EUROPEAN COMMISSION Brussels, 1.9.2022 COM(2022) 433 final REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Second Annual Report on the screening of foreign direct investments into the Union {SWD(2022) 219 final}



INTRODUCTION This Report is the second Annual Report by the European Commission on the application of the EU Foreign Direct Investment (FDI) Screening Regulation (the “FDI Screening Regulation”, or the “Regulation”). The Report covers the year 2021 and provides transparency around the operation of FDI screening in the EU, and developments in national screening mechanisms. It contributes to the accountability of the Union in an area where, given the security interests at stake, transparency regarding individual transactions is neither possible nor appropriate. It is based on reports by the 27 Member States and other sources and consists of four chapters: ·Chapter 1 on trends and figures for FDI into the EU; ·Chapter 2 on legislative developments in Member States; ·Chapter 3 on FDI screening activities by Member States; ·Chapter 4 on the EU cooperation mecanism on FDI screening. This Annual Report is adopted simultaneously with the Annual Report on Dual Use Export Controls. Both FDI Screening and Export Controls are important tools for strategic trade and investment controls to ensure security in the European Union.



CHAPTER 1 – FOREIGN DIRECT INVESTMENT INTO THE EUROPEAN UNION – TRENDS AND FIGURES In 2021, global foreign direct investments (FDI) rebounded from the COVID-19-induced slowdown in 2020. Global inflows reached EUR 1.5 trillion in 2021 (Figure 1), recording a +52% increase with respect to 2020 and a +11% increase with respect to the pre-COVID-19 levels of 2019. The EU contributed to 2021’s global recovery with EUR 117 billion of inward FDI, 8% of the world level (it was 27% in 2019), which represents a 31% decrease with respect to 2020 levels and a -68% decrease compared to 2019. The EU result is driven by the decreases of inward FDI in Ireland, Germany and Luxembourg and by disinvestments in the Netherlands. In 2021, strong equity markets and a recovery in business confidence led to increased mergers & acquisitions (M&A) and greenfield transactions globally but not yet in the EU27 (Figure 1), in spite of the drop in aggregated FDI inflows. The number of acquisitions and greenfield investments increased in the EU by +32% and +12%, respectively, compared to 2020. Acquisitions remained however 9% below the level reached in 2019. For greenfield investments the difference with the pre-pandemic year reached -39%.

The upward trend in cumulated flows of foreign transactions in the EU27 confirms the openness of EU countries to foreign investments, despite the slow-down caused by the COVID-19 pandemic (Figure 2), with an average rise of over 2 100 acquisitions and 3 200 greenfield investments per year in the past five years. Figure 2: 2015-2021 yearly cumulative number of transactions into the EU27 Source: JRC elaboration based on Bureau van Dijk data, extracted on 22/02/2022. Data for 2015 corresponds to the flows of FDI in 2015, while data for the subsequent years correspond to the cumulated sum of yearly flows. Year-on-year data by foreign jurisdiction shows an increase in the number of deals and projects for most origin countries in 2021 (Figure 3). The US was the top foreign investor in 2021, accounting for 32.3% of all acquisitions and 39.4% of the greenfield investments, followed by the UK with 25.6% and 20.9%, respectively. Notable exceptions are China and Japan, both remaining below their 2020 levels. China, in particular, with 2.3% of all foreign acquisitions in 2021 (down from 3.4% in 2020) and 6% of the greenfield investments (down from 7.1% in 2020), failed to take off in dealmaking, despite some large announced M&A and greenfield investments driving up the value of Chinese investments to EUR 9 billion in 2021 (from EUR 6.5 billion in 2020).



Strict Chinese capital controls and the concentration of investment activities in core industry sectors were negatively influencing Chinese dealmaking in 2021. While in 2021 most of the jurisdictions reached the pre-COVID-19 levels of acquisition of equity stakes, some of them even improving on 2019 levels, greenfield investment projects remained lower compared to 2019 levels. The only exception here being offshore countries (grouping 133 projects in 2021, up from 106 in 2019) and Russia (with 46 projects in 2021, up from 20 in 2019). Despite analysts’ positive outlook for 2022, arising from the expectation that the worst of the pandemic had been left behind, hopes are rapidly vanishing with the uncertain business climate stemming from Russia’s unprovoked and unjustified invasion of Ukraine. The economic effects of the sharp increase in the cost of energy (which was already having an effect prior to the invasion) and raw materials, and the extent of the economic repercussions of supply chain disruptions, in particular for critical raw materials and critical technologies, and weaker global activity and trade, which are still not fully assessed, will influence the dealmaking momentum in the EU, potentially leading to a downward revision of the initial positive stance for 2022.





