Published on 20 May 2026 in Client Alerts

European Union publishes draft changes to its current foreign direct investment screening system

On 10 February 2026, the Council of the European Union published a near final draft of a regulation to change the European Union (“EU”) rules on screening foreign direct investments.  Once implemented, the changes will significantly affect foreign investments into the EU.  They widen the scope of investments that must be screened by EU authorities and increase the powers of authorities to review transactions that have already completed.

The proposed regulation will replace the EU’s current framework for screening foreign direct investments into the EU in Regulation (EU) 2019/452, which entered into force in October 2020.  In light of growing geopolitical tensions and shortcomings of the current framework to safeguard public order and security across the EU, in January 2024, the European Commission proposed changes to the framework.  In December 2025, the Council of the EU and the European Parliament reached a provisional political agreement based on the European Commission’s proposal.

While the EU’s organs may still make further changes to the draft text of the regulation, broadly the proposed new regulation would, among other things:

• require all EU Member States to adopt a national screening mechanism; 
• cover investments that are both directly and indirectly foreign owned, e.g., where an EU subsidiary is owned by non-EU nationals or entities;
• require prior authorisation of deals concerning foreign investments in certain sensitive sectors, such as artificial intelligence, transport, energy or digital infrastructure; and 
• permit national authorities to review deals concerning foreign investments that have already completed (and potentially up to 5 years following completion) on security or public order grounds, even if the investment is not subject to a prior authorisation requirement.

The European Parliament is currently expected to vote on the revised regulation during its next plenary sitting.  If adopted without material changes to the February 2026 draft, the Council of the EU is expected to approve the regulation.  Once in force, following an 18-month transition period, the regulation will apply to all new foreign investments.

This is yet another example of the increasing focus of the EU on regulating inbound foreign investment.  The regulation that is expected to come into force will give significant powers to exclude contemplated and even expel existing foreign investment in the EU.  Because it will be obligatory under EU law, EU law will not protect foreign investors targeted by the new rules.  All current and potential investors into the EU will be well-advised to seek expert public international law advice about ways in which to protect their businesses from such potentially adverse governmental action using international law.

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