Step-by-step: The Foreign Direct Investment screening procedure

The bill for the implementation of a National Mechanism for the Screening of Foreign Direct Investments (FDI), in accordance with the regulation of the European Union (EU) for the protection of national security and public order, has been submitted to the House of Representatives for discussion and voting after the summer recess.

According to the explanatory report, the purpose of the bill is the implementation of Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019, establishing a framework for the screening of foreign direct investments into the Union.

This bill replaces the bill that was submitted to the House of Representatives in March 2024, which was amended following consultation with interested parties.

According to the reasoning report signed by the Attorney General, George Savvides, the bill sets out the conditions under which the obligation arises to notify the intended foreign direct investment (FDI) and obtain approval, the criteria and factors that may be taken into account during the screening of FDI, the FDI screening process, the type of information required during screening, and the enforcement powers of the competent authority.

• Read more: Marios Tannousis: The National FDI Control Mechanism is a very important and positive step

Obligation to notify FDI

According to the provisions of the bill, the competent authority for screening foreign direct investments is the Ministry of Finance, and a foreign investor intending to proceed with a foreign direct investment must notify in advance their intention to the competent authority at least ten days before the investment is made.

The said notification is made by written request, which describes the intended foreign direct investment in the Republic and provides information defined in Article 4 of the bill, as well as any additional information requested by the competent authority.

It is emphasised that the notification aims at the screening of the FDI and the securing of approval by the competent authority, since prior approval by the authority will be required for the FDI to take place.

It is worth noting that the obligation to notify applies only when the following criteria are cumulatively met:

1. The FDI results in the acquisition of special participation, as defined in subsection (3), according to which special participation is considered the acquisition, directly or indirectly, individually or in coordination with other persons, of a percentage amounting to at least 25% of the share capital and/or voting rights, or a corresponding ability to exercise decisive influence over the activities of the enterprise.
   
2. The value of the FDI, either individually or in combination with other transactions between the same parties within a period of 12 months from the date on which the FDI is scheduled to take place, is equal to or exceeds €2 million.
   
3. The FDI concerns a strategically important enterprise, which carries out activities falling within particularly sensitive sectors concerning vital infrastructure, whether physical or virtual, including infrastructure in the sectors of energy, transport, water supply, health, education, tourism, communications, media, data processing or storage, defense, electoral or financial services including systemic credit institutions, sensitive installations, as well as land and real estate of critical importance for the use of such infrastructure.
   

It is noted that special participation is considered the acquisition, directly or indirectly, individually or in coordination with other persons, of a percentage amounting to at least 25% of the share capital and/or voting rights, or a corresponding ability to exercise decisive influence over the activities of the enterprise.

Furthermore, under the provisions of the bill, any further increase in special participation, which results in the percentage of share capital and/or voting rights held by the foreign investor changing:

• From less than 25% to 25% or more, or
• From less than 50% to 50% or more,

creates an obligation to notify, regardless of the value of the FDI.

Beyond the above, any enterprise, organisation, foundation, or other type of legal entity in which at least 25% of the share capital and/or voting rights is held by a foreign investor and/or where the beneficial owner is a foreign investor and/or in which a foreign investor holds, directly or indirectly, control of the entity in question, and which intends to make an FDI in a strategically important enterprise, is also subject to the obligation to notify.

Exemptions from the obligation to notify apply to FDIs involving ships under construction or ships being bought or sold, except for floating storage and regasification units (FSRU) of natural gas.

It is clarified that the competent authority (Ministry of Finance) retains the right to examine any FDI, regardless of whether it falls under the framework of mandatory notification, in cases where there are reasonable grounds to believe that the FDI may affect the security or public order of the Republic of Cyprus.

In case the FDI does not fall under mandatory notification, the competent authority may exercise this power within 15 months from the date of the investment.

