THE AUTHOR:
Abdullah Javed, Commercial Counsel at Legalgram
Introduction
The modern investment treaty regime was built around a bargain. States wanted foreign capital; investors wanted assurance that their investments would not be taken from them overnight. That assurance was encoded in treaty protection standards, e.g., fair and equitable treatment, non-discrimination, and protection against expropriation. In return, states accepted a corresponding constraint on their sovereign discretion. Each party had reason to accept the trade. Investors remembered Yukos, Anglo-Iranian Oil Company, once one of the world’s largest oil companies, nationalized within a few years by the Iranian State. States remembered that the British East India Company had arrived at the Mughal court as a trader and left as sovereign of much of the subcontinent.
That equilibrium is under pressure. States have grown apprehensive about the intentions of foreign investors and the long-term consequences of foreign capital in strategic sectors, and those apprehensions have crystallized into screening. In general terms, screening refers to procedures for assessing, investigating, conditioning, prohibiting, authorizing, or unwinding Foreign Direct Investment (“FDI”) on public-order or national-security grounds.
Recent practice illustrates how screening can engage the treaty bargain at different points in the life of an investment:
- In November 2022, Germany prohibited a Chinese investor from acquiring the semiconductor business of Elmos, blocking entry before the investment could be made.
- In the United Kingdom, Nexperia’s acquisition of Newport Wafer Fab was completed in July 2021, before the National Security and Investment Act 2021 entered into force. It was subsequently unwound by a divestment order issued in November 2022 under the new regime.
- And in Italy, Sinochem, which had held a substantial shareholding in Pirelli since 2015, was restricted in June 2023 from nominating the company’s chief executive on the ground that Pirelli was of strategic national importance.
None of these measures is, on its face, extraordinary. But States are progressively repositioning security-based decisions as sovereign prerogatives insulated from ordinary treaty discipline (paraphrasing), thereby weakening the protection framework that investment agreements were formulated to provide. It is that quiet rewriting of the bargain that this piece takes up.
The Rights of the Investor at Entry
This piece is concerned with the admission stage and the point of entry. Even at entry, the foreign investor is not necessarily without protection. Investment treaties usually confer a defined set of rights, held against the host State and enforceable in most cases through investor–State arbitration, and those rights attach to a broadly drawn notion of “investment”.
Take the China – Germany BIT (2003) as an illustration. Article 1(1) defines “investment” as “every kind of asset invested directly or indirectly by investors of one Contracting Party in the territory of the other Contracting Party.” That is an open, asset-based formulation, and it is not confined to shares, plant, or land. However, Article 2(1) also provides that investments are admitted in accordance with the host State’s laws and regulations. The breadth of the definition of “investment” therefore does not, by itself, establish an unrestricted treaty right of entry.
Arbitral tribunals have given broad asset-based definitions substantial reach. See, for instance, SPP v. Egypt (Award of 20th May 1992, paras. 223 and 225–230), where the tribunal held that contractual rights arising from an agreement with a State entity were themselves a covered investment. See also, Bayindir v. Pakistan (Decision on Jurisdiction of 14 November 2005, paras. 130–138), where the tribunal reached a similar conclusion concerning rights under a construction contract. Tribunals have also accepted that a contribution to the host economy need not be purely financial; e.g., know-how, equipment, services, and labor may constitute relevant contributions under the factors identified in Salini v. Morocco (Decision on Jurisdiction of 23 July 2001, paras. 52-57), including contribution, duration, and risk for purposes of the International Centre for Settlement of Investment Disputes (“ICSID”) Convention analysis.
The consequence is not that every proposed acquisition becomes protected investment before closing. Rather, contractual rights, expenditures, or other assets already acquired in connection with a proposed transaction may themselves fall within the treaty’s protective perimeter if they satisfy the applicable definition of investment and jurisdictional requirements. A mere expectation that a transaction will proceed is unlikely, without more, to be sufficient.
Within that perimeter, four standards are central:
- Article 3(1) contains an autonomous Fair and Equitable Treatment (“FET”) clause. It requires the host State to act consistently, transparently, and without arbitrariness, and to respect and protect qualifying legitimate expectations formed when the investment was made. On its face, it is unqualified by any express reference to the customary international law minimum standard.
- Article 3(2) and (3) provide national treatment and Most-Favored-Nation (“MFN”) treatment, prohibiting the host State from treating the Chinese investor less favorably than its own nationals, or than investors of any third State, in comparable circumstances.
- Article 4 protects against direct and indirect expropriation, save for a public purpose, on a non-discriminatory basis, under due process, and with prompt, adequate, and effective compensation.
- Article 6 guarantees the free transfer of investments and returns, and Article 9 offers consent, subject to its terms, to investor–State dispute settlement.
EU Investment Screening and the 2026 Revision
Screening was formally introduced at Union level by Regulation (EU) 2019/452 (“Regulation”), establishing a framework for the screening of FDI into the Union, which established a framework of cooperation and information-exchange among Member States that operated national screening mechanisms. The Regulation was, by design, modest. It did not require any Member State to introduce a screening mechanism, and it left the substantive design of national regimes largely to Member State discretion. It offered a non-exhaustive list of factors that Member States “may consider,” ranging from critical infrastructure and technologies to access to sensitive information. But it did so without defining “public order” or “national security, and without prescribing an evidentiary threshold that a screening decision had to meet.
That framework has been substantially revised. On 10 February 2026, the Council’s Permanent Representatives Committee approved a proposal to repeal and replace Regulation 2019/452, and the new Regulation was formally adopted by the Council on 8 June 2026 and published in the Official Journal in June 2026 (the “New FIR Regulation”). Although the New FIR Regulation entered into force in July 2026, most of its provisions will apply from 17 January 2028.
