Extraterritorial Reach of Italian/UK FDI Rules: Are In-Country Sales Sufficient Nexus?

In the context of two decisions issued in the second half of 2024 (collectively, the "2024 Italian FDI Decisions"), the Italian FDI Authority asserted jurisdiction over two unrelated acquisitions by offshore investors of non-Italian target companies operating in one of the sectors that Italian FDI rules consider strategic for Italy's national interests (any such sector, an "FDI-Relevant Sector") that had no subsidiaries, affiliates or branches in Italy but sold their products directly to Italy-based customers (any such acquisition, a "Fully Foreign Acquisition").  

For a number of years now, the Italian FDI Authority has taken a consolidated position under which Italian FDI rules apply to indirect acquisitions of Italy-based companies operating in any of the FDI-Relevant Sectors made through the acquisition of a non-Italian parent company of such Italy-based company.  

However, the 2024 Italian FDI Decisions have provided new guidance in connection with the Italian FDI Authority's interpretation of Italian FDI rules which has led to a significant expansion in the scope of their extraterritorial reach.  

From a literal standpoint, Italian FDI rules do not explicitly clarify whether a Fully Foreign Acquisition would fall within the scope of the Italian FDI rules and would trigger a filing duty with the Italian FDI Authority.  

Before the 2024 Italian FDI Decisions, publicly available information concerning Italian FDI Authority's precedents had not provided conclusive guidance on this issue. In three instances regarding Fully Foreign Acquisitions that took place in 2021 and in 2023, the Italian FDI Authority issued no-action notices holding that the relevant transactions fell outside the scope of the Italian FDI rules, without however providing insight about the reasons that led to such a conclusion.  

In this context of uncertainty, the 2024 Italian FDI Decisions provide clarity on the approach taken by the Italian FDI Authority with respect to Fully Foreign Acquisitions, at least those targeting the defense and national security sector. More specifically, in the 2024 Italian FDI Decisions, the Italian FDI Authority asserted jurisdiction and held that, despite the lack of a permanent establishment in Italy, the relevant non-Italian target companies (which in both cases were supplying components to certain Italian defense and aerospace contractors) were to be deemed strategically relevant to the Italian defense sector, including for the purposes of protecting key national interests pertaining to ensuring the continuity of supplies and preserving the relevant supply chain, including in relation to certain strategic defense procurement projects.  

The position taken by the Italian FDI Authority in the 2024 Italian FDI Decisions shows that even Fully Foreign Acquisitions may be in scope of the Italian FDI rules, thus considerably expanding the extraterritorial reach of such rules.  

Such an expansive interpretation is relatively unusual in the European Economic Area where other major jurisdictions require a more stringent nexus with the relevant country than just in-country sales for a transaction to trigger reporting duties under the applicable foreign direct investment rules. However, certain jurisdictions such as the Czech Republic, Estonia and Lithuania do have FDI regimes with expansive jurisdictional scopes. 

It is worth noting that there are some parallels with the UK foreign direct investment regime, where the UK government has adopted a broad interpretation of a number of mandatory reporting sectors, including defense, advanced materials, dual-use goods and critical supplies to government, which can result in a requirement to file transactions in these sectors in the absence of a local target subsidiary or physical presence. Even where a transaction involves a target which is not active in a mandatory reporting sector, the UK government has a broad discretion to call-in acquisitions of businesses that either carry on activities in the UK or supply goods or services to customers in the UK, in both cases without regard to materiality. Acquisitions of interests in assets outside of the UK, including intellectual property rights, can also be subject to review in some cases. 

Time will tell whether the Italian FDI Authority will take a similar interpretive position with regard to FDI-Relevant Sectors other than defense and national security. Also, it remains to be seen whether investors will test such broad interpretation of the geographic scope of Italian FDI rules in court, for instance by claiming that their extraterritorial application is in breach of international law and unenforceable in the affected third countries. In the meantime, however, investors should be aware of the position taken by the Italian FDI Authority in this respect and factor it into their strategic planning and structuring of Fully Foreign Acquisitions.