Spain. Spain. Richard A. Silberstein and Gómez-Acebo & Pombo July 1, Outline

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1 Spain Richard A. Silberstein and Gómez-Acebo & Pombo July 1, Outline Is foreign investment subject to review in your jurisdiction? Briefly describe the regulatory framework and authorities. What is the relevant foreign investment legislation in your jurisdiction? Who enforces the foreign investment legislation? What kind of investments are caught? Spanish foreign investment legislation is centered upon the principle of full liberalization of transactions and the free movement of capital as established in the European Treaties. Article 73.D of the European Union Treaty (Maastricht Treaty) recognizes the authority of member states to establish or maintain administrative requirements for liberalized operations. This has two different goals: on the one hand, to permit the gathering of administrative, statistical and economic information concerning these operations and to take justified measures for reasons of public order and public security. Foreign investments into Spain are subject to control and review for the abovementioned purposes. Royal Decree 664/1999, of April 23, provides the basic legal framework for foreign investments in Spain. Law 19/2003, of July 4, regulates the legal regime of movements of capital, economic transactions abroad and certain measures to prevent money laundering. Law 18/1992, of July 1, sets out certain rules regarding foreign investments. The Order of May 28, 2001 of the Ministry of Economy implements Royal Decree 664/1999. The Order 755/2003, of March 20, of the Ministry of Economy, regulates declarations subsequent to investments filed by electronic means. Royal Decree 54/2005, of January 21, establishes certain measures regarding the prevention of money laundering. There is also specific legislation for special sectors such as telecommunications, energy and national defense (see response to Question 4 below). Together this legislation establishes a general regime where foreign investment in Spain may be freely made. The only requisite is the filing of a post investment declaration with the Investments Registry for statistical purposes. Exceptions to the general regime fall under a special regime characterized by certain types of intervention by the Spanish government. Special regimes may involve a prior administrative authorization (article 11 of Royal Decree 664/1999), a prior declaration with the Investment Registry (article 4.2 a) of Royal Decree 664/1999) or the suspension of the liberalized regime for certain investments (article 10 of Royal Decree 664/1999). The principle authorities enforcing foreign investment legislation are the Council of Ministers, the Ministry of Economy and Finance and the Ministry of Industry, Tourism and Trade. Both the Spanish central government and the governments of the Spanish autonomous regions have jurisdiction in sectors that are considered special. Investments caught are those considered to be made by persons defined as a foreign investor under the Spanish legislation. Article 2 of Royal Decree 664/1999 defines a foreign investor as: (a) an 1

2 individual not resident in Spain; (b) a private legal person domiciled abroad; and (c) a foreign sovereign public entity. Foreign investments are categorized as: (a) direct; (b) portfolio; (c) in real property or (d) other forms. Moreover, Article 3 of the Royal Decree 664/1999 sets forth the investments which are subject to declaration. (1) Direct investments subject to declaration are the following: (a) participation in Spanish companies; (b) creation of branches and establishments or increasing the funds available to them; and (c) subscription and purchase of securities representing loans issued by residents. (2) Portfolio investments subject to declaration include participation in Spanish companies, the subscription and acquisition of negotiable securities other than shares and the participation in Spanish mutual investment funds. (3) Investment in real estate: the acquisition of ownership and other rights in rem in real estate located in Spain by non-resident individuals or legal persons. (4) Other forms of investments cover the following kinds of investment: joint accounts, community property, foundations and economic interest groupings. 2. Thresholds What are the relevant thresholds which trigger the application of the foreign review process? Under the general regime, all foreign investments, while liberalized, must be declared to the Foreign Investment Registry, which is part of the Ministry of Industry, Tourism and Trade. There are only two exceptions to this general rule: (1) investments in real estate not exceeding 3,005, euros; and (2) other forms of investment not exceeding 3,005, euros. These exceptions do not apply when the investment is made from a tax haven. A prior administrative declaration is required for investments made from a tax haven (that is, a country or territory listed in Royal Decree 1080/1991 of July 5, as modified by Royal Decree 116/2003), regardless of the amount. Exceptionally, investments coming from tax havens are not subject to a prior declaration when the investment is in Spanish negotiable securities if issued or offered publicly whether on an official secondary market or not, and interests in mutual investment funds registered with special registries of the Stock Market Regulator (CNMV), and when the investment is in a company that does not have a foreign participation exceeding 50% of the share capital. Rules regarding exchange control must be taken into account when considering the form in which the investment is made (cash contributions, wire transfers, etc.). 3. Substantive test What is the substantive test for clearance? There is only a substantive test for clearance under a special regime, not the general regime. Under a special regime, there is room for the subjective assessment of authorities when granting a prior administrative authorization or suspending the liberalization of the investment. For further information, see responses to Questions 4 (reference to article 11 of Royal Decree 664/1999) and 6 (reference to article 10 of Royal Decree 664/1999). 4. Protected Industries 2