Further details More details on the above figures are provided in the accompanying Commission Staff Working Document, Section 1. There, additional data is provided on the impact and recovery per Member State and sector, on the origin of foreign investors in the EU, and on foreign state participation in foreign investors in the EU.



CHAPTER 2 – LEGISLATIVE DEVELOPMENTS IN MEMBER STATES IN 2021 The EU FDI Screening Regulation and EU Member States’ FDI screening mechanisms While the EU FDI Screening Regulation does not require Member States to establish a national screening mechanism, the European Commission continues to encourage Member States, both at political and technical level, to adopt, adapt, and implement national screening mechanisms. Most recently, the European Commission called upon Member States to set up a fully-fledged screening mechanism in the 2020 Guidance to Member States on how to use FDI screening in times of public health crisis and economic vulnerability in the EU and in the 2022 Guidance to Member States on FDI from Russia and Belarus. The European Commission is actively fostering this development in all Member States, facilitating the progress and alignment of national legislative processes. Throughout 2021, the European Commission has assisted Member States with technical and policy guidance, technical meetings and information exchange including exchanges of best practices. Nevertheless, despite this regular cooperation and a number of important similarities between national screening mechanisms, Member States continue to show significant degrees of variation in terms of what constitutes a formal screening of an FDI, applicable timelines, sectoral coverage, notification requirements and other elements. Therefore, the European Commission remains dedicated to support the alignment of national screening mechanisms and expects that all 27 EU Member States will soon have a national FDI screening mechanism in place. A national screening mechanism in all 27 Member States is necessary to safeguard the Union against potentially risky foreign investments from third countries. It would ensure that all 27 Member States and the European Commission screen relevant FDI, thereby protecting the collective security of the Member States and the Union, as well as the security of the Single Market and the very high level of economic integration which it allows. Overview of Member States with a screening mechanism or in the process of setting one up The global pandemic and recent disruptions in global supply chains have brought into focus the criticality of certain key industries, such as healthcare and energy. Consequently, many EU Member States have either adopted new national screening mechanisms, or updated and expanded existing ones. In 2021, three Member States adopted a new screening mechanism and six Member States amended their existing one. By the end of 2021, seven Member States had already initiated consultative or legislative processes to establish a national screening mechanism. In total, in 2021, two thirds of all EU Member States had an FDI screening legislation in place. FDI Screening is increasingly gaining momentum in the EU. The map below gives an overview of the legislative status quo of EU Member States. Developments in EU Member States in 2021 – FDI screening mechanisms So far, 25 out of 27 EU Member States either: ·had a national FDI screening mechanism in place; or ·adopted a new national FDI screening mechanism; or

·amended an existing mechanism; or ·initiated a consultative or legislative process expected to result in the adoption of a new mechanism or amendments to an existing one. The following table gives an overview of all 27 Member States’ legislative situation and developments in 2021. National FDI screening mechanism in place Austria, Finland, Malta, Poland, Portugal, Slovenia, Spain Have amended an existing mechanism France, Germany, Hungary, Italy, Latvia, Lithuania Had a consultative or legislative process expected to result in updates to an existing mechanism The Netherlands, Romania Have adopted a new national FDI screening mechanism Czechia, Denmark, Slovakia Had a consultative or legislative process expected to result in the adoption of a new mechanism Belgium, Croatia, Estonia, Greece, Ireland, Luxembourg, Sweden No publicly reported initiative underway Bulgaria, Cyprus Most amendments to national legislation revolved around three topics: upgrading screening procedures, expanding covered sectors, and prolonging the validity of national mechanisms. For instance, France lowered the threshold at which investments of non-EU investors are screened and now also requires investors to submit the EU Notification “Form B” alongside other documents. Germany introduced a variety of procedural changes (e.g. the addition of 16 new case groups relating to emerging/sensitive technologies), applied new thresholds on the acquisition of capital and voting rights that require a notification, and introduced new requirements for investors. Italy extended the applicability of its existing screening mechanism. Latvia, inter alia, extended the national authorities’ power to request further information from investors. Lithuania, inter alia, adjusted its list of enterprises and strategic infrastructure that it considers important. Hungary added to their legislation further activities of target companies that require a notification of the planned transactions. Finally, several other Member States have indicated that they are currently planning amendments to their existing mechanisms. More detailed information on the legislative developments in Member States’ national screening legislations can be found in the accompanying Commission Staff Working Document. Also, a list of national legislative updates is maintained by the European Commission.



