Business in Spain. Spain: a profile

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2 Spain is a dynamic country. Not only is Spain the eighth largest global economy, but it has also grown more than the European average during the last years (3.9% in 2006 in comparison to 2.9% in the EU and 2.6% in the euro-zone). In addition, Spain commands a privileged geo-strategic position as a gateway to the EMEA region (Europe, Middle East and Africa) and Latin America due to its strong economic, historic and cultural ties. Furthermore, Spain is a modern knowledge-based economy with services accounting for 60 percent of economic activity. The country has become a center of innovation supported by a young, highly-qualified work force and competitive costs. All of this confirms Spain's position as a highly attractive country for foreign investment, as borne out by the UNCTAD World Investment Report, in which, the country was ranked ninth in terms of direct inward foreign investment in This chapter contains Spain's most relevant statistics - the latest facts and figures which explain the demographics, the political framework, the economic structure and the foreign sector. ÑSociedad Estatal para la Promoción y Atracción de las Inversiones Exteriores, S.A.U. RM: Tomo 21818, libro 0, folio 15, sección 8, hoja M , Inscripción 1. NIF: A Depósito legal: M Published 2007

3 1. Introduction 2 2. The country, its people and quality of life Geography, climate and quality of life Population and human resources Political institutions 5 3. Spain and the European Union 5 4. Infrastructure 6 5. Economic overview 9 6. Domestic market Foreign trade and investment Legislation on foreign investment and exchange control regulations Legislation on foreign investment Exchange control regulations 14 1

4 1. Introduction 1. INTRODUCTION Not only is Spain the eighth most important economy in the world; it is also the eighth biggest investor and the ninth recipient of FDI. The continued dynamism of its economy is shown by its growth in recent years: ahead of the European average (3.9% in 2006 compared with 2.9% in the EU-25 and 2.8% in the euro-zone). In addition, Spain offers a privileged geo-strategic position within the European Union giving access to over 1,200 million potential clients in the EMEA Region (Europe, Middle East and Africa). Its strong economic, historic and cultural ties also make Spain the perfect gateway to Latin America. Furthermore, Spain is a modern knowledge-based economy with services accounting for 66 percent of economic activity. The country has become a center of innovation supported by a young, highly-qualified work force and competitive costs. This chapter gives a brief description of Spain s vital statistics - the latest facts and figures which explain the demographics, the political framework and the economic structure of the country. 2. THE COUNTRY, ITS PEOPLE AND QUALITY OF LIFE 2.1. Geography, climate and living conditions The Kingdom of Spain occupies an area of more than 500,000 square kilometres in the southwest of Europe, and is the second largest country in the EU. The territory of Spain covers most of the Iberian Peninsula, which it shares with Portugal, and also includes the Balearic Islands in the Mediterranean, the Canary Islands in the Atlantic Ocean, the North African cities of Ceuta and Melilla and some surrounding rocky islands. Despite the differences among the various regions of Spain, the country can be said to have a typical Mediterranean climate. The weather in the northern coastal region (looking onto the Atlantic and the Bay of Biscay) is mild and generally rainy throughout the year, with temperatures neither very low in the winter nor very high in the summer. The climate on the Mediterranean coastline, including the Balearic Islands, Ceuta and Melilla, is mild in the winter and hot and dry in the summer. The most extreme differences occur in the interior of the Peninsula, where the climate is rather dry, with cold winters and hot summers. The 2