3 Are any industries protected and subject to special rules? Foreign investments in some sectors are subject to special legislation in addition to the general rules for foreign investment. These special sectors include air transportation, radio, minerals, raw materials and mining rights, television, gambling, telecommunications, private security, manufacturing, trading or distribution of weapons and explosives for civil use and activities related to national defense. The special legislation governing these sectors imposes specific authorizations and/or reviews for foreign investments. The special authorization from the corresponding department is required prior to following the general rules. As a result, one foreign investment may be subject to several administrative authorizations. For example, article 11 of Royal Decree 664/1999 specifically excludes foreign investments in activities directly related with national defense from the general regime of liberalization. The procedure requires the filing with the Ministry of Defense of an application for authorization, and the favorable resolution of the Council of Ministers, upon the proposal of the Ministry of Defense after receiving the Foreign Investments Committee report. Any modification of an investment already authorized according to the abovementioned procedure requires prior authorization. There are exceptions. Several major Spanish quoted companies are engaged in such activities. The Spanish legislator has exempted nonresidents acquiring shares in such companies from obtaining administrative authorization under certain conditions. The non-resident must not acquire more than 5% of the company s share capital and may not participate directly or indirectly on the company s board of directors. 5. Particular investors Are there any special provisions applicable to certain investors? If so, what are they? Aside from the discussion of state owned entities in response to Question 7 below and the investors residing in tax havens discussed in response to Question 2, there are no special provisions applicable to certain investors. 6. National Security Do national security issues form part of the review? Foreign investment legislation distinguishes between foreign investments in the national defense sector (see response to Question 4) and foreign investments that may involve national security issues. We are going to focus here on the second type of investment. Article 10 of Royal Decree 664/1999 regulates the suspension of the liberalization of the foreign investment regime for investments that may affect activities related to the exercise of public powers or activities that may affect public order, national security or public health. The authority to suspend the liberalization of foreign investments, that is, to control and possibly forbid the foreign investments listed in article 10 is held by the Council of Ministers. Article 10 of the Order of the Ministry of Economy dated May 28, 2001 details the procedure. After the suspension is declared by the Council of Ministers, the foreign investor will need to request a prior administrative 3

