The new Act on Screening of Foreign Investments (“FIR Act“) – revamping the foreign direct investment screening mechanism in Slovakia – entered into force on 1 March 2023. Drawing from the EU FDI Regulation, the new FIR Act will have significant impact on inbound investments meeting specific legal criteria into Slovakia by non-EU investors.
The FIR Act introduces an approval procedure held by the Ministry of Economy of the Slovak Republic (“Ministry“) which is mandatory for foreign investments classified as “critical foreign investments” and voluntary for other foreign investments.
Who is considered a foreign investor?
Only investments by “foreign investors” are subject to the new regime. A foreign investor is anyone who has made or plans to make a foreign investment and, in particular:
- is not a citizen of an EU Member State;
- does not have a registered office or place of business in an EU Member State;
- is controlled by or its beneficial owner is:
- an individual or an entity mentioned in (1) or (2), or
- a public authority of a non-EU country, or
- an entity in whose management participates a public authority of a non-EU country; or
- the financing of the investment is secured through financial resources provided by:
- a public authority of a non-EU country, or
- an entity in whose management participates a public authority of a non-EU country.
What are foreign investments and which of them are covered?
The FIR Act applies to both direct and indirect foreign investments, including mergers and acquisitions, joint ventures and acquisitions of assets. A foreign investment is specifically defined as an investment made or planned by a foreign investor, if it enables the foreign investor, directly or indirectly, to:
- acquire the target or a part of the target (by a transfer of business as a going concern);
- exercise an effective participation in the target:
- in case of non-critical foreign investments, effective participation is an interest of at least 25% in the share capital or voting rights of the target;
- in case of critical foreign investments, effective participation is an interest of at least 10% in the share capital or voting rights of the target;
- increase an effective participation in the target:
- in case of non-critical foreign investments, increase to a 50% share in the share capital or voting rights of the target;
- in case of critical foreign investments, increase to a 20% share in the share capital or voting rights of the target and whenever the 33% or 50% thresholds have been reached;
- exercise control (within the meaning of merger control rules) in the target; or
- acquire ownership of or other rights to the substantial assets of the target (only in case of a critical foreign investments).
Intragroup transactions between entities “with the same owner” are explicitly not considered foreign investments. Nevertheless, the scope of this exemption is not entirely clear and we expect it will need to be further clarified by the Ministry.
Not all foreign investments are mandatorily notifiable
Only foreign investments which are considered “critical foreign investments” are subject to a mandatory notification to the Ministry. Critical foreign investments are foreign investments carrying an increased risk of a negative impact on the security or public order of Slovakia due to the importance of the target or its activities from the perspective of maintaining the basic functions of the state.
Foreign investments in a target engaging in one or more of the following activities are considered critical foreign investments:
- manufacturing, research, development, or innovation of arms and military equipment;
- manufacturing, research, development, or innovation of dual-use items (i.e., items that may be used for both civilian and military purposes) set out in the Council Regulation (EC) No 428/2009;
- production, research, development or innovation in the field of biotechnology in the health sector;
- operation of an element of critical infrastructure (i.e., an engineering structure, a service in the public interest, or an information system essential for economic and social function of the state);
- operation of an essential service (the list of which is public and includes activities related to banking and financial markets, transportation, digital infrastructure, electronic communications, pharmaceutical and chemical industries, smart industry, energy, water management, healthcare, public services, or postal services);
- provision of a digital service in the field of cloud computing (in case the provider has at least 50 employees and annual turnover or assets exceeding EUR 10 million);
- manufacturing, research, development, innovation, or possession of national cryptographic information protection products, or components necessary for their security function, if these products are certified by the National Security Authority;
- nation-wide television or radio broadcasting;
- provision of a content sharing platform with annual turnover exceeding EUR 2 million;
- publishing of a periodical publication, operating a news website or a news agency.
The list of the activities is set out in a government decree, enabling the government to make any changes as necessary. It is therefore recommended to double-check the list before assessing a specific transaction.
What is the procedure?
In case of critical foreign investments, the foreign investor has a legal obligation to file an application with the Ministry for assessment prior to making the foreign investment. The critical foreign investment cannot be completed before the Ministry issues the approval.
Other foreign investments may be voluntarily submitted for assessment whether they have a negative impact on the security or public order of Slovakia. Such a route should be considered if it cannot be conclusively determined whether the investment may be considered a critical foreign investment, in order to mitigate the risk of non-compliance and avoid severe fines.
The Ministry may also commence an investigation of a foreign investment from its own initiative in case:
- there is a reasonable presumption that the foreign investment might have had a negative impact on the security or public order of Slovakia at the time of its completion,
- there is a suspicion that the law has been circumvented, or
- it receives reasoned comments from another EU Member State or an opinion of the European Commission.
The time needed to render a decision by the Ministry can vary from case to case and it is not possible to foresee precisely this aspect yet. Nevertheless, the procedure can be quite lengthy and, for instance, the consulted authorities have up to 40 days to provide the Ministry with their opinion on the notified investment. If the Ministry neither issues an approval, nor presents an opinion to the government that the investment would have a negative impact, within 130 days of the initiation of the investment screening, it is presumed the Ministry has approved the investment.
What are the sanctions?
If a foreign investor fails to comply with any of their legal obligations, they expose themselves to the risk of sanctions. Failure to request an approval for a critical foreign investment may be punished with a fine in the amount of up to the value of the foreign investment or 2% of the aggregate net turnover achieved by the foreign investor’s group in the previous fiscal year, whichever is higher. In case a foreign investment carrying an increased risk of a negative impact on the security or public order is completed without the required approval, the Ministry has the authorization to order the foreign investor to reverse the transaction.