5 FRANCE La Coruña Santiago de Compostela Lugo Pontevedra Galicia Orense Santander Oviedo Asturias Cantabria Burgos León Palencia Castilla y León Valladolid Zamora Salamanca Segovia San Sebastián Bilbao País Vasco Pamplona Vitoria Navarra Logroño La Rioja Soria Zaragoza Aragón Huesca Lérida Cataluña Barcelona Tarragona Gerona Ávila Madrid Comunidad de Madrid Guadalajara Teruel PORTUGAL Extremadura Badajoz Cáceres Mérida Cuenca Toledo Castilla - La Mancha Ciudad Real Albacete Castellón de la Plana Valencia Comunidad Valenciana Palma De Mallorca Baleares Alicante Sevilla Córdoba Andalucía Jaén Murcia Murcia Huelva Granada Cádiz Málaga Almería Ceuta Melilla MOROCCO Santa Cruz de Tenerife Canarias Las Palmas de Gran Canaria Table 1 THE BIGGEST CITIES IN SPAIN* Canary Islands have a climate of their own, with temperatures constantly around 20 Celsius degrees and only minor variations in temperature between seasons or between day and night. POPULATION Madrid 3,128,600 Barcelona 1,605,602 Valencia 805,304 Sevilla 704,414 Zaragoza 649,181 Málagas 560,631 Murcia 416,996 Las Palmas de Gran Canaria 377,056 Mallorca 375,048 Bilbao 354,145 * Figures refer only to the municipal district of each city. Source: Report about population in Spanish cities at January 1, Instituto Nacional de Estadística (National Statistics Institute). Spain has an excellent quality of life and is very open to foreigners. Around 8,000 kilometres of coastline, abundant sporting facilities and events and social opportunities are crowned by the diversity of the country s cultural heritage as a crossroads of civilizations (Celts, Romans, Visigoths, Arabs, Jews, etc.) Population and human resources The population of Spain in 2006 was 44.7 million people (according to the Municipal Register s preliminary report), with a population density of more than 88.6 inhabitants per square kilometre. Spain is a markedly urban society (see Table 1), as evidenced by the fact that close to 33% of the population lives in the capitals of the provinces. 3

6 2. The country, its people and living conditions Spanish is the official language of the country. There are other Spanish languages that are also official in the corresponding Autonomous Communities (regions), according to their Statutes of Autonomy. Education is compulsory until the age of 16 and English is the main foreign language studied at school. Spain has a labor force of 20 million people, representing 58% of the country s population over 16 years old according to the Labor Force Survey (released on the third quarter 2006). Compared with other OECD countries, Spain s population is relatively young: approximately 15% is under 16 years old, 68% is between 16 and 64 years old, and only 17% is 65 and over, according to year 2006 figures. Additionally, as seen in Table 2 below, Spain has been Table 2 FOREIGN RESIDENTS IN SPAIN BY CONTINENT OF ORIGIN Europe 667, ,461 1,028,678 America 666,086 1,003,230 1,083,025 Asia 142, , ,965 Africa 498, , ,174 Oceania 1,112 1,466 1,819 Unknown 1,049 1,101 1,147 TOTAL 1,977,291 2,738,932 3,021,808 receiving a significant inflow of immigrants in recent years that has offset the consequences of an aging population. The structure of the labor force by economic sector has also changed significantly in recent years, with a notable increase in the number of those employed in the services sector and a decrease in the number of farm workers (see Table 3 and Chart 1). The labor force is highly qualified, productive and capable of adapting to technological changes. Last, in line with the European Union s commitment to fostering employment, the Government has implemented wide ranging reforms of the labor market regulations since the mid-nineties, introducing a high degree of flexibility in the use of the labor force by companies. The success of the reforms is proven by figures published in the Employment in Europe Report 2006 of the Table 3 EVOLUTION OF LABOR FORCE STRUCTURE BY ECONOMIC SECTOR (Percentage) Agriculture Industry Construction Services Source: Ministerio de Trabajo y Asuntos Sociales (Ministry of Labour and Social Affairs). Data at December 31, Source: Instituto Nacional de Estadística (National Statistic Institute). Labour Force Survey, fourth quarter of Chart 1 LABOR FORCE STRUCTURE BY ECONOMIC SECTOR IN 2005 Construction 13% 16% 66% Services Industry 5% Source: Instituto Nacional de Estadística (National Statistics Institute). Agriculture 4

