Michael Kyriakides: If implemented correctly, the new FDI screening system will be a positive development for Cyprus

Michael Kyriakides, Partner at Harris Kyriakides law firm, breaks down the government's new bill for screening specific foreign direct investments (FDI), and warns companies operating in critical industries to be aware of the new screening requirements.

However, speaking to CBN, he assures that he doesn't believe the new screening mechanism will reduce the overall volume of FDI flowing into Cyprus, and thinks that overall, this is a positive development for the country.

A new bill has been introduced on the screening of FDI that may affect national security or public order. Can you please explain in simple terms what this is about?

This is a new legislation which establishes a formal screening mechanism for specific foreign direct investments (FDI) in Cyprus, specifically those that could potentially impact national security or public order. FDI occurs when a foreign company or individual outside the European Union acquires a significant stake or controlling interest in a Cypriot business, either by purchasing shares or assets. The core purpose of this new law is to safeguard Cyprus’ strategic interests by allowing the government to scrutinise investments that involve sensitive sectors—such as energy, telecommunications, transport, defence, and advanced technologies—that are critical to national infrastructure and security.

This screening will apply only to investments equal to or exceeding €2 million and only when the investor is based outside the European Union (EU). For example, if a non-EU investor aims to acquire a controlling interest in a company managing essential utilities or communication networks, this transaction would undergo a careful review to identify any risks that might compromise security or public order.

A specialised inter-ministerial committee, led by the Ministry of Finance and including representatives from key government departments, will have the authority to approve these investments, impose specific conditions to mitigate risks, or reject them outright if deemed necessary.

Importantly, this bill aligns Cyprus with similar frameworks already adopted by other EU member states, ensuring consistency with broader European standards on protecting strategic assets. While the vast majority of foreign investments, especially those outside sensitive sectors, will proceed without interference, companies operating in critical industries should be aware of these new screening requirements as part of their transaction planning.

If passed as it is at parliament, how are you expecting it to affect FDI in Cyprus?

Cyprus’ new FDI screening regime fits within the broader framework established by the European Union but also reflects the flexibility that the EU regulation allows individual Member States. The EU Foreign Direct Investment Screening Regulation, which came into effect in 2020, does not impose a mandatory requirement for all Member States to conduct their own domestic screening of foreign investments. Instead, it encourages countries to adopt or maintain screening mechanisms tailored to their specific needs.

The trend for more FDI regulation has been accelerated by the Covid-19 pandemic, with governments concerned that “critical” national companies are becoming more vulnerable to foreign acquisition. Therefore, we can get some insights as to the impact of FDI laws from other countries, which have already been operating similar legislation for some years.

In my view, the screening regime is unlikely to deter most foreign investors or reduce the overall volume of FDI flowing into Cyprus. The legislation is carefully targeted, applying only to non-EU investors, and only for investments of €2 million or more in sectors considered sensitive from a national security perspective. Therefore, routine investments in sectors like retail, hospitality, financial services, or other less sensitive areas will remain unaffected and continue to attract international capital as before.

There is no doubt that for businesses and investors operating within strategic industries—such as infrastructure, energy, defence, transport, and advanced technologies—the law introduces an additional layer of scrutiny. This inevitably means that transactions in these sectors will experience longer timelines, as they will require government clearance before proceeding. Nevertheless, in the long run, FDI legislation should help Cyprus attract the right kind of investments—those that respect the country’s security needs while contributing to sustainable economic growth. The law, if properly applied, is prone to promote both protection and openness, ensuring that Cyprus remains competitive without compromising national interests.

This approach strikes a balance between protecting national security and maintaining an open, investor-friendly environment.

Do you see any drawbacks in the bill? If so, how do you suggest it is improved?

One of the main concerns with the proposed bill is the potential for delays and uncertainty during the screening process, particularly if the government’s administrative capacity is insufficient to handle applications efficiently. FDI screening is an added step that could lead to delays, potentially complicating deal execution and creating uncertainty around the final outcome, which investors typically view as a drawback. For investors, especially those involved in competitive or time-sensitive deals, predictability and speed are crucial. Prolonged reviews or unclear timelines could discourage some investors or cause them to look elsewhere.

In my view, in order to mitigate these risks, the government should provide clear, detailed guidance on how the screening process will work. This includes setting defined timelines for each stage of the review, specifying the required documentation upfront, and establishing clear communication channels between investors and the reviewing committee. Such clarity would help reduce ambiguity and build confidence in the process. Another valuable improvement would be to introduce a pre-notification or informal consultation phase. This would allow investors to seek preliminary feedback or clarifications before formally submitting their transaction for review, enabling them to address potential concerns early and prepare more complete applications. Also, transparency is key to ensuring the credibility of the screening framework. Investors need to understand the rationale behind any conditions imposed or decisions to block transactions. Clear, objective, and publicly accessible decision criteria will help reassure the market that the process is fair and focused strictly on protecting national interests. If implemented with these safeguards—efficiency, transparency, and investor engagement—the new FDI law can serve as an effective tool to protect Cyprus’s strategic sectors without discouraging legitimate foreign investment.

Overall, do you think passing this law will be a positive thing for Cyprus?

Yes, I believe that, if implemented correctly, the new FDI law will be a positive development for Cyprus. It addresses an increasingly important need in today’s geopolitical and economic environment, where control over critical infrastructure and advanced technologies has become a key factor in national security. The legislation helps ensure that Cyprus’s most sensitive sectors remain under appropriate oversight, protecting the country from potential risks that can arise when foreign investors gain significant control in strategic areas. This is particularly important given recent global trends, where safeguarding supply chains, critical infrastructure, and technology assets has become a priority for many governments. Moreover, the law signals to the international community that Cyprus is committed to aligning with EU standards on investment governance and security. This alignment can enhance investor confidence, especially among institutional investors and long-term stakeholders who value regulatory clarity, legal certainty, and economic resilience.