Screening of Foreign Direct Investments in Sweden : And its compatibility with European Union law

Abstract: On December 1, 2023, the new Swedish Act on Screening of Foreign Direct investments entered into force. The Act aligns with similar legislation in multiple Member States of the European Union. The European Commission advocates for the extensive use of screening mechanisms within the Union, towards both third countries and other Member States. The Swedish Act exhibit broad application, mandating the reporting of a wide range of investments regardless of the investors’ nationality, including harmless ones, before it is conducted. The supervisory authority shall then decide whether to leave the investment without notice, or to initiate a second phase screening. Besides from prolonging harmless transaction procedures, the ultimate consequence of the Act is the risk of prohibition or conditioned approval. Additionally, the supervisory authority has the power to initiate a review at its sole discretion when suspecting a harmful investment falling outside the ambit of the Act. Meanwhile, the Court of Justice of the European Union maintains a strict stance on Member States imposing screening mechanisms, as it imposes restrictive measures on the free movement of capital and the freedom of establishment as guaranteed by the Treaty of the Functioning of the European Union. In many cases from the Court, these restrictive measures have failed to be proven justified and proportionate by the Member State that enforces them. A natural conflict of norms occurs, and as late as summer of 2023, the Hungarian screening system, prohibiting foreign investments in the construction sector, was deemed inapplicable due to its incompatibility with the freedom of establishment. Consequently, the screening measures imposed by the Swedish Act can be considered restrictive in the light of EU-law and such measures must be justified and deemed proportionate accordingly. Given the expansive scope of the Swedish measures, the absence of underlying justifying motives, and the presence of potentially less restrictive alternatives, it is not unlikely that the Act might be incompatible with EU-law. The consequence of such inapplicability would be that the Swedish authorities and courts, are obligated to refrain from applying these measures in individual cases. Ultimately, aspects of the Swedish Act could be deemed unlawful if challenged in front of the Court.