Defence sector drives deeper scrutiny in EU FDI reviews

The European Commission’s (the Commission's) fifth annual Foreign Direct Investment (FDI) screening report, issued on 14 October 2025, signals heightened focus on defence and critical technologies, with practical implications for M&A timelines and deal structuring across Europe and the UK.

 

Why this matters

The Commission’s fifth annual report on the screening of FDI confirms that the EU remains open to foreign investment, but with a growing edge of strategic caution. As geopolitical tensions persist, defence and critical technologies have become the focal point of foreign investment reviews across the EU bloc.

For UK investors and defence businesses, the message is clear: EU-related deals involving sensitive assets or supply chains may now face longer reviews, closer scrutiny, and potential remedies, even when the buyer originates from the UK, the US, or one of the other "five eyes" countries.

 

Key findings from the EU FDI report

The Commission’s 2025 report (covering 2024 activity) reflects a sharp uptick in screening activity. Member States reviewed 3,136 transactions, almost double the average of the first four years of reporting, and issued 477 notifications under the EU’s cooperation mechanism – a 15% increase since 2021.

• Whilst national reviews dictate timing for an FDI review, the EU's cooperation mechanism appears to run efficiently, with around 92% of the 477 cases in 2024 handled within the initial coordination period and only 8% prompting further assessment. This suggests that EU-level coordination rarely delays national reviews.
• Remedies remain rare but are rising: national authorities blocked only 1% of investments, but 9% required conditions or mitigating measures (often related to technology transfer, supply security, or local R&D continuity).
• Wider EU coverage: 25 Member States now have national screening mechanisms, with Croatia and Cyprus expected to follow soon.

This expansion, coupled with ongoing reforms to the EU FDI Regulation, signals a generally more consistent, and potentially stricter, screening landscape across the Union.

 

Defence sector under the microscope

The standout finding from the report is the surge in defence-related reviews.

• Defence accounted for 37% of all Phase 2 assessments of critical technologies in the EU in 2024, up from 26% in 2023 – the single largest increase of any sector. A similar pattern is evident in the UK. According to the National Security and Investment Act 2021 (the NSIA) Annual Report 2024 – 2025, 56% of all notifications and 36% of call-in notices concerned the defence sector, confirming that defence remains a dominant focus of national security screening across both the EU and the UK.
• The share of manufacturing cases under detailed review rose to 50%, with the Commission citing concerns around “technology or knowledge leakage” and “security of supply” – issues often tied to dual-use and defence applications.
• This shift marks defence as a key critical technology driver in EU FDI scrutiny, underscoring its growing importance to the bloc’s “economic security” agenda.

The report notes the continued dominance of US and UK investors in EU notifications. In 2024, the US accounted for 40% of all transactions notified under the EU cooperation mechanism (up from 33% in 2023) with the UK second at 11%.

This pattern largely reflects the design of many Member State screening regimes, which are triggered only for non-EU acquirers (e.g. in Germany, France and Italy, among others), together with the scale of US and UK investment into the EU.

Nevertheless, the trend suggests that EU authorities are applying screening tools more broadly across investor origins, with scrutiny extending to transactions involving countries such as the US and UK. Recent national decisions underscore this broader reach. For example, in Italy, the government's 2024 approval of KKR's acquisition of Telecom Italia's fixed-line network was conditional on commitments to retain core operations in Italy and preserve state control over strategic assets.

 

Implications for transactions

The EU’s latest report offers several lessons for deal teams operating in or alongside the bloc:

• Longer timelines for defence-linked deals: a growing share of Phase 2 cases, and the prevalence of defence technologies in those reviews, means investors should expect additional information requests and potential delays to completion.
• Plan ahead for mitigation: while most deals still clear unconditionally, around one in ten reviewed cases across the EU have required mitigating measures in recent years (12% in 2022, 10% in 2023 and 9% in 2024). These interventions appear increasingly oriented towards sensitive areas such as defence and manufacturing, where concerns about technology-leakage, access to data, and supply chain continuity are flagged. Deal teams should build credible mitigation strategies early to manage any unexpected review or condition.
• Multi-jurisdictional filings: with nearly all EU Member States operating screening regimes and reforms underway to align their scope, parallel filings have become a standard feature for cross-border transactions.
• US and UK investors not exempt: given that most Member State screening regimes apply to non-EU acquirers, transactions involving US or UK investors will typically fall within the scope. Deal teams should therefore factor potential FDI review and timing implications into early deal planning.

For UK businesses, particularly those active in manufacturing, aerospace, or defence supply chains, the findings offer a timely reminder that the EU’s evolving FDI framework complements, rather than contrasts with, the UK’s own NSIA. Similar themes of defence capability, supply resilience, and dual-use technologies are shaping reviews on both sides of the Channel.

 

How we can help

FDI scrutiny in the defence sector increasingly demands early planning, sector-specific insight, and coordinated engagement with regulators.

Our global FDI and National Security team combines deep defence industry experience, acting for public bodies, manufacturers and suppliers, with expertise coordinating filing strategies and risk mitigation in screening regimes across the world.

As Europe sharpens its focus on defence and critical technologies, we help clients:

• identify and manage FDI and national security risks;
• plan mitigation strategies to keep deals on track; and
• engage effectively with authorities throughout the review process.