7 European Commission in October which show that Spain had one of the highest employment growth rates (3.6%) among the EU25 countries in Political institutions Spain is a parliamentary monarchy. The King is the Head of State 2 and his primary mission is to arbitrate and moderate the regular functioning of the country s institutions in accordance with the Constitution. He also formally ratifies the appointment or designation of the highest holders of public office in the legislative, executive and judicial branches 3. The Constitution of 1978 enshrined the fundamental civil rights and public freedoms as well as assigning legislative power to the Cortes Generales (Parliament) 4, executive power to the Government of the nation, and judicial powers to independent judges and magistrates. of: a legislative assembly elected by universal suffrage, which enacts legislation applicable in the Community; a Government with executive and administrative functions, headed by a President elected by the Assembly, who is the Community s highest representative; and a Superior Court of Justice, in which judicial power in the Community s territory is vested. A Delegate appointed by the Central Government directs the Administration of the State in the Autonomous Community (Region), and coordinates it with the Community s administration. The Autonomous Communities (Regions) are financially autonomous and also receive allocations from the general State budgets. As a result of the structure described above Spain has become one of the most decentralized countries in Europe. 3. SPAIN AND THE EUROPEAN UNION The responsibility for enacting laws is entrusted to the Cortes Generales, comprising the Congreso de los Diputados (Lower House of Parliament) and the Senado (Senate), the members of which are elected by universal suffrage every four years. The Cortes Generales exercise the legislative power of the nation, approve the annual State budgets, control the actions of the Government and ratify international treaties. The Government 5 is headed by the Presidente del Gobierno (President of the Government) who is elected by the Cortes Generales and is, in turn, in charge of electing the members of the Consejo de Ministros (Council of Ministers). The members of the Council of Ministers are appointed and removed by the President of the Government at his or her discretion. For administrative purposes, Spain is organized into 17 Autonomous Communities (Regions) each of which generally comprises one or more provinces, plus the Autonomous Cities of Ceuta and Melilla in Northern Africa; the total number of provinces is 50. Each Autonomous Community (Region) exercises the powers assigned to it by the Constitution as specified in its Statute of Autonomy. These Statutes also stipulate the institutional organization of the Community concerned, consisting generally Spain became a full member of the European Economic Community in Therefore, EU legislation is fully applicable in Spain. In this connection and according to figures published by the European Commission, Spain fully complies with the objectives established by the European Council and has implemented 2,701 Directives into national law. A major impact of European Union membership for Spain, and for the other Member States, came in the mid-nineties with the advent of the European Single Market and the European Economic Area, which created a genuine barrier-free trading space. Since then, the EU has advanced significantly in the process of unification by strengthening the political and social ties among its citizens. Spain, throughout all this process, has always stood out as one of the leaders in the implementation of liberalization measures. 10 new countries joined the European Union in May 2004 (Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia). Such enlargement of the EU poses a unique challenge since it is without precedent in terms of scope and diversity: an increase in land area of 23% and a population increase of almost 100 million people. Moreover, on January 1st, 2007, Romania and Bulgaria became new member States of the European Union 6. Spain holds significant responsibilities within the EU, evidenced by 1 the fact that it is, along with Poland, the fifth country in terms of 2 voting power in the Council of Ministers moncloa.es 6 5

