Be prepared for the new EU foreign investment screening regulation

1. The background: from patchwork to unified framework

The EU’s current foreign direct investment screening regulation has been in force since October 2020. This regulation created a cooperation mechanism for EU member states and the European Commission to share information on foreign investments posing potential national security risks. But the establishment of screening mechanisms by member countries was voluntary.

The result was a fragmented landscape across the EU. The number of member states with operational foreign direct investment screening mechanisms grew from 11 to 24 in the years following the current regulation, but implementation varied enormously.

On 8 June 2026, the Council of the EU adopted the new regulation. The Regulation is pending official publication and will enter into force 20 days after such publication. The application of the new regulation will start 18 months after it takes effect.

2. What the new regulation does

Except for some extraordinary cases, most Japanese investments have been approved without conditions under the current regime, reflecting the quality of deals made by Japanese companies. But the new regulation will make the regulatory environment more demanding for everyone, including Japanese companies.

1. Universal mandatory screening. Under the new regulation, every member state must set up a national screening mechanism and have prior authorisation for foreign investments in defined sectors. This means investors can no longer rely on lighter-touch regimes in certain member states as under the current regulation. All 27 member states will have to implement the new framework within the transitional period of 18 months after the new regulation enters into force.
2. Closing the EU-subsidiary loophole. One of the most consequential changes is how “foreign investment” is defined. Previously, an investment made through an EU-incorporated entity fell outside the scope of EU investment screening. The new regulation closes this loophole as investments by EU entities that are controlled by non-EU investors will be captured. Member states may, under the new regulation, further include investments by EU-incorporated entitles in which non-EU investors have only minority shareholdings. Japanese companies that have structured their European activities through locally incorporated subsidiaries will no longer provide a shield from screening requirements.
3. Defined sectors subject to mandatory prior authorisation. The new regulation defines a list of sectors in which member states must require pre-closing approval. These include the following sectors:
   • businesses developing or producing dual-use or military-listed items;
   • businesses involved in semiconductor or quantum technologies, or AI models with systemic risk or defence/space applications;
   • businesses involved in transport, energy or digital infrastructure deemed critical;
   • businesses involved in critical raw materials as defined under the Critical Raw Materials Act; and
   • certain categories of financial market infrastructure.

   Member states may go beyond this minimum list in their national regimes under the new regulation.

4. Call-in rights across all sectors. Even where a transaction does not fall within the mandatory defined sectors requiring prior approval, all member states will have the power to call-in and review any foreign investment in their territory. The call-in right may be exercised for at least 15 months after completion of the transaction. This means a deal that appears to clear the mandatory screening threshold may still face review after closing, and companies should factor in that ongoing exposure when structuring transactions. Member states are not required to grant the possibility to file on a voluntary basis to avoid the call-in.
5. Streamlined but mandatory timelines. The regulation introduces a two-phase process. Phase I — an initial review — must be completed within 45 calendar days, with no possibility of extension. Phase II, an in-depth investigation, is not subject to a prescribed deadline at EU level, leaving that to member states. For transactions requiring filings in several member states simultaneously, the respective timings of the submissions are expected to be co-ordinated.
6. Enhanced information sharing. The new regulation strengthens the cooperation mechanism under which member states and the European Commission exchange information on incoming investments. A common EU database will be set up, creating greater transparency about filing outcomes. Also, with requests from at least nine member states, an optional single portal for the electronic filing of foreign investments would be set up. Certain investments — particularly those involving state-controlled or sanctioned investors, or investors previously found to have circumvented screening — will be subject to mandatory notification to the European Commission and other member states.

3. Specific implications for Japanese corporate investment

Japanese companies occupy a generally favourable position in the EU, and Japan is viewed as a partner in technology and industrial supply chains. Historically, most cases reviewed under EU screening mechanisms have been cleared without mitigation. That is unlikely to change dramatically for mainstream Japanese corporate investment.

However, the following matters deserve careful attention.

1. Sector exposure is broadening. Japanese companies are heavily active in precisely the sectors that the new regulation targets most closely: semiconductors, automotive electronics, industrial machinery, robotics, pharmaceuticals and critical materials. Dual-use or military-listed items may also become more important. Mandatory prior authorisation will become needed where it was not before, for example a Japanese automotive group investing in a European EV battery manufacturer or a trading house with interests in European critical minerals suppliers.
2. EU-subsidiary structures require re-examination. More than a few Japanese multinationals have built their European presence through Dutch, German or other EU holding structures. Those structures may previously have allowed EU-level transactions to go ahead without triggering screening. That will change under the new regulation. Legal and M&A teams should examine existing corporate structures and review how planned transactions are held and executed.
3. The call-in risk is real. The broad call-in powers of all member states mean that transactions in sectors not subject to mandatory screening still carry residual regulatory risk which may result in screening or other outcomes. Japanese corporate investors in areas such as logistics, financial services or consumer goods should not assume that falling outside the mandatory sectors means falling outside regulatory scrutiny altogether.
4. State ownership and governance matter. The new regulation gives special attention to companies that are state-controlled or state-owned. A foreign investor which is directly or indirectly controlled by a non-EU government may be considered from national security and public order perspectives during the screening process. There may be implications for companies which are controlled by a government of a friendly nation such as Japan. Japanese companies in which government entities hold significant stakes should be prepared for closer scrutiny in these categories. Even indirect or partial government connections can become a relevant factor in screening by member states.
5. Multi-member state deals face coordination requirements. For Japanese companies carrying out transactions with assets in multiple EU countries — common in pan-European acquisitions and joint ventures — coordinating filings across member states simultaneously will become an expectation. The increased practical complexity and timeline implications of simultaneous filings deserve early attention in deal planning.

4. The broader context: a global tightening

The EU’s reforms do not exist in isolation. Investment screening is tightening globally, and Japanese companies must navigate a multi-jurisdictional regulatory environment. Japan itself significantly strengthened its own foreign investment framework under the Foreign Exchange and Foreign Trade Act (FEFTA), with amendments that passed the National Diet in May 2026, introducing post-closing intervention in non-defined sectors and plans to introduce a more governmental institutions wide system like the American CFIUS regime imported to Japan.　

The simultaneous tightening of both inbound and outbound investment screening reflects a broader structural shift in how governments are treating cross-border capital flows. For Japanese companies working across these regulatory environments — both as inbound investors from the perspective of the EU, and as targets from the perspective of their own government — the compliance burden is increasing on multiple fronts.

5. What to do now

The EU foreign investment screening regulation is not yet in force, and the transitional implementation period will give member states time to update their national regimes. But waiting until early 2028 which is the likely effective date of the new regulation before beginning preparation might be a mistake.

Companies should consider taking several steps. First, review existing European corporate structures to understand which transactions or ownership arrangements might be captured by the new definition of foreign investment. Second, assess portfolio and target exposure to the sectors subject to mandatory prior authorisation, and map out where call-in risks may arise even outside those sectors. Third, build regulatory filing timelines into deal planning from the outset — 45-day Phase I reviews running across multiple member states simultaneously will require earlier preparation. Fourth, engage with experienced European legal counsel to understand the national variations that will persist even under a more harmonised framework.

The EU stays open to Japanese investment, and the new EU foreign investment screening regulation is not designed to close that door. But the rules of engagement are changing, and the cost of being unprepared — in time, in deal certainty, and potentially in outcomes — is rising.