Will the Coronavirus Put Globalisation into Reverse?

The coronavirus pandemic (COVID-19) is intensifying the regulation of international investments in Europe. In many EU Member States, both political and economic pressure has been building for some time to tighten legislation in an effort to protect the economy.

At the start of the crisis, the European Commission recommended that Member States screen foreign direct investments (FDI) in companies in critical sectors to make sure they remain in European hands. The Commission called upon Member States ‘to make full use’ of existing national FDI screening mechanisms. For those Member States that currently do not have one, the Commission recommended setting up ‘a full-fledged screening mechanism’.

In October, the EU will adopt a union-level screening mechanism for foreign investments impacting the security of Member States. This mechanism will give Member States and the Commission the ability to intervene in investments in critical sectors even after then have already taken place.

New screening will bring transactions into focus that were previously overlooked. As EU countries begin looking at foreign investments in, for example, biotech and healthcare technology companies more closely from a national security perspective, many SMEs and even start-ups could be caught in the net. This is a major change, as to date, strategic screening has mostly only been a concern in the case of major acquisitions. 

The monitoring of transactions is also intensifying due to DAC6. The Finnish legislation based on DAC6 entered into force in Finland at the start of the year. DAC6 seeks to prevent tax avoidance in cross-border transactions by imposing a new reporting obligation and improving information exchange between tax authorities.

The business world will no doubt adapt to these regulations with time, but it would be a good idea to dedicate a little more time and resources to cross-border transactions this year.