On 1 March 2023, Act No. 497/2022 Coll. on Screening of Foreign Investments and on Amendments to Certain Acts (the “FDI Act”) came into force. Slovakia has thus joined several other EU countries, which have already implemented foreign investments screening mechanisms in their laws several months or a few years ago. The purpose of the FDI Act is to ensure protection of security and public order in the Slovak Republic and EU. Based on the new FDI Act, foreign investments are subject to screening or approval procedure by the Slovak governmental authorities.
The FDI Act applies only to foreign investments made by foreign investors, i.e., individuals not being state citizens of the Slovak Republic or of another member state of the EU, and entities not having their registered seat in the Slovak Republic or in another member state of the EU. Slovak or EU entities or citizens qualify as foreign investors if:
- they are being controlled by a foreign individual or entity, or by a public body of a third country (governmental authority of a third country, etc.) or an entity, in which a third country has participation; or
- their ultimate beneficial owner is a foreign individual or entity, or a public body of a third country (governmental authority of a third country, etc.) or an entity, in which a third country has participation; or
- financing of a foreign investment is secured by sources provided by a public body of a third country (governmental authority of a third country, etc.) or an entity, in which a third country has participation; or
- they act (in relation to a foreign investment) in concurrence with a foreign individual or entity, or with a public body of a third country (governmental authority of a third country, etc.) or an entity, in which a third country has participation.In addition, particular other organizations (funds or trusts) may qualify as foreign investors.Below we summarize main principles of the new FDI Act.
1. Foreign Investment
Foreign investments regulated by the FDI Act concern investments in Slovak target entities, i.e., in entities with their registered seat in Slovakia, which already exist or which shall be created in connected with the foreign investment (the “Slovak Target Entity”).
A foreign investment is understood as an investment planned or made by foreign investor provided that it allows the foreign investor to (directly or indirectly):
a) acquire a business of the Slovak Target Entity or its part; or
b) perform an effective participation in the Slovak Target Entity; The “ e ff e c ti v e p a rtici p a ti o n ” means the amount of share(s) on the registered capital or voting rights of the Slovak Target Entity, which is:
- 10% in case of a critical foreign investment, and
- 25% in case of any other foreign investment; or;
c) increase an effective participation in the Slovak Target Entity; The “increase of an effective participation” means an increase of the amount of share(s) on the registered capital or voting rights of the Slovak Target Entity, which is:
- an increase to (in each case) 20%, 33% and 50% in case of a critical foreign investment, and
- 50% in case of any other foreign investment.
or;
d) exercise control in the Slovak Target Entity; or
applicable only in case of critical foreign investments:
e) acquire an ownership right or other right to the Slovak Target Entity’s material assets.
Important to note is that foreign investments made after a commencement of enforcement of a pledge or another security right in relation to the Slovak Target Entity are not excluded from the application of the FDI Act. Thus, the new FDI Act must be also taken into consideration in connection with financings. Similar principles apply to investments after the Slovak Target Entity’s entry into liquidation, commencement of bankruptcy or restructuring proceedings, or enforcement or other similar proceedings concerning the Slovak Target Entity.
Exemptions:
Particular foreign investments, which would otherwise fulfil the definition of the foreign investments pursuant to the FDI Act, are exempted from the application of the FDI Act. These include, for example, foreign investments, if a foreign investment is planned or made by and between entities, whose shareholders or owners are the same persons. In our view, the likely purpose of this regulation was to exempt intra-group transactions and similar corporate reorganizations , in which the Slovak Target Company and the foreign investor are owned or controlled by the same persons, from the application of the Slovak FDI Act, although the respective wording of the FDI Act is not precisely formulated.
2. Types of Foreign Investments
(Critical or Other Foreign Investments)
The Act on FDI differentiates between:
- critical foreign investments; and
- other foreign investments.Depending on the type of the foreign investment, different rules apply. The main difference is that critical foreign investments are always subject to mandatory screening. A critical foreign investment must not be made prior to its approval or conditional approval by the Ministry of Economy of the Slovak Republic (the “Ministry”). Critical foreign investments are foreign investments, in connection with which there is an increased risk of an adverse effect on security and public order of the Slovak Republic. They are specifically defined in a governmental regulation implementing the FDI Act1. They include investments in Slovak Target Entities carrying out business in specific areas, such as business certain activities in biotechnology in the health industry, defense industry, digital services in the field of cloud computing, etc.