8 3. Spain and the European Union The introduction of the euro (January 1st, 2002) marked the beginning of the third Spanish Presidency of the European Council, representing the culmination of a lengthy process and a whole deal of growth opportunities for the Spanish and European markets. 15,000 km of motorway network, which will provide direct access to the provincial capitals putting 94% of the population within fewer than 30 kilometers of a motorway. With the euro in the European Union, a monetary zone has been established to form the world s number one trading power, triggering the integration of the financial markets and economic policies of the Member States adopting it. Such changes have also fostered the coordination of the tax systems of the Euro Zone Member States, thus further increasing the stability of the EU. The euro has yielded clear results at an international level, promoting the visibility of the Euro Zone both in international and financial fora (the G-7 group meetings) and in multilateral organizations. The economic and commercial stability provided by the euro has further bolstered Spain s current economic growth along with additional international political presence. Spain is the EU Member State that in recent years has received the most EU structural and cohesion funds - used to finance infrastructure and development projects. In fact, for the period , Spain is expected to receive million euros in various EU structural funds and cohesion funds, becoming the second EU recipient of such funds, after Poland 7. Moreover, Spain will receive a special Fund of 2,000 million euros for R+D activities, in accordance with the decisions taken in the last European Council of London. With these funds, the Government has R&D launched programs co-financed by private initiatives. The most important has been the Ingenio 2010 Program, which basically aims to achieve a situation where public and private investment in R&D&I is equal to 2% of GDP in INFRASTRUCTURE The Government plans to continue investing heavily in infrastructure in the future. This is reflected in the Strategic Infrastructure and Transport Plan for , the greatest infrastructure commitment ever made by the Spanish Government. This has provided investment totaling over 248,000 million euros. Rail transport is the main item in the Plan, accounting for nearly 50% of the investment. The motorway network, totaling nearly 11,000 km, has undergone continuous renovation to enhance efficiency and convenience. The Government investment plan will result in over 7 Appearance of the Spanish Second Vice-president in the Regions General Commission of the Senate (April 2006) (press release). As far as rail transport is concerned, Spain has a network of over 15,000 km of track. High-speed train lines have become a priority for the Government infrastructure plans and it is expected that in 2020 the high-speed train network will span 10,000 kilometers. Connections already exist between Madrid-Seville, Madrid-Lerida and Madrid-Tarragona. As a consequence, all principal Spanish cities will have direct access to this network and 90% of the population will be within fewer than 50 kilometers of one of its stations. Moreover, Madrid will very soon be connected by high-speed train to the French border via Zaragoza (Aragón) and Barcelona (Cataluña) and additionally via Vitoria and Irún (Basque Country). In fact, the section Madrid-Guadalajara-Zaragoza-Lérida opened in October 2003 and it is planned the possibility of allowing a private company to create and exploit another international section, Figueras-Perpiñán. Additionally, the section Córdoba- Antequera with more than 100 new high speed kilometres has been opened as from December 2006; by this way, it is foreseen that Madrid will be connected to the Costa del Sol in 2.5 hours by the end of Finally, it is worth noting that the freight sector was liberalized in January There are air transport services between the main cities. Approximately 250 airlines with scheduled flights operate from the country s 49 airports and connect Spain with the principal cities in the world. Spain is an important hub for connections between Latin America and Europe and lies in a crucial position in the network to America and Africa from Europe. The main investments in this area will be made in the two principal international airports, located in Madrid and Barcelona. The Madrid airport has increased its capacity to 70 million passengers a year since Terminal 4 opened in February 2006, and is recognized as the twelfth airport in the world (in terms of number of passengers) by the Airports Council International. Improvements at Barcelona airport will allow 90 flights per hour and the ability to handle 40 million passengers a year. Related to the Strategic Infrastructure and Transport Plan for , the Government has announced the implementation of the Plan Canarias, which provides for investment in the Canary Island airports amounting to almost 3,000 million euros 9. 6

9 Freeways Freeways of toll Freeways in construction Other main highways Santander La Coruña San Sebastián Asturias Oviedo Cantabria Bilbao Santiago de Lugo País Compostela Pamplona Galicia Vasco Vitoria Navarra Orense Burgos Pontevedra León Logroño Palencia La Rioja Huesca Castilla y León Valladolid Soria Zaragoza Zamora Segovia Aragón Guadalajara Salamanca Comunidad Ávila Madrid de Madrid Teruel PORTUGAL Badajoz Cáceres Extremadura Mérida Cuenca Toledo Castilla - La Mancha Ciudad Real Albacete Comunidad Valencia Valenciana Alicante FRANCE Lérida Cataluña Tarragona Castellón de la Plana Gerona Barcelona Palma de Mallorca Baleares Huelva Sevilla Córdoba Jaén Andalucía Granada Murcia Murcia Cádiz Málaga Almería Ceuta Santa Cruz de Tenerife Canarias Las Palmas de Gran Canaria MOROCCO Melilla ROAD NETWORK High speed (more than 250 km/hour) High speed under construction Santander Planned high speed La Coruña San Sebastián Asturias Oviedo Cantabria Bilbao Fast line (more than 200 km/hour) Santiago de Lugo País Compostela Pamplona Galicia Vasco Long distance rail routes Vitoria Navarra Orense Burgos Pontevedra León Logroño Palencia La Rioja Huesca Castilla y León Valladolid Soria Zaragoza Zamora Segovia Aragón Guadalajara Salamanca Comunidad Ávila Madrid de Madrid Teruel PORTUGAL Badajoz Cáceres Extremadura Mérida Cuenca Toledo Castilla - La Mancha Ciudad Real Albacete Comunidad Valencia Valenciana Alicante FRANCE Lérida Cataluña Tarragona Castellón de la Plana Gerona Barcelona Palma de Mallorca Baleares Huelva Sevilla Córdoba Jaén Andalucía Granada Murcia Murcia Cádiz Málaga Almería Ceuta Santa Cruz de Tenerife Canarias Las Palmas de Gran Canaria MOROCCO Melilla RAILWAIYS 7

