13 proposals to amend the draft of the Foreign Investment Reliability Assessment Act

The Ministry of Economic Affairs and Communications drafted a law according to which a foreign investor from a third country must apply for a permit from Estonia if they wish to complete a foreign investment in a strategic area in Estonia. The Chamber of Commerce does not oppose this draft and understands the state’s wish to establish a system for evaluating foreign investments, but we still see the need to make several important changes to the draft.

The list of strategically important companies needs to be narrowed down
The draft contains a long list of companies that are important from the point of view of security and public order and in case of which a foreign investor is required to apply for a foreign investment permit before making a foreign investment. These include, for example, vital service providers, state-owned companies, national television and radio service providers, and defence companies.

The Chamber of Commerce proposed to the Ministry to remove state-owned companies from the list. For example, in Latvia, Lithuania and Finland, state-owned companies are not listed in the regulation on separate foreign investment control. If a state-owned company is important from the point of view of security and public order, such a company is already strategically important under another point of the draft and there is no need to list them separately. The change may also involve the risk that in the future, the Estonian state may purchase one share or stake in many companies, as a result of which it may become more difficult to make foreign investments in such companies.

In addition, we proposed to clarify in the draft in which cases it is necessary to apply for a foreign investment permit if the company supplies or manufactures dual-use goods or provides technical assistance related to such goods. Examples of dual-use items are software and technology that can be used for both civilian and military purposes. In our opinion, only those companies could be on the list of strategically important companies that have a valid dual-use agreement with an Estonian government agency at the time of making a foreign investment and where the dual-use goods sold to the government agency make up a small part of the company’s turnover, for example less than ten percent. Other companies manufacturing dual-use goods could be exempted from the permit requirement.

It remains unclear in which cases the state will refuse permission
One of the important problems of the draft is that it is not clear enough for foreign investors or other parties to foreign investment in which cases the Consumer Protection and Technical Regulatory Authority refuses to issue a foreign investment permit. The draft states in very general terms that a permit will be refused if the foreign investment may endanger the security or public order of Estonia or a member state of the European Union. In particular, it is unclear what is meant by endangering the public order, as the concept of public order is very broad. Therefore, we proposed to the Ministry to make the grounds for refusing to issue a permit significantly more specific, so that everyone would better understand in which cases the state refuses to issue a permit.

In addition, we proposed to the Ministry to delete an item from the draft that allows the Consumer Protection and Technical Regulatory Agency to revoke a foreign investment permit if new circumstances become apparent. The emergence of new circumstances is an indefinitely wide range of scenarios, and in essence the state may revoke the permit even if the foreign investor has not violated the requirements contained in the draft. Such a solution would reduce the confidence of parties to foreign investments and would lead to additional business risk for them.

The consequences of revoking an authorisation also need to be clarified
The draft prescribes that upon revocation of a foreign investment permit, the foreign investor and other party to the foreign investment are immediately required to take the necessary actions to restore the situation that preceded the foreign investment. According to the Chamber of Commerce, such a provision may have a negative effect on the desire of foreign investors to make investments in Estonia. The main reason is that even after obtaining a foreign investment permit, a situation may arise where the permit is revoked years later and the transaction has to be reversed.

We asked the Ministry to explain in more detail how the situation preceding the foreign investment should be restored and what the requirement to do so immediately means. For example, if several years have elapsed since the foreign investment was made, the person who sold the holding in the enterprise may no longer have the funds to repurchase the holding. There may also be a dispute between the person who sold the holding and the foreign investor over the value of the holding.

Information related to applying for a foreign investment permit must be confidential
According to the draft the completion of a strategically important foreign investment is prohibited before obtaining a foreign investment permit. Therefore, in the letter sent to the Ministry, we emphasised that the information related to the application for a permit must be confidential and third parties must not be able to obtain any pieces of information even about the fact that a foreign investor is applying for a foreign investment permit. Ensuring confidentiality is also necessary in a situation where a foreign investor or other party to a foreign investment contacts the Consumer Protection and Regulatory Authority for clarification or advice before applying for a permit. In such cases, a situation must not arise where, for example, the document register of the Agency shows that a foreign investor or other person has applied to the Agency for authorisation.

The process of applying for a permit must be as quick as possible
According to the draft, the processing of an application for a foreign investment permit shall take 30 calendar days from the submission of an application without shortcomings, but the Consumer Protection and Technical Regulatory Authority may extend this term by up to 90 calendar days. The Chamber of Commerce proposed to change the wording of the draft so that the Agency has the right to extend the term by 90 days only for good reason and by no more than 30 days at a time.

You can read more about the draft of the Foreign Investment Reliability Assessment Act here. According to the draft, the new law will enter into force on 1 May 2023.