4 authorization. The request for authorization is addressed to the General Director of Trade Affairs and Foreign Investments. The Council of Ministers decides whether to grant the authorization for the foreign investment, only after the proposal from the Ministry of Economy and Treasury Department or from the affected Department and after receiving the Foreign Investments Committee report. Further details of the procedure are set out in the Order of the Ministry of Economy dated May 28, State Owned entities Are there special rules for state-owned entities? There are no special rules for state-owned entities. Article 2 of the Royal Decree 664/1999 makes reference to foreign sovereign public entities together with [private] legal persons domiciled abroad as one category of investors subject to the foreign investment regulations. The general regime of Royal Decree 664/1992 is applicable to both foreign public entities and private legal persons. NOTIFICATION, REMEDIES, PENALTIES AND APPEALS 8. Formal notification Provide an overview of the formal notification requirements. In particular: Is filing mandatory or voluntary? If mandatory, do any exceptions exist? When should a transaction be notified? (reference to Question 1) Is it possible to obtain formal or informal guidance before notification? Who is responsible for filing? What form of notification is used? (reference to Question 2) Are filing fees required? Can a transaction close without clearance from the Regulator? Filing declarations or applications for review under foreign investment legislation is mandatory if the investment is subject to notification or review. Certain transactions, see questions 2 and 4, are exempt from filing a prior declaration or from filing an application for review in order to obtain a prior administrative authorization. All prior and subsequent declarations corresponding to transactions under the general regime must be filed with the Foreign Investment Registry. The subsequent or post-investment declarations should generally be made within 30 days following the closing of the transaction. Foreign investors need to fill in several kinds of official forms to declare the investment before the Registry. Moreover, an annual report on the progress of the investment must be presented to the Registry. It is possible to obtain both formal and informal guidance from the Investment Registry staff before submitting a declaration or report. Transactions falling under a special regime must be declared prior to making the investment. These prior declarations are valid for six months from their filing. The investment must be made within such term. If the term elapses and the investment is not made, the investor will need to file a new prior declaration. There are specific forms for prior declarations. Prior declarations do not exclude a requirement to make declarations subsequent to the investment. 4

5 Finally, those transactions under articles 10 and 11 of the Royal Decree 664/1999 which require a prior administrative authorization or which have been suspended must follow a special procedure. The non-resident making the investment is the one responsible for making any required filing before the Investment Registry and/or other competent authorities. Additionally, the investor may also rely on other intermediaries to the transaction to provide required information and to participate in the filing process. Intermediaries taking part in the filing process may be, among others, Spanish Notaries Public, investment services companies, credit entities and other financial entities. No filing fees are required. Transactions which are subject to notification by means of declarations subsequent to the investment can close prior to notification. Transactions that require prior authorization or those which have been under suspension cannot close prior to the receipt of approval by the competent authorities. 9. Procedure and Timetable (reference to Question 8) There are different procedures for: (1) subsequent declarations under the general regime; (2) prior declarations for investments coming from tax havens; (3) prior authorizations under the special regime articles 10 and 11 of Royal Decree 664/1999; and (4) procedures applicable in special sectors. The timetable in each case is different. Generally, procedures 1 and 2 do not entail a long process while the process for clearance in procedures 3 and 4 can go on for several months. 10. Publicity; Politics In relation to the notification and clearance process: What publicity is given to the process and how is commercial information protected from disclosure? To what extent is the investment review process conducted independently of political influence? Are customers, competitors, or other interested parties involved in the review? If so, what rights do they have? There are no specific transaction related details published by the Foreign Investment Registry, only general aggregate information. The only information made public by the Foreign Investment Registry for statistical purposes does refer to the country of origin of the investment. Access to the Registry is restricted and all information concerning the investor or a business is privileged. Only the legal representatives of companies and Secretaries to the Board of Directors of companies making or receiving a foreign investment can access their own information communicated to the Foreign Investment Registry. This restriction is subject to an exception: the communication of the information by the Registry to other governmental or judicial authorities. However, no third parties can access the Registry to obtain specific information about a particular foreign investment. Generally, the investment review process is conducted independent of political influence. Foeign investments in protected industries such as national defense, telecommunications and energy or affecting public order, public health or 5

