Germany Increases Scrutiny of Foreign Defense Investments

This OnPoint examines the guidance and its practical implications for investors and targets in the defense sector.

Background

The BMVG on January 29, 2026, took the (rather unusual) step of publishing guidance on its website setting out how it evaluates foreign investments in Germany's security and defense industry. The guidance details the BMVG's advisory role in the interministerial FDI screening process, identifies key assessment criteria and flags know-how protection risks that extend beyond formal investment control.

Germany's foreign investment screening regime, administered by the Federal Ministry for Economic Affairs and Energy (BMWE), empowers the government to review, impose conditions  or prohibit foreign acquisitions of German businesses. Investments in the security and defense industry are subject to heightened scrutiny, as well as mandatory approval requirements and strict prohibition on closing before clearance (gun-jumping prohibition). While the BMWE leads the review process, the BMVG serves as a key advisory body for transactions involving the defense sector.

Notably, the BMVG's guidance contains an expressly positive framing of foreign investment. It highlights that Germany, as Europe's largest economy, is an attractive destination for foreign investment by virtue of its innovation and technological strength. The guidance further recognizes that such investments are welcome and important for economic growth and job creation. This signals that that the screening framework is not intended to discourage foreign investment, but rather to reconcile the promotion of an open investment environment with the protection of essential security interests.

The guidance, however, also emphasizes that once critical know-how leaves Germany, domestic production and R&D capabilities may be irreversibly undermined, thereby compounding strategic harm well beyond any immediate supply chain disruption. The BMVG's identification of these risks also has direct implications on how asset managers should structure their pre-acquisition due diligence and post-closing governance frameworks.

The guidance should be read in the overarching context of Germany’s National Security and Defense Industry Strategy of 2024, which designates a range of key technologies as essential to Germany's strategic sovereignty and commits the government to deploying investment screening tools to prevent the outflow of know-how in critical areas.

The BMVG’s Assessment Framework and Key Screening Criteria

The BMVG's guidance identifies two overarching concerns when evaluating foreign investments in the German defense sector, namely (1) security of supply and (2) preservation of Germany's defense-technological edge.

With respect to security of supply, the BMVG assesses whether a transaction could compromise the reliable supply of goods or services to the German Armed Forces. In addition, the BMVG examines whether a transaction could facilitate the transfer of sensitive know-how to non-allied states, potentially enabling those states to accelerate the development of their own military capabilities.

In its review of proposed transactions falling within the scope of FDI screening, the BMVG applies a range of criteria, including (1) criteria relating to the target, such as whether the target directly or indirectly supplies the German Armed Forces and whether the target's products possess distinctive technological advantages relative to global competitors, and the products’ current and potential future military relevance, and (2) criteria relating to the foreign investor, such as the security profile of the acquirer, the location of its decision-making bodies and its governance structure. Notably, the BMVG further places significant weight on know-how protection mechanisms.

Know-How Risks Beyond Formal FDI Screening

The BMVG acknowledges that formal investment screening cannot capture all potential risks associated with the loss of sensitive know-how. In particular, the guidance identifies a number of scenarios that, while typically falling outside the scope of formal FDI screening, may nonetheless give rise to significant know-how outflows. These include the establishment of new subsidiaries or the acquisition of smaller regional firms, designed to gain access to the EU Single Market and to recruit German specialists who carry knowledge from prior employers. The BMVG further highlights that partnerships between foreign entities and German companies in research and development may pose comparable risks.

Practical Implications and Outlook

The BMVG’s decision to publish this guidance is itself noteworthy. German ministries rarely communicate their internal screening priorities in this manner, and the timing – amid a broader recalibration of Germany's defense and industrial policy – suggests that the guidance is intended not merely as informational but as a signal to foreign investors contemplating acquisitions in the sector that caution is warranted. The anticipated introduction of a standalone Investment Screening Act (“Investitionsprüfungsgesetz” – a draft bill is expected later in 2026) reinforces this reading.

From an investor's perspective, the guidance raises several practical considerations. First, the assessment criteria outlined by the BMVG are broad and involve elements of discretion, particularly regarding the evaluation of an investor's security profile and the future military relevance of a target's products. This creates a degree of unpredictability that is difficult to mitigate through transaction structuring alone. Second, the BMVG's emphasis on know-how protection mechanisms suggests that investors should expect detailed scrutiny of post-closing governance arrangements, data security protocols and information barriers – and should be prepared to offer substantial commitments in these areas as a condition of clearance. Third, the guidance's discussion of risks beyond formal FDI indicates that the German government is developing a broader conception of economic security that may, over time, lead to an expansion of the regulatory perimeter. Parties contemplating transactions in the German defense sector should engage with FDI counsel at the earliest possible stage to assess screening risk, develop realistic timelines and formulate mitigation strategies that address the BMVG's stated priorities.

Of particular relevance for asset managers is that the guidance identifies the decision-making structure of the foreign acquirer and the countries in which its decision-makers are based as key screening criteria. In practice, this means that the BMWE will look beyond the immediate acquiring entity and assess the nationality, governance and ownership of those ultimately controlling or directing the investment. Funds with sovereign wealth fund participation, state-owned enterprise investors or limited partners from non-allied states should assess their investor base carefully in this context. Similarly, asset managers operating parallel vehicles, co-investment structures or fund-of-funds arrangements should be alert to the possibility that voting rights held across affiliated entities may be aggregated for FDI screening purposes.