Information to be checked

According to the bill, the information required for the purpose of FDI screening includes, among others:

• The details of the parties involved in the transaction, including, where applicable, the name, trade name, registered address, headquarters, NACE classification code, registration number, and any other information deemed necessary by the competent authority
• The ownership structure of the foreign investor and the strategically important enterprise where the FDI is planned, including information on the ultimate investor and/or beneficial owner and shareholding, as well as any other information deemed necessary by the authority
• The approximate value of the FDI
• The products, services, and business activities of the foreign investor and the strategically important enterprise where the FDI is planned
• The nature of economic activities carried out in the Republic of Cyprus by the parties to the transaction
• The funding of the investment and its source
• The date on which the FDI is planned to take place
• The countries in which the foreign investor and the strategically important enterprise conduct business
• Information on whether sanctions and restrictive economic measures have been imposed on parties or persons related to a third-country enterprise involved in the transaction
  

Risk assessment

According to the annex of the bill, factors considered by the competent authority when assessing whether an FDI is likely to affect the security or public order of the Republic of Cyprus include:

• Whether the enterprise where the FDI is planned operates in a particularly sensitive sector involving vital infrastructure, either physical or virtual, including infrastructure in the sectors of energy, transport, water, health, education, tourism, communications, media, data processing or storage, defense, electoral or financial services including systemic credit institutions, sensitive installations, as well as land and real estate of critical importance for the use of such infrastructure
• The potential consequences of the FDI regarding access to sensitive information, including personal data, or the ability to control such information
• The freedom and pluralism of the media
• Technologies of strategic importance and dual-use items, including technologies in the fields of artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defense, energy storage, quantum and nuclear technologies, as well as nanotechnologies and biotechnologies
• The supply of production factors of critical importance, including energy or raw materials, as well as food security
  

To determine whether an FDI is likely to affect national security or public order, the authority also considers:

• Whether the foreign investor is directly or indirectly controlled by the government of a third country, including state bodies or armed forces, through ownership structure or provision of significant funding
• Whether the foreign investor has been involved in activities affecting the security or public order of an EU Member State
• Whether there is a serious risk that the foreign investor is engaged in illegal or criminal activities
• Any observations by EU Member States and/or the opinion of the European Commission
• The extent to which the FDI under review affects or is likely to affect the security or public order of another EU Member State or the EU as a whole
• The possibility that the FDI may impact projects or programs of EU interest
  

Prohibition or termination of FDI

It is noted that, based on the bill, if the competent authority considers that the FDI under review affects the security or public order of the Republic of Cyprus, it may, depending on the case, impose conditions, prohibit, or reverse the FDI, and inform the foreign investor accordingly.

If the foreign investor refuses or fails within the time period set by the authority to comply with any conditions, the authority, by written decision, may prohibit, terminate, or reverse the FDI insofar as it concerns the strategically important enterprise.

In the case of prohibition, termination, or reversal of any FDI under review, or until the investor complies with any imposed conditions, the foreign investor and/or any persons controlled by or acting in coordination with them are prevented from exercising any rights arising from or related to the FDI in the strategically important enterprise, including but not limited to voting rights, management, or control.

Additionally, if any person related to an FDI covered by the provisions of the bill fails to notify, the FDI is automatically deemed to be in violation of the law, and the authority may take any or all measures to prohibit, terminate, or reverse the FDI.

Sanctions – fines

According to the provisions of the bill, the competent authority may impose the following administrative sanctions on the foreign investor or any person directly or indirectly controlling the FDI that falls under the bill, and who violate or fail to comply:

• Administrative fine not less than €5,000 and not exceeding €50,000 for failure to notify the FDI
• Administrative fine up to €100,000 for providing false or misleading information under any obligation imposed by the law
• Administrative fine up to €50,000 for failing to provide information required by law
• Administrative fine up to €100,000 for failure to comply with any measure ordered by the authority, and an additional fine of up to €8,000 per day for each day the violation continues
  

Advisory Committee

According to the provisions of the bill, an Advisory Committee is established, consisting of seven members appointed by the competent authority.

The Advisory Committee shall provide information and reasoned written advice to the competent authority regarding FDIs notified to the authority.

The Chair of the Advisory Committee is a civil servant of the competent authority serving in a position of scale A13 and above, while the members are appointed by the competent authority following the recommendation of the respective ministries, and are civil servants of scale A13 and above from the following ministries/services:

• Ministry of Defence
  
• Ministry of Energy
  
• Ministry of Foreign Affairs
  
• Ministry of Interior
  
• Ministry of Justice
  
• Ministry of Transport

(Source: InBusinessNews)