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ECJ Finds a Member State s FDI Screening Law Incompatible with EU Law Implications and Key Insights

ECJ Finds a Member State’s FDI Screening Law Incompatible with EU Law: Implications and Key Insights

The European Court of Justice (ECJ) recently issued a significant ruling declaring Hungary’s foreign investment screening law inconsistent with EU law, specifically the freedom of establishment in Article 54 TFEU. The case, known as Xella Magyarország v. Innovációs és Technológiai Miniszter, provides essential insights into FDI screening within the EU and raises pertinent points for consideration.


In the EU, foreign direct investment screening is primarily under the jurisdiction of individual member states, each enacting its legislation based on national security concerns. Additionally, the EU FDI Screening Regulation (Regulation (EU) 2019/452) fosters cooperation between EU countries and the European Commission and plays a supporting role in assessing investments from third countries. The Xella Magyarország judgement stands as a noteworthy ECJ ruling on FDI screening in the EU.

The ECJ’s Decision

The case arose from a request for a preliminary ruling from a Hungarian Court, seeking guidance on the compatibility of Hungary’s law with the EU FDI Screening Regulation and EU law at large. The Hungarian law allowed the Minister of Innovation and Technology to block foreign investors, including EU-based companies under “majority control” by third-country investors, from acquiring Hungarian companies deemed “strategic.”

In the context of Xella Magyarország’s attempt to acquire Janes és Társa, a company engaged in mining raw materials, the Hungarian Minister cited concerns over the “security of raw material supply to the construction sector” and its impact on the “national interest” to prevent the transaction.

The ECJ found Hungary’s national screening law incompatible with EU law, particularly the freedom of establishment.

Key Points of the Judgment

1. Scope of the EU FDI Screening Regulation

The ECJ clarified that the EU FDI Screening Regulation does not encompass investments made by companies registered in an EU Member State and controlled by third-country investors. The regulation’s scope is limited to investments in the EU by undertakings organized under the laws of a third country. Consequently, Hungary’s law, covering investments made by EU-based companies under majority control by third-country investors, exceeds the narrow scope of the EU FDI Screening Regulation.

2. Prohibition of Protectionist FDI Screening Measures

The ECJ highlighted that measures affecting intra-EU FDI must adhere to the TFEU rules on free movement, particularly the freedom of establishment. The Hungarian measure, preventing an EU company from acquiring a stake in a strategic resident company based on security and public policy grounds, was considered a severe restriction on the freedom of establishment.

For such restrictions to be justified, they must be based on overriding reasons of public interest, excluding purely economic motives. The objective of securing construction materials supply was deemed insufficient to justify a restriction of Article 54 TFEU (*). The ECJ emphasized its rigorous review of limitations on fundamental freedoms and its limited acceptance of protectionist measures.


The ECJ’s ruling emphasizes that protectionist national FDI screening legislation will be deemed unjustifiable restrictions on fundamental freedoms protected under EU law. Although member states can continue screening foreign investments, any resultant restrictions must narrowly target genuine and sufficiently serious threats to a fundamental interest of society, avoiding purely economic motivations.

The judgment also suggests that third-country investors in EU companies may benefit from free movement rules under the TFEU and may not be subject to the EU FDI Screening Regulation after subsequent investments with their EU company. This could prompt third-country investors to prioritize initial investments in member states with more flexible FDI screening approaches or establish local entities for future acquisitions.

Notwithstanding, primary authority for screening foreign investments remains with national authorities. They retain the right to review all foreign investments, including intra-EU FDIs, provided the intervention is justified by genuine grounds of public policy, security, or health. The Xella Magyarország judgment reaffirms that intra-EU FDIs fall within the protective scope of EU free movement rules. It remains crucial to monitor how national screening authorities implement this approach, particularly in cases where investors maintain connections with third countries, as seen in the Xella Magyarország case.

(*) Companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Union shall, for the purposes of this Chapter, be treated in the same way as natural persons who are nationals of Member States. ‘Companies or firms’ means companies or firms constituted under civil or commercial law, including cooperative societies, and other legal persons governed by public or private law, save for those which are non-profit-making.

Disclaimer: This article like all other articles under this section are intended for the general information of readers who may be interested. There are not meant to provide a comprehensive overview and should not be considered as legal advice due to their general nature. Readers are encouraged to seek professional legal counsel for specific and personalized guidance.