties, established timeframes, protection of confidential data and the possibility of judicial redress against the Member State’s decisions.

One must distinguish between screening and evaluation. The former refers to the disclosing of all relevant information thereby having in place transparent rules and procedures which avoid discrimination amongst foreign investors, exchange of confidential information, recourse against screening dictums and measures to identify and prevent circumvention by foreign investors.

This is not in place at the moment in Malta, however, from October of this year, Malta will have to initialise a framework that will allow it to perform these requirements. As a matter of fact, Malta will be required to identify the UBO (Ultimate Beneficial Owner) in order to conform to AML regulations.

Unlike screening, Malta does indeed have in place evaluation procedures. In conclusion, screening is triggered when the activity complies with the qualification listed in Article 4 of the Regulations thereby necessitating the influencing of public security, order, or health.

These activities must inherently comprise a long-lasting relationship in Malta, hence why there is the need to have a factor of production such as labour or putting in machinery in order to form such an enduring rapport. As things stand at the moment, 143 applications have been received by the Maltese office for evaluation, 9 of which required some amendments to their Memorandum & Articles of Association whilst only 2 needed screening.

It is wise to wait for further guidelines in order to decipher as to what screening will exactly comprise of, however, some have suggested that the approach taken will consider the activity to require screening where such activity falls within the remit of the criteria articulated above.

Author: Jurgen Dalli – Junior Legal Associate, PKF Malta
Published on Malta Chamber of Commerce Blog – 15th July 2020
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