Evaluation of foreign direct investment and its implications for businesses

Foreign investment in the European Union has attracted increasing attention recently, with many foreign investors financing large-scale projects to develop key national infrastructure. A regulation was recently adopted in this context. For example, failure to comply with an injunction in a foreign investment assessment procedure can result in a penalty payment of up to €100,000. Therefore, Estonian companies need to be very careful about their foreign investment obligations.

To ensure its security and prevent and mitigate the risks associated with foreign investment, the European Union has adopted Regulation 2019/452, which establishes a framework for assessing foreign direct investment (FDI) that Member States must now follow.

In Estonia, in connection with the Regulation mentioned above, the Act on the Prudential Assessment of Foreign Investment (VUHS) entered into force on 01.09.2023, which means that certain investments now require a permit from the Consumer Protection and Technical Surveillance Authority (TTJA).

What are the real-life implications for Estonian businesses of the Act’s entry into force?

For Estonian businesses, it is crucial to know the answers to two main questions regarding the entry into force of the VUHS:

  • In which cases is an Estonian company involved in the assessment of FDI;
  • In which cases will Estonian enterprises be involved in the assessment of FDI?

1. When must an Estonian company participate in the foreign investment assessment?

If the investment qualifies as an FDI, it must be approved by the TTJA before it can be completed:

  • The investment is made by a foreign investor, i.e., a person or company from outside the European Union;
  • The investment is in an Estonian target company;
  • As a result of the investment, the foreign investor acquires a substantial shareholding in, or acquires part of, or obtains control over, the Estonian target enterprise. 

It is important for Estonian companies to determine whether they qualify as a target company, as in some instances, the investment in a target company requires an assessment procedure by the TTJA. 

Target companies are companies whose activities have a significant impact on Estonia’s security, for example:

  • providers of critical services, i.e., electricity companies, data communication providers, or payment service providers;
  • national media companies, i.e., television or radio service providers and publishers of newspapers or magazines;
  • Owners or operators of critical infrastructure, i.e., airports, railways, or ports.

2. What obligations may an Estonian company have during an FDI assessment?

When the TTJA has to assess a foreign investment that meets the conditions described above, the main focus is verifying the details of the foreign investor and the investment. 

Although the lion’s share of the burden in the authorisation procedure lies with the foreign investor, the Estonian target company must also be prepared to contribute actively by answering any questions the TTJA may have and providing information on itself and the details of the investment. 

It is worth noting that the Estonian target company must also inform the TTJA of a potential foreign investment concerning it if the foreign investor still needs to do so. 

In the procedure for the assessment of foreign investment, the TTJA has the power to impose a penalty payment of up to EUR 100 000 in the event of failure to comply with the injunction. Therefore, Estonian target companies must diligently fulfill their foreign investment obligations and comply with all possible requirements.

You can reach out to Hedman law firm for advice on this matter.

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