The Background: Luxembourg has introduced a new foreign direct investment regime with a suspensory mandatory notification requirement in relation to investments in a broad range of sectors.
The Result: Investors from outside the European Economic Area ("EEA") will be required to notify any investments that exceed the specified thresholds, either directly or indirectly, in a Luxembourg entity that carries out "critical activities" in Luxembourg.
Looking Ahead: The Luxembourg FDI Regime will come into force on 1 September 2023. Investments in Luxembourg entities (or entities with Luxembourg subsidiaries) that could potentially close after this date (including transactions signed before this date) should factor in the possibility of a Luxembourg mandatory notification requirement.
Luxembourg Joins Other European Jurisdictions With Broad FDI Regimes
Luxembourg joins a growing number of European jurisdictions with broad FDI regimes, adding further complexity to multijurisdictional deals. Within the Benelux region alone, new FDI regimes are being introduced in the Netherlands, which came into effect in June 2023 (see our Commentary), and Belgium, which came into effect on 1 July 2023 (see our Commentary).
Investments Captured by the Luxembourg FDI Regime
The Luxembourg law of 14 July 2023 establishing a new foreign direct investment regime (the "Luxembourg FDI Regime") applies to investments made by an investor from outside the EEA (a "Foreign Investor"), which enable it to exercise control, either directly or indirectly, of an entity established under Luxembourg law (a "Luxembourg Entity"). A Foreign Investor will be considered to acquire the necessary level of control if it meets, directly or indirectly, any of the following thresholds (the "Control Thresholds"):
- The Foreign Investor crosses the threshold of holding 25% of the voting rights of the Luxembourg Entity;
- The Foreign Investor holds the majority of the voting rights of the shareholders or partners in the Luxembourg Entity (recognising that a multistage acquisition could give rise to multiple notifications if the Foreign Investor first acquires 25%, and subsequently more than 50% of the voting rights);
- The Foreign Investor 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; or
- The Foreign Investor is a shareholder or 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.
Sectors and Activities Covered by the Luxembourg FDI Regime
The requirement to notify the Ministry of Economy (the "Ministry") of a proposed investment is triggered if the investment is in a Luxembourg Entity that carries out "critical activities" in Luxembourg. Critical activities cover a broad range of sectors and activities within those sectors, including:
In addition to the above, the acquisition of a Luxembourg Entity that carries out research, or production activities connected to critical activities, or activities likely to grant access to sensitive information, or connected activities enabling access to premises where critical activities are carried out, can also give rise to a mandatory notification requirement.
Mandatory Notification and Review Timing
Any investments that are subject to the application of the Luxembourg FDI Regime must send notification to the Ministry and receive authorisation before being implemented. There are no de minimis thresholds.
Once a notification is received, the Ministry has up to two months following the date of the Ministry's confirmation of receipt of the notification to decide whether to conduct a detailed screening process. If a detailed screening process is conducted, the Ministry has a further 60 calendar days to make a decision as to whether the investment is likely to affect security or public order, and to either authorise the investment, prohibit it, or authorise it subject to conditions. If the Ministry requests any additional information from the Foreign Investor during the initial two-month period or the review period of 60 calendar days, the relevant period is deemed suspended until the receipt of this information.
The Luxembourg FDI Regime also provides a derogation from the suspensory effects of the regime for circumstances where a Foreign Investor meets the threshold of holding 25% of the voting rights of a Luxembourg Entity due to events modifying the distribution of the capital (as opposed to the acquisition of capital by the investor). In these cases, the Foreign Investor has up to 15 days to notify the Ministry of the event.
Sanctions for Failure to Comply
Failure to comply with the notification requirements, or failure to comply with any conditions imposed by the Ministry, can result in the Ministry imposing administrative measures and sanctions.
Administrative measures include ordering the Foreign Investor to modify the transaction or restore the previous situation at its own expense. If the Foreign Investor does not comply with these requirements, the Ministry can impose a fine, the amount of which is determined inter alia by the gravity of the infringement, its duration, and the degree of responsibility of the Foreign Investor. The maximum fines under the statute can be up to EUR 1,000,000 if the Foreign Investor is a natural person, or EUR 5,000,000 if the Foreign Investor is a legal entity.
Two Key Takeaways
- Luxembourg is the latest European jurisdiction to pass broad FDI legislation, underlining the growing complexity of managing FDI concerns in multijurisdictional deals involving Europe.
- The Luxembourg FDI Regime will come into force on 1 September 2023. Investors should consider whether any upcoming transactions involving Luxembourg entities that might close after this date (including transactions signed before this date) could trigger notification requirements in Luxembourg, and factor this into transaction timing accordingly.