The U.S. Outbound Investment Security Program and its implications for the EU

The U.S. has implemented restrictions on certain outbound investment activity. Although the regime is currently limited to China and few sensitive technologies and products, it has implications for EU subsidiaries of U.S. entities and may inform current discussions on the necessity of outbound investment screening in the EU. Here is what you need to know.

On 9 August 2023, President of the United States (“U.S.”) Biden issued an Executive Order declaring a national emergency and directing the U.S. Department of the Treasury (“Treasury”) to create an outbound investment regime. On 2 January 2025, the Treasury’s Final Rule to implement the President’s Executive Order came into effect, establishing an outbound investment security program (“OISP”) restricting investments into certain sectors in the People’s Republic of China, including Hong Kong and Macau (“China”).

The OISP is a further move in the context of the strategic rivalry between the U.S. and China, which has not only an economic but also a geopolitical and security dimension, and which may intensify under the Trump administration. While, in addition to the trade level, e.g. through export controls, this rivalry has been played out at the investment restriction level for a while, U.S. rules on investment restrictions were so far exclusively aimed at inbound investment activity. The OISP now establishes the U.S.’ first outbound investments restrictions and may be the first step towards comprehensive outbound investment (screening) programs in both the U.S. and the EU.

The U.S. Outbound Investment Security Program in a Nutshell

The OISP restricts outbound investments into technologies and products that the U.S. government considers sensitive or critical for military, intelligence, surveillance, or cyber-enabled capabilities, i.e., semiconductors and microelectronics, quantum information technologies, and artificial intelligence. Its objective is to limit geopolitical rivals’ military, intelligence, surveillance, or cyber-enabled potency by preventing the flow of U.S. funds into these sectors in “countries of concern”.  The scope of the OISP is currently limited to China, but may be extended to further “countries of concern” in the future.

The OISP identifies certain types of transactions that may be either notifiable or prohibited, for example the direct or indirect acquisition of an interest in a foreign (i.e., Chinese) person as well as the provision of a loan or a similar debt financing arrangement to a foreign (i.e., Chinese) person.

The OISP applies to transactions that involve a “covered foreign person”, i.e., a Chinese person that is engaged in a “covered activity”. The OISP includes a list of “covered activity” distinguishing between both sectors as well as activity triggering a prohibition or a notification obligation.

Amongst other things, the following activity is “covered activity”, which may trigger a prohibition:

• The development or production of certain electronic design automation software; certain fabrication or advanced packaging tools; the design or fabrication of certain advanced integrated circuits; advanced packaging techniques for integrated circuits, and the development, installation, sale, or production of supercomputers;

• The development of quantum computers or production of any critical components required to produce a quantum computer; the development or production of certain quantum networks or quantum communication systems; or

• The development of any AI system that is: (i) designed to be exclusively used for, or intended to be used for, certain military or government intelligence or mass surveillance end uses; or (ii) trained using a quantity of computing power greater than 10^25 computational operations generally, or, for an AI system using primarily biological sequence data, greater than 10^24 computational operations.

Other “covered activity” only trigger a notification obligation, for example:

• The design, fabrication, or packaging of integrated circuits not otherwise covered by the prohibition above;

• The development of any AI system not otherwise covered by the prohibition above that meets certain end use thresholds (designed for certain military or government intelligence or mass surveillance end uses or intended for specified cybersecurity or other uses) or the technical threshold of greater than 10^23 computational operations.

Interestingly, the OISP does not provide for a review and approval process, as is the case in the context of “traditional” inbound investment screening regimes. Therefore, U.S. investors face significant due diligence burdens. They should implement robust internal compliance mechanisms in order to ensure compliance with the OISP.

Implications for EU subsidiaries of U.S. entities

The OISP applies to U.S. persons, which includes U.S. citizens or lawful permanent residents, as well as any entity organized under the laws of the U.S. or any jurisdiction within the U.S., including any foreign branch of any such entity, and any person in the U.S.

However, the OISP has indirect implications for EU entities, too, because it obliges U.S. persons to “take all reasonable steps to prohibit and prevent any transaction by its controlled foreign entity that would be a prohibited transaction if engaged in by a U.S. person.”  An EU entity is “controlled” by an U.S. person if (i) more than 50 % of the outstanding voting interest or the voting power of the board is directly or indirectly held by an U.S. person; (ii) its general partner, managing member, or equivalent is a U.S. person; or (iii) in the case of pooled investment funds, its investment adviser is a U.S. person.

This means that the U.S. Outbound Investment Regulations could halt plans of U.S. entities’ EU subsidiaries to invest into sensitive sectors in China, while the EU Member States themselves do not restrict investments into China.

State of discussions on outbound investment screening in the EU

The U.S. is not alone in its approach of including outbound investment restrictions into its economic security strategy toolbox. The European Commission (“Commission”) has set the ball rolling in the EU, too, and Germany’s federal government has hinted that outbound investment screening may be a useful tool in its view.

In a speech on EU-China relations on 30 March 2023, Commission President Ursula von der Leyen expressed that “Europe should develop a targeted instrument on outbound investment” and that such an instrument “would relate to a small number of sensitive technologies where investment can lead to the development of military capabilities that pose risks to national security”. Von der Leyen also announced that the Commission would “present some initial ideas as part of our new Economic Security Strategy”. In its first China strategy of July 2023, the German federal government mentioned outbound investment screening as a potentially important addition to the existing inbound investment screening regime.

The mentioning of outbound investment screening in the context of a speech on EU-China relations as well as the German federal government’s China strategy seems to indicate that any future outbound investment screening regimes in the EU, too, would likely initially be limited to investments into China.

However, the EU and its Member States are only at the start of their analysis on whether outbound investment screening is at all necessary to protect security interests. On 24 January 2024, the Commission published a white paper on outbound investments. It underlines the need to scrutinize outbound investments in order to understand (i) what kind of investments in certain critical technologies are made from the EU; (ii) whether such investments may effectively put EU or EU Member State security at risk; and, if so, (iii) to what extent such risks can be mitigated by existing tools or would justify additional policy action at EU or national level.

In order to better understand any national security risks arising from outbound investments, the Commission drew up a time line for the next steps. First, a public consultation took place until 17 April 2024. The results were published on 23 July 2024 and are currently being assessed by the an expert group. Based on this assessment, the Commission will draft a recommendation to EU Member States to monitor/review certain outbound investment transactions involving sensitive technologies over a certain period of time. Subsequently, based on the results of the monitoring, the Commission and EU Member States will draw their conclusions on whether outbound investments pose national security risks to the EU or its Member States.

Our lawyers regularly advise investors, sellers, target companies as well as M&A advisors and counsel on foreign direct investment (“FDI”) screening laws and regulations. We will continue to monitor developments in FDI screening, including potential future outbound investment screening in the EU. Should you have any questions, please reach out to Marian Niestedt or Kahraman Altun.

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