New Foreign Direct Investment Screening Act

Slovak Act No. 497/2022 Coll. on Screening of Foreign Direct Investments (the Slovak FDI Act), published on 23 December 2022, will have a significant impact on foreign investments in the Slovak Republic.

The Slovak FDI Act takes effect on 1 March 2023. The new rules do not apply to investments completed prior to such date.

What foreign investment will require approval?

Foreign investors must obtain approval from the Slovak Ministry of Economy (Slovak MoE) for investments classified as „critical foreign investments.“ The Slovak government will specify which investments fall under this category in a separate decree. As per the Slovak FDI Act, an investment is considered made once the agreement pertaining to it becomes effective. Often, transactional parties cannot avoid having certain contract clauses take effect before receiving the necessary approval. Given the substantial fines for violating the Slovak FDI Act, parties involved should exercise caution to prevent early implementation of the contract.

Foreign investments not classified as „critical“ do not require prior approval. However, the Slovak MoE can still review these investments up to two years after they have been made. This review may lead to an investment ban, necessitating its reversal. To mitigate the risk of an investment being prohibited, investors may opt for voluntary notification of their investment. This approach delays the transaction until the Slovak MoE confirms that there is no risk of negative impact from the foreign investment, and thus no risk of the investment being banned or conditionally approved.

What is a foreign investment?

A foreign investment is directly or indirectly connected to its target, which is any entity located in the Slovak Republic. Under the Slovak FDI Act, a foreign investment enables a foreign investor to: (1) acquire a target or a portion of it; (2) gain an effective interest of at least 25% in the target’s registered capital or voting rights, or at least 10% in the case of a critical foreign investment; (3) increase their effective interest in the target, meaning raising their existing interest in the target’s registered capital or voting rights to a minimum of 50% (or 20% for critical foreign investments) or reaching at least a 33% or 50% threshold.

It is important to note that splitting a foreign investment into multiple smaller investments to avoid meeting the criteria for a foreign or critical investment is considered a circumvention of the law. (4) Foreign investments also enable investors to exercise control over a target, as defined by the Slovak Act on the Protection of Competition; (5) in the case of critical foreign investments, investors can obtain ownership or other rights to the target’s tangible assets.

What factors of a foreign investment will be screened?

Under the Slovak FDI Act, foreign investments undergo a screening process to assess their impact on the security and public order of the Slovak Republic and the EU. The Act lists factors to consider during this process, including details about the target, the foreign investor, entities controlling or controlled by the foreign investor, and the broader context surrounding the investment. The screening process involves consultations with various bodies such as the Slovak Police Force, Slovak Intelligence Service, and the Slovak Ministry of Finance, which provides input on conflicts with international treaty obligations.

The foreign investment screening process is initiated either by the investor’s application or through official authority. It generally comprises two stages: (1) an initial review for potential negative effects, where if no risk is identified within 45 days, the process moves to the next stage, and (2) the investment screening stage, which occurs if a negative effect risk was identified in the first stage. In certain cases, such as critical foreign investments, the first stage may be skipped, and the process starts with screening itself.

The Slovak MoE has the authority to screen transactions involving critical infrastructure elements in sectors like energy, pharmaceuticals, metallurgy, and chemicals, according to Slovak Act No. 45/2011 Coll. on Critical Infrastructure. This screening may occur even if the transaction does not involve a foreign investment as defined by the Slovak FDI Act. The process can be triggered by the transfer or assignment of critical infrastructure elements, obtaining a direct or indirect interest of over 10% in the operator’s capital or voting rights, or gaining influence over the operator’s management. This also applies if the transfer takes place during enforcement procedures or similar processes. The Slovak MoE informs the relevant operator when its element is registered on the list of critical infrastructure, which is not publicly available.