Four features of the reform bear on the analysis that follows:
- Screening will become mandatory across the Union: every Member State must maintain a national mechanism.
- National regimes must operate a harmonized review procedure, including a “Phase 1” assessment fixed at forty-five calendar days.
- The Regulation prescribes a common minimum sectoral scope in which screening is compulsory, covering, among others, hyper-critical technologies, critical entities in energy, transport, and digital infrastructure, critical raw materials, and specified financial-system entities.
- The personal and material scope is broadened. Certain intra-EU investments where ultimate control lies in a third State fall within the regime, and Member States must be equipped with ex officio call-in powers to review defined below-threshold transactions.
The Impact of the Investor Entry
The reformed regime meets the investor at two different entry points. The first is straightforward: a Chinese company entering the German market directly. The second is newer, and made explicit by the New FIR Regulation’s expanded scope. It is the case of an EU-incorporated company that is ultimately controlled by a third-State parent, entering a new Member State market. Each raises a different set of questions.
FET: The Direct Entrant
Article 3(1) of the China – Germany BIT provides that investments of investors of each Contracting Party “shall at all times be accorded fair and equitable treatment in the territory of the other Contracting Party.” The Tecmed v Mexico (Award of 29th May 2003 Para. 154)tribunal captured what that means in practice: the investor is entitled to expect the host State to act consistently and transparently, so that it knows in advance the rules that will govern its investment. The tribunal in Saluka v Czech Republic (Partial Award of 17 March 2006, para. 309 said the same thing the other way around. The host State must not act in a way that is non-transparent, inconsistent, or discriminatory.
Held against that standard, the framework has a real gap. Article 1(1) of Regulation 2019/452 says that screening operates “on the grounds of security or public order,” and Article 4 offers a non-exhaustive list of factors a Member State may consider, including critical infrastructure, technologies, and sensitive information. But neither “security” nor “public order” is ever defined, and no evidentiary threshold is set. The New FIR Regulation narrows that gap by introducing common safeguards and risk criteria, but it does not eliminate Member State discretion over the meaning and application of “security” and “public order”.
The growing practice of conditional clearances adds another layer: mitigation measures, ring-fencing, and technology-transfer restrictions. The investor may then find that the investment eventually admitted is not the one it originally proposed.
The Internal Entrant and the Court of Justice of the European Union (CJEU)’s Own Yardstick
For the EU-incorporated subsidiary with a third-State parent, the treaty is not the only reference point. The CJEU has already told us what a restriction on capital movements has to look like to be lawful. In Église de Scientologie de Paris (Judgment of 14 March 2000, para. 17), the Court held that public-policy or security restrictions must respond to a “genuine and sufficiently serious threat” to a fundamental interest of society, applied strictly and proportionately. The Commission v Portugal (Judgment of 4 June 2002, paras. 49-52) added that any such restriction must rest on non-discriminatory, objective, and publicly accessible criteria, driven by genuine security or public-policy concerns rather than economic ones.
In Xella Magyarország (Judgment of 13 July 2023), the Court applied this framework to a national screening decision under Regulation 2019/452, confirming that the standard is not displaced by the Regulation’s silence. In other words, the discipline the treaty asks for and the discipline the Court already applies overlap substantially: transparency, precision, and proportionality.
National Treatment
Article 3(2) of the China – Germany BIT provides that the host State may not treat the Chinese investor less favorably than its own nationals in comparable circumstances. On paper, the reformed regime’s risk factors apply to everyone. They include third-State government control, sanctions exposure, and prior non-compliance. In practice, they land most heavily on a small number of third States, and China more than any other.
A screening decision that blocks a Chinese semiconductor acquisition while letting a comparable domestic deal through can, on the Pope & Talbot v. Canada (Award on the Merits of Phase 2, 10 April 2001, paras. 72–79) test, engage the national-treatment obligation. The Nexperia story makes the point vivid: the very Newport Wafer Fab that the UK ordered unwound from Chinese-owned Nexperia in November 2022 was, in March 2024, cleared for acquisition by the U.S.-based Vishay Intertechnology for USD 177 million. Although this example does not itself implicate the China – Germany BIT, it illustrates how screening outcomes may differ depending on the investor’s origin.
The host State can, of course, reply that a Chinese acquirer and a domestic or allied one are not in “like circumstances” because their security profiles differ. A comparison between a Chinese investor and an investor from another third State would instead engage the MFN obligation under Article 3(3). But either reply raises the same underlying question: whether the different treatment rests on an objective security or merely on the investor’s nationality.
Conclusion
The China – Germany BIT was signed in 2003, and its text has not moved since. What has moved is the world around it. The reformed EU screening regime does much that Regulation 2019/452 did not, and much that a coordinated Union response to shifting security realities may reasonably require. But it does not eliminate the questions the treaty and the CJEU, in their different vocabularies, have long asked of any restriction on capital: Is the criterion precise? Is the process transparent? Is the measure proportionate?
The bargain has not been broken. It has, quietly, been rewritten.
ABOUT THE AUTHOR
Abdullah Javed is Commercial Counsel at Legalgram, an AI-powered legal services platform, and a Pakistan-qualified lawyer with roughly four years of legal experience. He holds an LL.M. with Distinction in Investment Treaty Arbitration from Uppsala University, where he was supervised by Prof. Dr. Steffen Hindelang, and an LL.B. from Bahria University. His research focuses on investment treaty arbitration and the EU and U.S. foreign direct investment screening regimes. He is based in Stockholm.
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
