The key changes include directing all member states to introduce a national FI screening mechanism that requires prior authorisation for at least certain types of transactions, as well as certain material procedural changes intended to streamline screening processes. National mechanisms can be broader than the minimum content required by the Regulation.
One of the changes that has received comparatively little attention but could matter in practice is the introduction of a definition of “beneficial owner”. The previous Regulation contained no such concept.
This raises an important question for private equity and other fund investors: does this change who counts as the “investor” for FI screening purposes? Could limited partners (LPs) — sometimes left outside the scope of screening in some member states — now be drawn in?
In this alert, we explain the role that the concept of beneficial ownership plays in the Regulation and, beyond that, whether it may have any impact on how member states use this or equivalent concepts under their national screening mechanisms.
A broad definition
The definition of “beneficial owner” in Article 2(6) of the Regulation is broad. It captures:
- any natural persons who (i) directly or indirectly own or control a foreign investor (or the EU target), (ii) ultimately benefit from the foreign investment, or (iii) on whose behalf the foreign investment is made or on whose behalf the control over that foreign investment is exercised or
- where no natural persons are identified, any legal person, entity, or trust which directly or indirectly owns or controls a foreign investor or Union target or ultimately benefits from the foreign investment.
Recital 19 sheds light on the policy rationale: the term is intended to capture the “true holders of influence” over a foreign investor (or EU target), whether directly or indirectly. This includes situations where foreign investors are a front for the person behind the investment, or where they are coerced by other actors who ultimately exert influence over the investment. Where no natural person can be identified—including in the case of publicly traded companies—the legal person, entity, or trust at the highest identifiable level in the upstream ownership chain or chain of control is the beneficial owner.
Notably, this definition encompasses not only ownership and control but also persons who “ultimately benefit from the foreign investment” and persons on whose behalf the investment is made or control is exercised. On its face, this breadth could capture LPs in a fund as persons who “ultimately benefit” from an investment—a point we address below. At the same time, the EU concept is so broad that there might be room for national specification.
What the beneficial owner concept does—and does not do
Despite its breadth, the concept of beneficial owner does not appear to be immediately relevant for defining the scope of transactions that must necessarily be captured by the national FI screening mechanisms. A “foreign investment” is defined, in essence, as a transaction through which a foreign investor (or a foreign investor's subsidiary in the Union) acquires effective participation in the management or control of an EU target. A “foreign investor” is any natural person that does not hold the nationality of a member state or a legal entity organised under the laws of a third country. A “foreign investor’s subsidiary in the Union” is an undertaking established under the laws of a member state that is directly or indirectly controlled by a foreign investor.
Nowhere in these definitions does the concept of beneficial ownership play any role in expanding the perimeter of transactions that member states must screen. (That said, there is some natural overlap between the concepts of foreign investor and beneficial owner. A foreign entity that controls an EU subsidiary that acts as a buyer in an acquisition is both a “foreign investor” and a “beneficial owner” under the definitions above.)
The beneficial owner concept is, however, relevant in three more limited—but practically important—contexts:
Information and disclosure
Article 15(1)(a) requires that notifications through the cooperation mechanism include, where applicable, the name and address of the beneficial owners of the foreign investor. This is intended to give screening authorities visibility into the ultimate ownership structure behind the investing entity.
Risk assessment
Article 19(2) provides that when assessing whether a foreign investment is likely to negatively affect security or public order, member states and the European Commission must consider whether the beneficial owners of the foreign investor (among other persons) are likely to pursue a third country's policy objectives, facilitate the development of military capabilities, support serious human rights violations, have been involved in previously blocked investments, or have engaged in illegal or criminal activities.
Similarly, under Article 5(1)(b) and (c), a mandatory notification through the cooperation mechanism is triggered where a beneficial owner of the foreign investor is subject to EU restrictive measures or was involved in a previously prohibited or conditioned investment. In both cases, the beneficial owner is one of several persons whose profile feeds into the risk analysis.