3. Foreign Investments Screenings and Assessments of Risks
There are two main proceedings according to the FDI Act:
a) assessment of a risk of an adverse effect of a foreign investment on security or public order in the Slovak Republic;
In the proceeding on the assessment of the risk, the Ministry analyses the investment in order to determine whether there is a reasonable supposition that the investment may endanger or violate security or public order of the Slovak Republic or EU.
b) foreign investment screening;
In the foreign investment screening, the Ministry analyses the investment in order to determine whether the foreign investment has an adverse effect, i.e., whether it endangers or violates security or public order of the Slovak Republic or EU.
3.1 Assessment of Risk (Voluntary Proceedings)
In principle, foreign investments, which are not critical foreign investments, do not always have to be mandatorily notified to the Slovak governmental authorities (as opposed to critical foreign investments, which must be always notified to the Ministry prior to their execution). However, the Ministry may anytime within two years after the investment was made (this long-stop date does not apply in case of a critical foreign investment made without its prior approval or conditional approval) initiate proceedings on foreign investments screening, if:
- there are reasons to suppose that a risk of an adverse effect of the foreign investment existed when the investment was made; or
- there are justified comments from another member state of the EU or an opinion of the European Commission to the foreign investment; or
- there is a suspicion that the FDI Act was violated.One of potential outcomes of such initiated foreign investment screening may be also a prohibition of the foreign investment or its conditional approval (even of the investment already made). Thus, in order to avoid legal uncertainty and potential adverse consequences if it is (ex post) determined that the foreign investment had an adverse effect, a foreign investor may voluntarily apply for an assessment of a risk of an adverse effect of the foreign investment. The outcome of the proceedings on the assessment of a risk of an adverse effect of the foreign investment may be:
- conclusion that no risk of an adverse effect of the foreign investment has been identified (in which case the entire process is completed); or
- initiation of the foreign investment screening (if there has been identified a risk of an adverse effect; on in particular other cases, such as when the foreign investor or the Slovak Target Entity do not cooperate in order to assess the risk of an adverse effect).
Timing: If within 45 days after the application for the assessment of the risk of an adverse effect of the foreign investment the Ministry does not notify the foreign investor that the foreign investment screening is initiated, the risk of an adverse effect of the foreign investment is deemed not to exist.
3.2 Foreign Investment Screening
Proceedings on foreign investments screening are initiated, in particular, upon an application of a foreign investor to screen a critical foreign investment (but also in certain other cases). The outcome of a foreign investment screening may be:
- approval of the foreign investment;
- conditional approval of the foreign investment – in which case the Ministry shall also decide on mitigation measures that must be adopted so that the foreign investment has no adverse effect on security and public order;
- prohibition of the foreign investment (even the already made foreign investments may be prohibited); the prohibition of the foreign investment must be approved by the Government of the Slovak Republic, which decides based on a submitted statement from the Ministry on the same.
Timing: If within 130 days after the initiation of a foreign investment screening the Ministry does not issue a decision on the foreign investment’s approval or conditional approval, nor does it submit to the Slovak government its statement on a prohibition of the foreign investment, the foreign investment is deemed not having an adverse effect and the Ministry’s decision on approval of the foreign investment is deemed having been issued.
4. Sanctions
Sanctions for violation of the FDI Act differ and depend on the nature and type of the respective violation. They may be imposed upon a foreign investor or a Slovak Target Entity. For example, if a critical foreign investment is made without its prior approval or conditional approval, the maximum penalty that the Ministry may impose is the higher amount of either the value of the foreign investment, or an amount corresponding to 2% of the total annual net turnover of the foreign investor, a person being controlled by the foreign investor and a person controlling the foreign investor.
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March 2023. This legal update has been prepared solely for information purposes and it does not contain all comprehensive information. Thus, it shall not be considered legal advice. For further information or advice on the new Slovak regulation on FDI, please do not hesitate to contact our FDI experts Marek Holka (marek.holka@cechova.sk) and Lenka Subenikova (lenka.subenikova@cechova.sk).
1 Regulation No. 61/2023 Coll. of the Government of the Slovak Republic Stipulating Critical Foreign Investments