6 national security may be influenced politically. There are situations where a foreign investor should devote its best efforts to engage in public relations and frequent communication with authorities. One should also be aware of the existing lobbies that may influence the decisions taken by the Ministry or Government. Customers, competitors or other interested parties are not involved in the review process. 11. Undertakings What obligations / undertakings can be imposed as condition of clearance to address concerns of the Regulator? At what stage of the procedure can they be offered and accepted? What are these obligations, and how are they enforced? Spanish legislation does not provide for any specific obligations or undertakings to be imposed on foreign investors by the authorities as condition of clearance. However, each transaction will be analyzed on an independent basis and authorities may require specific commitments from foreign investors when the target of the investment is a protected industry or when the investment may affect national security, public order or public health. 12. Penalties What are the penalties for: Failure to notify correctly? Closing before approval or after prohibition of the transaction? Failure to observe a decision of the Regulator (including any obligations / undertakings) What is the history of enforcement practices? The breach of the obligations set forth in Royal Decree 664/1999 and other foreign investment regulations is an infraction for purposes of Law 19/2003, on the legal regime of the movements of capital and economic transactions with foreign countries, and certain measures for the prevention of money laundering. Law 19/2003 regulates the penalties for failure to notify, for closing before approval or after prohibition of the transaction and for failure to observe a decision of the Regulator. These administrative infringements are classified as a gross breach, breach and minor breach. The following conduct is considered a gross breach of the Law: (1) carrying out transactions involving movements of capital which are forbidden by virtue of restrictive measures adopted by the European Council of Ministers; (2) carrying out transactions without requesting an authorization when such authorization is compulsory (i.e. transactions affecting public order, public health, national defense), before the authorization is granted or in breach of the conditions set forth in the authorization; and (3) untrue statements made in requests for authorization. Gross breaches are subject to fines that may equal the economic value of the transaction (the minimum fine is 30,000 euros) and public or private reprimands. A breach of the Law includes: (1) failure to submit declarations in transactions exceeding 6,000,000 euros; (2) untrue statements, omission or inaccuracy of data in declarations of transactions exceeding 6,000,000 euros; and (3) failure to comply or respond to formal requests by competent 6

7 authorities. Breaches are subject to fines of to half of the economic value of the transaction (the minimum fine is 6,000 euros) and public or private reprimands. Minor breaches include: (1) late declarations and (2) the failure to submit declarations in transactions not exceeding 6,000,000 euros, together with untrue statements, omission or inaccuracy of data in declarations of transactions not exceeding 6,000,000 euros. A minor breach is subject to fines of to a quarter of the economic value of the transaction (the minimum fine is 3,000 euros) and private reprimands. Late declarations without a prior request from the Administration are subject to fines ranging from 150 to 600 euros. Over the past few years Spanish authorities have become more committed to the prevention of money laundering, and as a consequence they have become more aggressive in applying the penalties for investors infringing the law. 13. What powers does the Regulator have to prohibit or otherwise interfere with a transaction? (reference to Question 5, 1 st paragraph) Spanish authorities may interfere with or even prohibit a transaction when affecting special sectors or involving national security, see questions 4 and 6. Investments from tax havens are closely monitored by the authorities. Authorities may impose financial penalties for noncompliance with foreign investment legislation, among other sanctions. 14. Does the Regulator provide reasons for its decisions? If so, are these reasons made public? What are the opportunities for appeal or judicial review? All resolutions by Spanish public administrations or authorities must be for cause, according to the general provisions of Law 30/1992, regarding the legal regime for the public administration and common administrative procedure. Therefore, if an authorization is not granted, the Spanish authorities must provide reasons for such decision. The interested party will have the opportunity to dispute the matter administratively or judicially and try to reverse this decision. JOINT VENTURES 15. Please explain how joint ventures are analysed under your foreign investment legislation? Spanish legislation on foreign investments does not contain any special rule for foreign joint ventures investing in Spain. Foreign joint ventures would be considered as private legal persons domiciled abroad and subject to the general regime, provided that the special rules referred to in responses to Questions 4 and 6 are not applicable. There are no special rules either if the target of a foreign investment is a joint venture. MULTI-AGENCY AND MULTI- JURISDICTIONAL CONSIDERATIONS 16. Are foreign-to-foreign investments caught? Foreign-to-foreign investments follow the general rules set forth for the declaration of foreign investments. 17. To what extent does the authority consider the existence of any parallel reviews by other authorities within the jurisdiction, or parallel reviews outside its home jurisdiction, in conducting its review? 7

8 The Spanish Council of Ministers and the relevant Ministry may exchange points of view with the Autonomous regional governments together with other public entities that may be reviewing the transaction, such as the competition authorities. PROPOSALS FOR REFORM 18. Are there current proposals to amend the foreign investment laws or establish new foreign investment policies? At present, there are no proposals to amend the foreign investment laws or establish new foreign investment policies. 8