The incoming Foreign Direct Investments screening framework of the EU applied in Cyprus

By Demetris Roti, Emilios Charalambous and Maria Aristidou

It is an undeniable fact that Foreign Direct Investments (FDI) are a key contributor to the European Union’s growth as they enhance its competitiveness, create jobs and economies of scale, bring in capital, technologies, innovation, expertise and open up new markets for the Union’s exports. While maintaining an open investment environment, the EU has committed to upholding and promoting its values and interests and contribute to the protection of its residents.

With the above in mind, and since it is mandatory for member states of the European Union to adopt restrictive measures relating to foreign direct investment on the grounds of security or public order under Regulation EU 2019/452, member states must create a screening mechanism to make it possible to assess the relevant risk to their security or public order.

Cyprus’ cabinet approved the relevant bill “Law on the establishment of a framework for the control of foreign direct investments of 2025” on July 2 and it was tabled at the House on July 10.

While the bill is not yet a law, and therefore subject to changes, it is worth examining its key aspects, as it has the potential to impose large changes to the investment landscape of Cyprus.

Scope and applicability

The regulation is applicable to ‘foreign investors’ – natural persons of a third country or a legal undertaking of a third country, intending to make or having made a foreign direct investment – and to ‘strategic enterprises’, which is an enterprise that carries out activities that fall under particularly sensitive sectors defined in the annex to the bill, such as energy, transport, health, defence, communications, tourism, financial services, dual-use technologies, etc.

The competent authority for this matter is the finance ministry, which has the power to approve, impose conditions, prohibit, or reverse investments that may affect security or public order.

Any foreign investor is required to share their intention in writing to the competent authorities at least 10 days before the investment takes place, which requires pre-approval before it is carried out.

The need for notification is applicable if all the following criteria take place for the FDI:

  1. It results in receiving special participation, which can take place through the acquisition, directly or indirectly, individually or in coordination with other persons, of a percentage amounting to at least 25 per cent 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, whether in itself or in combination with other transactions that will take place within 12 months of the planned investment date, is greater or equal than two million euros.
  3. It is related to strategic enterprises.

The competent authority still retains the right to examine any FDI, regardless of whether it falls under the framework of mandatory notification, in cases where there are justifiable reasons to consider that the FDI might affect the security or public order of the Republic.

Exempt from the above are FDIs related to ships under construction or ships that are the subject of purchase and sale, except Floating Storage and Regasification Units (FSRUs).

Factors for whether the FDI might affect security or public order

In determining whether the FDI might be detrimental to security or public order, the evaluation considers the following factors, amongst others:

  1. Whether the sector in which the FDI will take place is sensitive, including the sectors of energy, transport, health, education, tourism, communication, processing or storing of data, defence, electoral or financial services, land and assets, amongst others,
  2. Whether the foreign investor is checked directly or indirectly from a third country government,
  3. If the foreign investor has been involved in activities which affect the safety or public order of an EU member state,
  4. The degree to which the FDI affects or might affect the security or public order of a member state other than the Republic of Cyprus or the EU as a whole,

Required information for screening of a FDI

Under Article 4 of the bill, some of the key points that will need to be for the effective screening of the FDI are:

  • Details of the parties in the transaction and their corporate details,
  • The approximate value of the investment,
  • The products, services, and business activities of the foreign investor and the strategic enterprise,
  • The nature of economic activities being undertaken by the parties in Cyprus,
  • The date at which the investment is planned to take place.

Penalties

Under Article 12, the competent authority may impose administrative fines according to the related violations in cases of:

  1. failure of the investor to notify regarding the FDI, administrative fine not less than €5,000 and not more than €50,000,
  2. submission of falsified or misleading information, administrative fine of up to €100,000,
  3. failure of submission of information, administrative fine of up to €50,000,
  4. lack of compliance within the specified time period for rejected FDIs, administrative fine up to €100,000 and additional administrative fines of up to €8,000 per day of continuous violation.

All fines are imposed with a fully justified decision, according to the severity and duration of the violation, while in every case the affected party will have the opportunity to be heard.

Overall, in our view the bill has managed to incorporate the scope of the EU regulators into a Cypriot framework – all that remains is to see whether it will be approved as a law or whether it will be amended to further cater to the economic system of Cyprus.

This article does not constitute legal advice. For more information and professional advice, feel free to contact any of our team members at Elias Neocleous & Co LLC which authored this piece: Demetris Roti, partner; Emilios Charalambous, associate; Maria Aristidou, associate