CHAPTER 3 - MEMBER STATES’ FDI SCREENING ACTIVITIES The FDI Screening Regulation establishes a cooperation mechanism for FDI screening among the European Commission and EU Member States. However, the decision on which investments to screen, approve, condition, or block, is taken by the Member States where the investment takes place. This chapter relies on - and aggregates - data provided by Member States on cases screened under their legislation and screening mechanisms during 2021. Overall, there has been a considerable number of requests for authorisations received in 2021at national level. Pursuant to Article 5 of the Regulation, which organises their reporting obligation, Member States have reported 1 563 requests for authorisation and ex-officio cases in 2021. Figure 6 - Member States’ FDI Screening Activity Source: Member States’ reporting. There is an apparent trend towards screening more cases formally. Indeed, out of the 1 563 authorisation requests and ex-officio cases, roughly 29% of the cases were formally screened. This seems to mark an increase in the proportion of formally screened cases from 2020. It could be explained by a greater attention of what national authorities consider as potentially “critical”, as well as a change in overall investment trends. About 71% of all applications were deemed ineligible or did not require formal screening because of an evident lack of impact on security and public order. The number of authorisation requests is also very unevenly distributed across EU Member States. Indeed, four Member States accounted for roughly 70% of all authorisation requests and ex-officio cases in 2021. Out of the cases formally screened in 2021, and for which Member States have reported a decision, the majority (73%) were authorised without conditions, which means that the transaction was approved without any additional action required from the investor. However, 23% of the decisions involved an approval with conditions or mitigating measures. In these cases, national screening authorities have negotiated certain actions, assurances, and commitments from the investors before approving the planned foreign direct investment. Finally, national authorities ultimately blocked transactions in only 1% of all decided cases, while for a further 3% the transaction was withdrawn by the parties.

Figure 7 – Notified decisions on FDI cases Source: Member States’ reporting. In summary, the above findings give rise to the following key take-aways: ·In comparison to 2020, Member States have considered the requests received as more sensitive in 2021, as the proportion of formally screened cases has increased. ·Authorisation requests are unevenly distributed across EU Member States, with four countries accounting for roughly 70% of all applications received. It was 86.5% in the first annual report. This speaks for a diversification of screening among Member States. ·Throughout 2021, the majority of transactions, where a decision was reported, was authorised without any conditions (73%, it was 79% in the first report). ·23% of the decided cases did entail mitigating measures (this is a significant increase compared to the last report, with 12%). ·Only 1% of the transactions were blocked by Member States (compared to slightly more before, i.e. 2% in the first report), confirming that the European Union remains open to foreign direct investments and Member States only deny cases that pose very serious threats to security and public order.



CHAPTER 4 – EU COOPERATION MECANISM ON FDI SCREENING 1.Notifications and other actions taken under the FDI Screening Regulation Chapter 3 summarised the level of screening activity at a national level. It captures those investments caught at a national level that met the conditions to be subject to screening under the FDI Regulation. In 2021, 13 Member States submitted a total of 414 notifications, pursuant to Article 6 of the FDI Screening Regulation, compared to 11 Member States during the period covered by the first annual report on FDI screening. Five Member States, namely Austria, France, Germany, Italy and Spain, were responsible for more than 85% of those notifications. The notified transactions vary greatly in terms of sectors of the investment target, origins of the ultimate investor and value of the transaction. The five sectors with the highest number of transactions were ICT, Manufacturing, Financial activities, Wholesale and Retail - and construction (in the first annual report, “construction” was incorporated in the category “Other”). The first three sectors are the same ones as in the first annual report but in a different order. Source: Member States’ notifications.