Scope exclusion for internal restructurings
Article 1(5)(b) excludes from the Regulation's scope “internal restructuring, unless a new legal entity, established in a third country that is not already represented in the upstream ownership chain of the Union target, is introduced in that chain”. Article 2(3) then defines “internal restructuring” as a reorganisation of a corporate group to which a Union target belongs that does not result in a change of the beneficial owner of the Union target.
Read together, these provisions establish that an internal restructuring falls outside the Regulation's scope only if it does not result in a change of the beneficial owner of the Union target. Conversely, a reorganisation that results in a change of beneficial ownership is not excluded from the Regulation's scope. In principle, such transactions may be screened by member states.
What does this mean for investments through funds?
Although the new Regulation does not use beneficial ownership to determine who qualifies as a foreign investor, since it does require the disclosure of beneficial owners through the cooperation mechanism, it may have an impact on the information that national FI rules require from investors.
In addition, national screening mechanisms can be broader than what the EU framework requires and some of them already use some definition of beneficial ownership to determine who qualifies as a foreign investor. If these member states broaden their notion of beneficial owner, they could expand the scope of their regimes.
So, for fund sponsors and their investors, the key question is whether the new beneficial ownership concept may be used in the future to inquire about their LPs.
For this reason, we must proceed on a member state-by-member state basis, checking whether they use the concept of beneficial owner (from now on, for the national concepts, simply UBO), how they apply it to fund investments, and whether their practice might change because of the new Regulation.
Analysis for some key jurisdictions
Spain
Under current Spanish FI rules, the origin of the investor is determined by the origin of its UBOs (in particular, by their tax residency—which is an aspect that may have to change once the new Regulation becomes applicable, since it uses the nationality of natural persons or the law of organisation for legal entities). A UBO under Spanish law is anyone controlling the investor (as defined in competition law) or holding more than 25% shares or voting rights in it.
In investments through funds, Spanish FI rules contain an important specification: the UBO will be the fund manager or controlling entity (or rather, its UBOs), and not the LPs, provided that the latter are purely passive (i.e., they have no governance rights and no privileged access to the target company's information).
This means that in a typical institutional fund structure (to be confirmed case by case), the LPs will not be considered UBOs of the investment and won’t be relevant to determine whether the investor is foreign. In addition, even if the transaction is in scope, LPs won’t be ordinarily screened (unless the authorities require this information for the material risk assessment).
Since the Spanish specification is not contained in the EU notion of beneficial ownership, could the Spanish rules need to change? There are several options.
- Spain could try to keep the current notion of UBO to define who counts as a foreign investor and introduce a separate broader concept of beneficial ownership for disclosure purposes. However, this may be confusing and complicate the system.
- As an alternative, Spain could reduce the scope of who counts as a foreign investor, replicating the concept in the Regulation, and make the broader UBO concept only relevant for disclosure and risk analysis. In this scenario, in investments through funds, the foreign investor would still be the managing entity (since the fund would be considered its subsidiary, as it’s controlled by the manager). The new Spanish FI rules would still have to decide whether the new concept of UBO needs to capture LPs for disclosure purposes.
- Finally, a continuity approach would be to keep things as they are, with only minor adaptations required by the Regulation, and understand that the new EU concept of beneficial ownership is sufficiently broad to give some room to introduce or retain national specifications. In this scenario, purely passive LPs would remain out of the screening process.
In our view, the latter alternative is the most likely, as we would expect the Spanish authorities to leverage the experience gained since the FI screening mechanisms were enacted in 2020, and avoid revamping the system where it’s not strictly required by the new EU rules.
France
French FI legislation does not use the notion of UBO (bénéficiaire ultime), but it follows a similar approach to Spain. When a foreign investment is made through an investment fund, the fund manager (société de gestion), including all entities or persons in its control chain, will ordinarily be treated as the relevant investor—not the LPs.
