National Foreign Direct Investment: Key Features

On the 18th of December 2020, Malta’s National Foreign Direct Investment Screening Office Act (the ‘NFDI Act’) was published,  with an effective date of 11th October 2020. The NFDI Act effectively implements Regulation (EU) 2019/452, giving the power and authority to assess, investigate, authorise, condition, prohibit or unwind a foreign direct investment (‘FDI’) on grounds of security or public order in Malta, as well as implement screening decisions, report annually to the European Commission, and liaise with the authorities of third countries on FDI screening-related issues.

Regulation (EU) 2019/452 relates particularly to foreign direct investments, or ‘FDI’ which is likely to affect security or public order and which establishes or maintains lasting and direct links between investors from third countries including state entities and undertakings carrying out an economic activity in a Member State.

In terms of the NFDI Act, investors seeking to establish or maintain direct, tangible, and long-lasting business interests within the territory of Malta and the Maltese economy are required to undergo a notification and screening process with the NFDI Office in Malta wherever the proposed investment involves a Relevant Activity (as defined hereunder) and the investor is a natural  person  or  an undertaking  of  a  third  country.

The list of Relevant Activities include:

1. critical infrastructure, whether physical or virtual – including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure;
2. critical technologies and dual use items (defined as items, including software and technology, which can be used for both civil and military purposes, and shall include all goods which can be used for both non-explosive uses and assisting in any way in the manufacture of nuclear weapons or other nuclear explosive devices) – including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defense, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies;
3. supply of critical inputs, including energy or raw materials, as well as food security;
4. access to sensitive information (“confidential information, including commercially-sensitive information”), including personal data, or the ability to control such information; and
5. the freedom and pluralism of the media.

Notification Forms must only be submitted to the NFDI Office when all of the 3 below-   mentioned conditions are met:

1. The Ultimate Beneficial Owner, whether existing or new, is a ‘foreign investor’ (natural person of a third country or an undertaking of a third country, intending to make or having made a Foreign Direct Investment) and is an individual who has a direct or indirect economic ownership and/or voting rights of 10% or more, or control by other means in the Maltese investment;
2. The activity is a Relevant Activity; and
3. There is a direct, tangible and long-lasting nature within the territory of Malta.The NFDI Act defines “beneficial owner” to mean any natural person or persons who ultimately own or control the applicant and/ or the natural person or persons on whose behalf a transaction or activity is being conducted. It goes on to provide the following rules in respect of the ascertainment of beneficial owners within different structures:a) in the case of a body corporate or a body of persons, the beneficial owner shall consist of any natural person or persons who ultimately own or control that body corporate  or  body  of  persons  through  direct  or indirect ownership of more than ten percent (10%  +1) of the shares or more than ten percent (10% + 1) of the voting rights or an ownership interest of more than ten percent (10% + 1) in that body corporate or body of persons, including  control through other means. This definition excludes companies that are listed on  a  regulated  market  which  is  subject  to disclosure requirements consistent with European Union law or equivalent international standards which ensure adequate transparency of ownership information.  If no beneficial owner is identified, the natural person or persons who hold the position of senior management official  (SMO) or  officials  will be treated as the  beneficial owners of that entity.
   b) in the case of trusts, the beneficial owner shall consist of: (i) the settlor or settlors; (ii)  the trustee or trustees; (iii)  the  protector  or  protectors,  where applicable; (iv)  the  beneficiaries  or  the  class  of beneficiaries, as may be applicable; and (v)  any  other  natural  person  exercising ultimate  control  over  the  trust  by  means  of  direct  or indirect ownership or by other means.
   c) in the case of legal entities such as foundations and legal arrangements similar to trusts, the beneficial owner shall consist of the natural person or persons holding equivalent or similar positions to those referred to in paragraph (b) above.

The National Foreign Direct Investment Screening Office

The National Foreign Direct Investment Screening Office (“NFDI Office”) is established by virtue of the NFDI Act. The NFDI Office is charged with implementing the obligations listed in Regulation (EU) 2019/452 of the     European Parliament and of the Council of 19 March 2019, establishing a framework for the screening of foreign direct investments into the Union (“Regulation (EU) 2019/452”). This Regulation essentially covers all categories of foreign direct investment, as defined by the European Court of  Justice (“ECJ”).

The ECJ defines foreign direct investment as an investment of any kind by a foreign investor or a third country national aiming to establish and maintain lasting and direct links between the foreign investor and the target company to carry out an economic activity in a given Member State.

According to the Malta NFDI Screening Office, foreign direct investment can take two different forms, namely through greenfield investment, and mergers and acquisitions (M&A) activity. International greenfield investment typically involves the     creation of a new company or establishment or facilities abroad, whereas a merger or acquisition transaction involves the transferring the ownership of existing assets to a foreign investor .

