Mandatory control and authorisation of certain foreign investments in Slovakia from March 1, 2023

21. 03. 2023

The new Act No. 497/2022 Coll. imposes more rigorous control of entities from third countries as well as further related obligations associated with acquisitions performed in Slovakia. An overview of the new aspects of Act No. 497/2022 Coll. is presented in the following article.

What are the reasons and the meaning of screening of foreign investments in Slovakia?

The reason for screening of foreign investments is primarily the recent development in the global economic and the interconnectedness of the economies of the European Union, to which some foreign investments may represent a potential security threat.

The screening of foreign investments shall allow the Slovak Republic to monitor and eliminate potential risks by imposing conditions for the execution of a specific foreign investment or by prohibiting or invalidating it.

The mechanism of control of foreign investments and the fulfilment of the obligations arising from Act No 497/2022 Coll. is therefore of great importance, especially in the case of acquisition of shares in Slovak commercial companies, as well as in similar acquisition processes.

Who shall be considered a foreign investor pursuant to Act No. 497/2022 Coll.?

In the context of the adopted Act No 497/2022 Coll., any person who is not an EU citizen or does not have a registered office or place of business in the EU shall be considered a foreign investor. 

Foreign investors are also persons who are resident or have a registered seat in the EU but 
-        are directly or indirectly controlled by a person outside the EU; or 
-        are directly or indirectly controlled by a public authority of a third country,
where such person is the ultimate beneficiary, or such person finances the transaction in question.

Example 1: Example 1: A natural person residing in the Russian Federation is interested in purchasing a business share in a Slovak company. Since such person is a third-country national, the Russian citizen shall be considered a foreign investor under the act.

Example 2: Two citizens of Ukraine are the sole shareholders of a Slovak limited liability company. The said limited liability company (hereinafter referred to as the "parent company") is intended to become the sole shareholder or partner of another commercial company with its registered seat in Slovakia. In such a case, the parent company shall be considered a foreign investor although it has its registered seat in Slovakia.

Example 3: 100% of the shares of a German company are held by a commercial company with its registered seat in Beijing, whose sole shareholder is the City of Beijing. A German company that intends to make a controlled investment in Slovakia is considered a foreign investor under the act.

What is considered a foreign investment under Act No. 497/2022 Coll.?

Under the Act, any investment which is planned or executed by a foreign investor, through which such investor may directly or indirectly acquire a so-called target person (a person with its registered seat in Slovakia), exercise effective participation or control therein, or acquire substantial assets of such person, may be considered a foreign investment.
Neither the value of the investment nor the fact whether it is an investment under Slovak or other law is relevant. Nor is it relevant whether the foreign investment is made in the context of the enforcement of a mortgage, enforcement auction or other enforcement right.
However, in terms of the restrictions and obligations laid down by the Act, it is decisive whether the investment is a so-called critical foreign investment.
A critical foreign investment is considered to be the acquisition or increase of a share in the share capital or voting rights of the target person with a value of at least 10% in the target person (a person with its registered seat in Slovakia), which operates in one of the following sectors:
- production of so-called designated products (e.g. firearms)
- production of defence industry products (military equipment)
- production of dual use items (products designated by the Annex to Regulation No 429/2009, such as electronics, computers, special materials, telecommunications and information protection, navigation systems, etc.)
- production, research and development in the field of health or biotechnology
- critical infrastructure (e.g. emergency services operator)
- provision of cyber security or cloud computing services
- production, research and development in the field of encryption
- operation of media services 
- operation of content sharing platforms with annual turnover exceeding EUR 2 000 000
- publishing of periodicals
- operation of news websites
- operation of a press agency
However, an investment is not a foreign investment if it is planned or made between entities whose shareholders or owners are the same persons or transactions arising from normal course of business.

Mandatory screening of foreign investment pursuant to Act No. 497/2022 Coll. 

If the foreign investment is a critical foreign investment, the foreign investor shall apply for official screening prior to execution of such investment.
Thus, a critical foreign investment may not be executed prior to the decision on the foreign investment authorisation or the decision on the conditional authorisation of the foreign investment.
Otherwise, a number of serious consequences may be associated with the execution of an unauthorised foreign investment.

What are the consequences of a foreign investment executed without official screening and authorization?

In the event of non-compliance with the obligations set out by Act No. 497/2022 Coll. and the execution of a critical foreign investment without official screening and authorisation, the Ministry of Economy of the Slovak Republic may commence a procedure for screening of the transaction.

If the Ministry of Economy of the Slovak Republic concludes that the Act has been violated, it may order the foreign investor to unwind the transaction and restore the situation that existed before the implementation of the transaction.

The Ministry of Economy of the Slovak Republic is also entitled to impose a fine of up to the value of the critical foreign investment or 2% of the sum of the total net turnover of the foreign investor or the controlling person, or, if the determination of such value causes delays in the proceedings, of up to EUR 1 000 000,-.

Entry in the register of public sector partners in case of a foreign investment

Pursuant to Act No. 497/2022 Coll. a foreign investor is also obliged to ensure its entry into the register of public sector partners (through an authorised person, such as a Slovak attorney-at-law) in the case of:  
-        a decision on the authorisation of a foreign investment, 
-        a decision on conditional authorisation of a foreign investment,
-        if the Ministry of Economy of the Slovak Republic sends the foreign investor a confirmation that no risk of negative impact of the foreign investment has been identified,
-        if the Ministry of Economy does not send the foreign investor a notice of the commencement of the screening within 45 days from the receipt of the application for screening. 

In general, the foreign investor shall be entered in the register of public sector partners for at least three years from the date of the investment or receipt of the confirmation from the Ministry of Economy of the Slovak Republic.

Final recommendation for foreign investors

With respect to the aforementioned, we recommend foreign investors to assess, in cooperation with a local expert, whether the planned transaction falls under the so-called critical or ordinary foreign investments prior to the execution of their investments in Slovakia.

Consequently, we recommend that a thorough due diligence analysis is carried out and that further steps are coordinated so that foreign investors can avoid potential complications associated with possible violations of the Act No. 497/2022 Coll.

VAVRO LEGAL s.r.o. has vast experience in the field of M&A and is ready to provide its services to anyone interested in a foreign investment in Slovakia.