This approach is based on the Order of December 31, 2019 under the French Monetary and Financial Code, which provides that where the chain of control includes investment funds, the documents provided must attest to the identity of the fund manager(s) and the entities or individuals controlling the fund manager(s), with no requirement to disclose the identity of LPs. The notion of control is determined either by corporate law or by the concept of decisive influence within the meaning of competition law.
The Direction Générale du Trésor’s Guidelines of September 2022 confirm that passive beneficial owners in an investment fund are generally not considered to have a controlling influence, unless they have specific rights to be verified on a case-by-case basis.
The new Regulation presents similar options to the French authorities as the ones mentioned above for Spain: either introduce a broader notion of beneficial ownership for disclosure purposes that covers LPs or keep the current practice of focusing only on the fund manager and its control chain (unless otherwise required by the specific circumstances of the case).
In our view, the French authorities are likely to draw on their existing experience and maintain the current approach in substance. In any case, it will be necessary to analyse the specific way in which the concept of beneficial ownership is transposed into French law to determine if more information will have to be disclosed.
Germany
Germany takes a different approach from Spain and France in investments through funds: the German Ministry of Economics (MoE) applies a very broad “look-through” analysis that examines the entire ownership and control chain.
The review covers all relevant entities and persons along the chain, including fund structures, general partners (GPs), and LPs. Therefore, a non-EU/EFTA passive LP could be sufficient to trigger FI screening in Germany. As regards the risk assessment, while the fund manager or general partner is often a key focus as the entity exercising control, the authorities also look through to LPs to assess potential risk factors.
Because the German approach is already structurally broader than a pure UBO test, the new EU definition is unlikely to narrow or limit current practice. If anything, the new broad definition is consistent with the MoE's existing comprehensive review.
However, the German government is actively working on a rather far-reaching amendment of the national FDI regime including the ambition to enact a stand-alone Investment Screening Act; it is yet unclear to which extent Germany will change its approach towards the UBO concept that will now be at the heart of the corresponding EU FDI framework.
The Netherlands
The Dutch screening regime is different from the ones discussed above: it is country-neutral and applies to all investors (including Dutch persons or entities) investing in critical sectors and does not use the concept of “foreign” investor or UBO as a jurisdictional trigger. The identity or nationality of the investor is irrelevant to determine whether a transaction is in scope and needs to be notified.
When a deal must be screened in the Netherlands, the filing form requires the investor to indicate whether a State, or part thereof, has a direct or indirect ownership and/or control interest in the acquirer. This question also covers ownership interests without controlling powers. Where relevant, the Dutch screening authority (BTI) may request information on LPs. Consequently, the Dutch screening authority considers a wide range of (beneficial) ownership and control interests as part of its substantive risk assessment.
As such, the new definition of beneficial owner introduced by the new Regulation does not appear to require a change to the existing Dutch practice and is unlikely to be a limiting factor in the need to disclose information on LPs.
Belgium
Under the Belgian FI regime, one of the criteria for identifying a “foreign” investor is whether one or more of its UBOs has its main place of residence outside the EU.
The Belgian FI regime defines a UBO by reference to anti-money laundering (AML) legislation. Under the applicable AML rules, a UBO is defined as the natural persons who ultimately own or control a company, the company’s representative or the beneficiary of life insurance contracts, and/or the natural persons on whose behalf a transaction is carried out, or a business relationship is established.
For legal entities, UBOs include:
- the natural persons who ultimately own or control a legal entity through direct or indirect ownership of a sufficient percentage of shares, voting rights, or ownership interests, including through bearer shares (A shareholding of more than 25% held by a natural person is an indication of direct ownership. A shareholding of more than 25% held by a corporate entity that is controlled by one or more natural persons, or by several corporate entities controlled by the same natural persons, is an indication of indirect ownership.)
- the natural persons who exercise control over a legal entity by other means or
- the natural persons in senior management, if none of the above criteria can be applied.
Unlike in Spain and France, there is no specific rule or established practice that designates the fund manager as the relevant investor or UBO. Although, in practice, the fund manager will often qualify as the UBO, it cannot be ruled out that limited partners may also fall within this definition. Similar to the German FI regime, the Belgian FI regime applies a “look-through” approach when determining the UBO.