Prior to carrying out an investment, applicants, including UBOs or their respective corporate service provider  must notify the NFDI Office with the investment by submitting a notification form, in the following 3  circumstances:

1. Where an investment is with respect to any of the ‘Relevant Activities’ as defined in the Schedule to the Act;
2. Where, following an investment carried out in Malta, there is a plan to change the business activity of the TCN to one which affects any of the aforementioned Relevant Activities;

The application notification form is to be filed with the Office only where the Ultimate Beneficial Owner/s, whether existing or new, is/are Foreign Investors. Such notification form is to be completed and submitted to the Office for a preliminary clearance in the  following situations:

1. a proposed incorporation of any new company in Malta;
2. the transfer of shares in Maltese companies;
3. the issue of shares by Maltese companies;
4. a change in the ultimate beneficial owner/s of an existing Maltese company; and/or
5. an acquisition of assets / rights by a foreign investor.

In accordance with the NDFIS Act, the NFDI Office has the power and authority to assess, investigate, authorize, condition, prohibit or unwind a foreign direct investment (“FDI”) on grounds of security or public order in Malta as well as implement screening decisions and report annually to the European Commission as well liaise with authorities of third countries on FDI screening-related issues.

On the 14th of October 2020, the NFDI Office published a Circular on its website whereby it notified Corporate Service Providers that Notification Forms must only be submitted to the NFDI Office when all the 3 below-mentioned conditions are met:

1. Where the Ultimate Beneficial Owner, whether existing or new, is a ‘foreign investor’ (natural person of a third country or an undertaking of a third country, intending to make or having made a Foreign Direct Investment) and is an individual who has a direct or indirect economic ownership and/or voting rights of 10% or more, or control by other means in the Maltese investment;
2. The activity is one as described in Article 4 of Regulation 2019/452, meaning that it is likely to affect security or public order in terms of its potential effects on:
3. • critical infrastructure, whether physical or virtual – including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure;
   • critical technologies and dual use items (defined as items, including software and technology, which can be used for both civil and military purposes, and shall include all goods which can be used for both non-explosive uses and assisting in any way in the manufacture of nuclear weapons or other nuclear explosive devices) – including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies;
   • supply of critical inputs, including energy or raw materials, as well as food security;
   • access to sensitive information (“confidential information, including commercially-sensitive information”), including personal data, or the ability to control such information; and
   • the freedom and pluralism of the media.

When determining whether foreign direct investment is likely to affect security or public order, the following factors may also be considered:

• • whether the TCN is directly or indirectly controlled by the government, including state bodies or armed forces, of a third country, including through ownership structure or significant funding.
  • whether the TCN has already been involved in activities affecting security or public order in a Member State; or
  • whether there is a serious risk that the TCN engages in illegal or criminal activities.

3. Where there is a direct, tangible, and long-lasting nature within the territory of Malta.

Where all the conditions specified in (1) to (3) above subsist, the Notification Form is to be completed and submitted to the NFDI Office BEFORE the relevant  corporate documents are submitted to the Malta Business Registry for registration.

The information which is to be provided in the Notification Form must include the ownership structure of the TCN and undertaking, the approximate value of the FDI, the products, services and operations of the TCN and undertaking, the jurisdictions in which the TCN and undertaking conduct relevant business operations, the funding and source of the investment, as well as the date when the FDI is planned to be completed, or has been completed. The Screening Process of the NFDI begins with an initial analysis which occurs within 5 days of receipt of notification, which determines whether the FDI will be subject to screening.

Once the Office concludes in the affirmative, it is obliged to inform the investor within 5 days from the date of its decision which will trigger the co-operation mechanism. Following these 5 days, and within 60 calendar days, the NFDI Office is to determine whether the FDI may affect the security or public order of MALTA. The NFDI Office may extend this 60-day period where it deems necessary. Typically, the NFDI would provide its feedback even within two business days.

If the Office concludes that the FDI affects the security or public order of Malta, it may    condition, prohibit, or unwind such investment/ once the investment has already been affected.

Failure to Notify and Administrative Penalties

The Office may also impose administrative penalties by virtue of the powers conferred on it by Article 17 of the Act in circumstances where there is any breach of the obligations imposed by the Act. Such penalties may range from €5,000 to €100,000.

Review of Administrative Action

The following Guidelines to the Notification Form have been published on the website of the NFDI Office as guidance to prospective applicants in the completion of the relevant forms.

1. In the Notification Form, the applicant must provide sufficient proof of the sources of funding of the investment. The NFDI Office can seek to carry out independent due diligence on each or some of the UBOs.
2. Investors from third countries who make Maltese investments which relate to activities mentioned in Article 4 of the EC Regulation 2019/452 mentioned above shall be obliged to notify the NFDI Office before submitting the Memorandum and Articles or other relevant forms to the Malta Business Registry for registration.
3. If the applicant is not sure as to whether the investment falls under any of the activities listed in Article 4 of the Regulation cited above, the applicant should communicate with the NFDI Office to request clarifications prior to submitting this Notification Form.
4. In the case of companies having ownership of intellectual property, such as patents and any other incorporeal rights, resulting from activities listed in Article 4, the Notification Form is to be submitted to the NFDI Office.