Kevin Gerretz (Ellex Legal) authored this publication

On September 1, 2023, by virtue of the Foreign Investment Reliability Assessment Act (FIRAA) entering into force, an FDI screening mechanism was eventually established in Estonia. 2024 marked the first full effective year of the new FDI regime. While the number of filings remained modest for the first year—owing to a decrease in capital flows into Estonia and the difficult geopolitical situation in the region—the number of filings is expected to grow going forward.

Summary of major changes in 2024

• The list of target undertakings in scope of the Estonian FDI regime doubled in October 2024.
• The definition of "vital services" in scope of the FDI regime was extended to the pharmaceutical sector and food sector

Who files?

The FIRAA applies to any direct or indirect acquisition of qualifying holding in, control over, or a part of a target undertaking by a foreign investor, including the undertaking's assets.

A qualifying holding is defined as holding at least 10 percent of shares, or at least 10 percent of votes; or giving significant influence over the management by other means.

Control is defined as holding the majority of votes represented by shares; the right to appoint or remove the majority of management members; control over the majority of votes pursuant to an agreement entered into with other shareholders; and exercise, or the power to exercise, dominant influence or control.

The term "foreign investor" within the meaning of the FIRAA includes a natural person who is a national of a third country (in case of dual-nationality, at least one nationality of a third country) or stateless; an undertaking (within the meaning of competition law) established under the laws of a third country; and any undertaking under the control of a natural person, or another undertaking specified as a foreign investor. "Third country" is defined as any non-EU country.

Types of deals reviewed

The FIRAA provides an exhaustive list of economic sectors and criteria to determine if the target will be subject to the mandatory FDI review process and approval.

The types of targets in scope include providers of vital services, such as suppliers of electricity, natural gas or liquid fuel; providers of data transmission services, payment services and cash circulation services; providers of district heating and water supply and sewage; and suppliers of medicinal products and food. Also included are all state-owned companies in which the state holds a qualifying holding; producers or suppliers of military or dual-use goods; providers of nationwide TV and radio services, newspapers, magazines and online or print news; railway infrastructure managers, certified operators of aerodromes, heliports and air navigation service providers; as well as operators of Estonian maritime ports that are a part of the trans-European transport network.

Scope of the review

If the relevant transaction is subject to the FIRAA, the law provides for a process of review and approval of the foreign investment to determine whether the foreign investment may bring about negative effects on Estonian, or any other EU Member State's, security and public order with regard to the foreign investor's ownership, economic activities or financing, and the economic sector in which the target operates.

The FDI regime is mandatory and suspensory in nature, meaning that if the transaction is subject to review in accordance with the FIRAA, the foreign investor must file an application for review and the transaction is subject to a standstill obligation until the clearance has been issued by the competent authority, namely the Consumer Protection and Technical Regulatory Authority.

The filing includes submission of an Estonian filing form and English Form B notification under the EU's Investment Screening Regulation, together with all relevant annexes, including transaction documents. Only upon submission of a complete filing, under the discretion of the competent authority, is the review process initiated and the clock starts running.

If the foreign investment would be otherwise blocked under the FIRAA, the authority may clear the foreign investment conditionally, whereby the foreign investor or the target is obligated to offer remedies to avoid risks to the security or public order of Estonia or any other EU Member State, including to divest a certain shareholding in the target or maintain existing service or supply agreements.

The authority may annul an earlier clearance after it has been issued on certain grounds, including where the investor does not comply with conditions specified in the decision (in case of a conditional clearance), or the investor has submitted false or misleading information or documents that constituted a decisive factor for the clearance. Upon annulment, the foreign investor or the target is required to immediately reverse the transaction by returning to the initial state of affairs to the maximum extent possible.

Review process timeline

The process can take up to 180 calendar days from the date of submission of a complete application to the authority. By default, the authority is required to adopt a decision within 30 calendar days from the submission of a complete application.

The process may be extended once by up to 90 calendar days where this is necessary for the assessment of the foreign investment's impact, or another EU Member State, or the European Commission intends to provide comments on the foreign investment in accordance with the Investment Screening Regulation. Furthermore, where clearance can be given only conditionally, the authority may extend the above deadlines by up to 60 calendar days for discussions on remedies.

How foreign investors can protect themselves

Where a transaction gives rise to the risk of being subject to FDI review and approval in Estonia, non-EU investors should consider filing the application with the authority at least 30 calendar days prior to the planned closing. It is important that all the required information is included in the filing, as incomplete filings do not start the clock.

For a foreign investment that risks having an adverse effect on the security and public order of either Estonia or another EU Member State, such as an investment into the defense sector or originating from a high-risk country, the time of filing an application should be brought further forward to account for the potential extension of the review process up to a total of 180 calendar days.

Foreign investors should be particularly mindful of a possible Estonian FDI filing whenever a target deals in dual-use or military goods and has activities or turnover in Estonia. Given the ambiguous wording of the Estonian FDI regulation, a filing in Estonia may be triggered where dual-use or military goods are produced, supplied or where technical assistance with respect to these goods is provided, in Estonia or into Estonia, including by a non-Estonian entity.

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