As the Regulation does not rely on beneficial ownership to define a foreign investor, maintaining current references to the UBOs’ residence in the Belgian definition of “foreign investor” may create unnecessary complexity and confusion.
The Regulation is expected to trigger changes to the Belgian FI regime, which may entail a simplification of the definition of foreign investor to align it with the EU approach.
Italy
The Italian FDI regime (the so-called “Golden Power” legislation) does not use a standalone concept of UBO to determine the origin or nationality of the investor but rather the nationality of its ultimate controlling shareholder. In investments through funds, the relevant “investor” for jurisdictional purposes is ordinarily the entity exercising control—i.e., the GP or fund manager.
However, the definition of “non-EU investor” includes an anti-circumvention element, under which an EU/EEA person or entity may be treated as a non-EU investor where there are elements indicating evasive behaviour or where the entity is controlled, directly or indirectly, by a non-EU person. In theory, this provision could be read as extending to fund structures where a significant share of the capital is ultimately provided by non-EU LPs, although in practice we are not aware of this interpretation having been applied by the Italian authorities.
A similar question arises with respect to the filing trigger. The Italian regime requires notification when an investor acquires a share of voting rights or capital exceeding certain thresholds. Because the trigger is (also) based on capital—and not only on voting rights or control—a strict literal interpretation might suggest that a passive LP indirectly acquiring a percentage of the share capital of a strategic target should file, even without being entitled to exercise the corresponding voting rights.
In practice, however, there are no express rules on the treatment of LPs and notifications are made by the GP or fund manager. We are not aware of filings triggered by purely passive LPs, and nothing in the annual reports published by the Italian government suggests otherwise.
On the disclosure side, the Italian notification forms require the notifying party to identify the beneficial owner (titolare effettivo) under Italian AML criteria, as well as the ultimate investor (investitore finale), with detailed ownership structure charts. In principle, this means that information about the broader ownership chain—which could include LPs—may be required as part of the notification, although the extent to which this is enforced in relation to purely passive LPs is unclear in practice.
The practical impact of the new Regulation on Italy may therefore be limited, given that the Italian notification forms already capture much of the information that the new EU definition of beneficial owner is designed to elicit. That said, the Italian government could use the transposition as an opportunity to clarify the treatment of LPs, either by confirming that passive LPs fall outside the scope of screening (consistent with prevailing practice) or by formalising disclosure obligations for risk assessment purposes.
Key takeaways
The introduction of the beneficial ownership concept in the new EU FI Regulation is a notable development, but its practical impact on the screening of investments through funds might be limited in most EU jurisdictions, unless member states decide to revisit their current rules and practices.
The new Regulation uses a broad definition of beneficial owner that is not directly relevant to define who counts as a “foreign investor” or a “foreign investment”, but essentially as something that needs to be disclosed, considered in the risk assessment, and used to determine whether a corporate reorganisation qualifies as an internal restructuring excluded from the Regulation’s scope.
Member states will have to adopt this broad new EU concept, but they may either try to keep their pre-existing (and divergent) practices with only minor necessary adjustments or use the opportunity of the new Regulation to revamp their systems.
For investments through funds, this means that the current variation of screening rules among member states is likely to remain. Those jurisdictions that ordinarily treat the fund manager as the investor and leave out passive LPs (Spain, France or Italy) are likely to consider that the Regulation allows this, although it remains to be seen whether some information on LPs may end up being required.
Jurisdictions that already look through to LPs (such as Germany or Belgium) will also probably find the new definition consistent with their existing practice. The Netherlands, whose country-neutral regime does not use the concept of foreign investor as a jurisdictional trigger and already provides for the consideration of LPs, is also unlikely to require material changes.
In all cases, however, national developments in the coming months will have to be followed closely, as member states start reviewing their screening regimes to adapt to the new Regulation.
