On 13 June 2023, the Chamber of Deputies of Luxembourg adopted the bill of law n°7885 (the “Law”) introducing a foreign direct investment screening mechanism in Luxembourg, which entered into force on 1 September 2023.

The Law implements Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019, which empowers Member States to review investments within its scope on the grounds of security or public order, and to take measures to address specific risks. 

1. Scope of the screening

Pursuant to the Law, a foreign direct investment is an investment of any kind, made by an investor from a third country outside the European Union / European Economic Area (EEA), aiming to establish or maintain lasting and direct links with a Luxembourg entity, thus allowing the foreign investor to participate in the control of an entity incorporated under Luxembourg law carrying out a critical activity. Thus, portfolio investments (i.e. acquisitions of securities with the intention of making a financial investment and not allowing for the exercise of control) are excluded from its scope.

It is, however, not sufficient for the direct investor to be established in the EEA to be out of scope of the Law. The notion of "control" in the context of the definition must be interpreted with regard to the foreign investor acting alone, in concert or through the interposition of a company, even one established in another Member State of the European Union or the EEA.

The foreign investor is deemed to exercise control if it, directly or indirectly:

• holds the majority of the voting rights of the shareholders or partners in the Luxembourg entity;
• has the right to appoint or remove the majority of the members of the directors, management, or supervisory boards of the Luxembourg entity, and, at the same time, is a shareholder or a partner;
• is a shareholder/partner in the Luxembourg entity and controls, by virtue of an agreement with other shareholders or partners, a majority of the voting rights of its shareholders or partners; or
• crosses the threshold of holding 25% of the voting rights of the Luxembourg entity.

The Law defines several activities per sector as critical activities, including the production/exploitation/sale of dual-use goods and activities in the energy, transport, water, health, communications, data processing or storage, aerospace, defence, media and agri-food sectors or, in the financial sector, the activities of the central bank as well as the infrastructures and systems for the exchange, payment and settlement of financial instruments. 

2. Mandatory notification

The Law provides for a mandatory ex-ante notification regime. The foreign investor must notify the foreign direct investment to the Ministry of the Economy before completion of the foreign direct investment.

By derogation, for transactions in which the foreign investor crosses the threshold of 25% of the voting rights of a Luxembourgish Entity (as a result of events modifying the distribution of the capital), the foreign investor will have a 15-day period in which to notify the transaction.

The following information must be included in the notification:

• The ownership structure of the foreign investor and of the relevant Luxembourg entity before completion of the foreign direct investment or following events that have modified the breakdown of capital, including information on the beneficial owner, and the shareholding structure
• The approximate value of the foreign direct investment
• The products, services and commercial operations of the foreign investor and of the Luxembourg entity
• The countries in which the foreign investor and the Luxembourg entity carry out commercial activities
• The financing of the foreign direct investment and its source
• The date on which the foreign direct investment is planned or has been carried out 

3. Screening procedure

The Ministry of the Economy must notify its decision within two (2) months following the notification by the foreign investor, unless it asks for additional information during the review period (in which case the procedure will be suspended until it receives the requested information).

The Ministry of the Economy will assess whether the foreign direct investment in question would be likely to affect security or public order.

To determine whether a foreign direct investment is likely to undermine security or public order, the Ministry of the Economy will consider the foreign direct investment’s potential effects on inter alia:

• the integrity, security and continuity of the supply of critical infrastructures, whether physical or virtual, linked to critical activities
• the sustainability of activities related to critical technologies and dual-use goods
• supply of essential inputs, including raw materials, and food safety
• access to sensitive information, including personal data, or the ability to control such information
• freedom and pluralism of the media

Based on its assessment of the proposed foreign direct investment, the Ministry of the Economy can either authorise the foreign direct investment, prohibit it, or authorise it subject to conditions.

4. Sanctions for non-compliance

The Ministry of the Economy can impose administrative measures and sanctions where (i) a foreign direct investment has been implemented without prior notification or clearance, or (ii) a foreign investor does not comply with the conditions imposed by the Ministry of the Economy or the timeline to implement them.

The Ministry of the Economy may suspend the exercise of voting rights related to foreign direct investment and attached to securities directly or indirectly held by the foreign investor exceeding the threshold of 25% of the voting rights of the relevant entity governed by Luxembourg law until the situation is regularised. Where the voting rights have been exercised notwithstanding the suspension of their exercise, all or part of the decisions of the general meeting can be declared void if, without the voting rights illegally exercised, the quorum of either presence or majority required for the said decisions had not been met.

The Ministry of the Economy may further order the foreign investor (i) to modify the transaction, (ii) to reinstate, at its own expense, the situation prior to the completion of the transaction or (iii) to comply within a certain timeframe with the conditions attached to the authorisation to proceed with the foreign direct investment.

Failure to comply with the above-mentioned injunctions may lead to the imposition by the Ministry of the Economy of a fine in a maximum amount of EUR 1 million if the foreign investor is an individual and in a maximum amount of EUR 5 million if the foreign investor is a legal entity.

Foreign investors have one month from the date of notification of the screening decision to dispute the fine before the administrative court.

5. Practical considerations

While the introduction of a foreign investment screening regime is an important development, the practical impact is likely to be limited as the Luxembourg government expressed its desire to keep Luxembourg as an attractive investment destination, while protecting the country’s interests. Non-EEA individuals and companies should assess at an early stage whether a filing is required.

For more information, please contact Cédric Bless or Nicolas Marchand.