Looking at the transactions’ value, the majority of the transactions had a value of less than EUR 500 million yet the biggest part (34%) was over EUR 500 million. Source: Member States’ notifications. The notified transactions show a broad range in terms of value, with the lowest deal-value at EUR 1 and the highest approximately EUR 29-31 billion. The FDI Screening Regulation foresees that an assessment of FDI transactions is undertaken in two possible phases: All notified transactions are assessed under Phase 1, with only a limited number proceeding to Phase 2. Phase 2 implies a more detailed assessment of cases that could possibly affect security or public order in more than one Member State, or create risks to projects or programmes of Union interest. Phase 2 cases could ultimately be concluded by the European Commission issuing an opinion on the case in question.



Of the 414 cases notified, 86% of the cases were closed by the European Commission in Phase 1, with the remaining 11% (14% in the previous report) proceeding to Phase 2 with additional information being requested from the notifying Member State. 3% of those cases were still ongoing on the cut-off date of this report, i.e. not yet closed in Phase 1 or 2. Additional information requested by the European Commission when opening Phase 2 varies considerably, depending on the specific transaction and the detail and quality of the information supporting the notification. The information requested typically includes one or more of the following elements: data on products and/or services of the target company; possible dual-use classification of any products involved; customers, alternative suppliers and market shares; the influence of the investor on the target company after the transaction; the IP portfolio and R&D activities of the target company; and additional defining characteristics of the investor and its strategy. This information is requested in order to assess better the criticality of the target or the potential threats posed by the investor. The main sectors at issue in Phase 2 cases were Manufacturing, ICT, and Financial activities. Manufacturing and ICT accounted for 76% of all Phase 2 cases. The ICT sector rose quite drastically from 17% in the previous report to 32% in the current one.



Figure 11 - Phase 2 main targeted sectors in 2021 cases On the top sector - manufacturing, it encompasses critical infrastructures and/or technologies, i.e. defence, aerospace, energy, health (including pharma) and semiconductor equipments. Defence and aerospace account for almost half of the notifications in that sector (45%).

Nine Member States accounted for 47 Phase 2 cases. For all Phase 2 cases, the average duration for Member States to provide the requested information has been 22 calendar days (compared to 31 calendar days in the first report), with a range from 3 to 101 days (compared to 2 to 101 calendar days in the first report). The FDI Regulation does not set precise timelines within which Member States must respond, but the timelines under the Regulation are suspended until full information is received. As for the origin of the ultimate investor, in the 414 cases notified to the European Commission in 2021, the five main countries of origin were the USA, the UK, China, the Cayman Islands and Canada. Russia accounted for less than 1.5% of the cases and Belarus for 0.2%. Of all the cases notified in 2021, 28% (compared to 29% in the first report) constituted multi-jurisdiction FDI transactions because they concerned (and were notified by) several Member States. The main sectors that were the subject of such notifications were ICT, Manufacturing, Wholesale and Retail and Financial activities. Table - Multi-jurisdiction FDI transactions and main sectors ICT 39% Manufacturing 20% Wholesale and retail 11% Financial activities 9% Other 32% Besides all the cases notified pursuant to Article 6 of the Regulation, the European Commission has in 2021 not made use of Article 7 of the Regulation (but did previously, as stated in the first report). Article 7 allows the European Commission to screen ex officio investments of which it becomes aware with a Member State and, independent, of the question of whether that Member State has its own screening mechanism or not. As for the adoption of Commission opinions, pursuant to either Articles 6, 7 or 8 of the Regulation, such opinions remain confidential pursuant to Article 10 of the Regulation. Hence, no information can be published on individual opinions in this report. Opinions have been issued in less than 3% of all cases notified (same figure as in the first annual report) and are issued only when and if required by the circumstances of a case, more specifically the risk profile presented by the investor and the criticality of an investment target. When issued, any recommended mitigating measures are proportionate and specific to the risks and criticality identified. Commission opinions may also consist of sharing relevant information with a screening Member State, and may also suggest potential mitigating measures to address identified risks. It will ultimately be for the Member State where the investment takes place to decide on the transaction, while it shall give due consideration to any Commission opinion.