10 4. Infrastructure Main ports FRANCE Ferrol-San Cimbrao Avilés Gijón Santander Bilbao La Coruña La Coruña San Sebastián Asturias Pasajes Oviedo Santander Cantabria Bilbao Lugo País Vilagarcía Pamplona Santiago de Galicia Vasco Compostela Vitoria Marín- Pontevedra Navarra Orense Burgos Pontevedra León Logroño Gerona Vigo Palencia La Rioja Cataluña Huesca Castilla y León Lérida Valladolid Soria Zaragoza Aragón Tarragona Barcelona Barcelona Zamora Segovia Tarragona Guadalajara Salamanca Comunidad Ávila Madrid de Madrid Castellón Teruel de la Plana PORTUGAL Cuenca Castellón Palma de Mallorca Cáceres Toledo Valencia Baleares Castilla - La Mancha Extremadura Comunidad Valencia Valenciana Baleares Mérida Badajoz Ciudad Real Albacete Alicante Alicante Córdoba Murcia Jaén Murcia Huelva Sevilla Andalucía Cartagena Huelva Málaga Granada Almería Bahía de Cádiz Cádiz Málaga Motril Almería Bahía de Algeciras Ceuta Ceuta Santa Cruz de Tenerife Canarias Santa Cruz de Tenerife Las Palmas Las Palmas de Gran Canaria MOROCCO Melilla Melilla PORTS International Airports National Airports Control centers of Navigation Santiago de Compostela Pontevedra Vigo Galicia PORTUGAL La Coruña La Coruña Lugo Santiago Orense Avilés Asturias Oviedo León Salamanca Salamanca Extremadura Badajoz Mérida Badajoz Huelva Cáceres Sevilla Cantabria Castilla y León Valladolid Valladolid Zamora Sevilla Jerez Cádiz León Santander Santander Córdoba Andalucía San Sebastián Bilbao País Vitoria Pamplona Vasco Vitoria Navarra Logroño Pamplona La Rioja Segovia Guadalajara Comunidad Madrid/Barajas Ávila de Madrid Madrid Málaga Cuenca Toledo Castilla - La Mancha Albacete Córdoba Bilbao Burgos Palencia Burgos Ciudad Real Málaga Madrid/Torrejón Jaén Granada Granada Soria San Sebastián Murcia Murcia Almería Huesca Zaragoza Zaragoza Aragón Madrid/Cuatro VientosTeruel Almería Albacete Huesca Valencia Comunidad Valenciana Alicante Alicante Murcia/San Javier FRANCE Cataluña Sabadell Gerona Lérida Barcelona Reus Barcelona Tarragona Castellón de la Plana Ibiza Gerona Palma de Mallorca Palma de Mallorca Baleares Menorca Ceuta Tenerife Norte Santa Cruz de Tenerife Canarias La Gomera Gran Canaria El Hierro Tenerife Sur Las Palmas de Gran Canaria Fuerteventura MOROCCO Melilla Melilla AIRPORTS 8

11 Spain also has excellent sea communications, with 53 international ports on the Atlantic and Mediterranean coasts. The Strategic Infrastructure and Transport Plan expects to increase the Spanish ports capacity by up to 75%, consolidating their role as intermodal nodes, by Spain is also well equipped with industrial land and technological and industrial infrastructure. In the last few years, technology parks have proliferated in the main industrial areas and near universities and R&D centers. There are currently 70 technology parks 10 (24 of them fully operating). In these technology parks there are more than 2,000 companies mostly dedicated to the computer sector and telecommunications; approximately, 20% of the total number of workers of said companies are involved with R&D activities. R&D expenditure has risen significantly in recent years. In 2006 the R&D Budget has increased by 30% an increase expected to reach 33% in Additionally, the previously mentioned special R+D Fund of 2,000 million euros approved in the last European Council of London will further increase expenditure in R&D. With a view to achieving new goals, the government has created the new INGENIO 2010 Program, which aims to achieve a situation where public and private investment in R&D&I is equal to 2% of GDP in 2010 and where private sector investment accounts for 55% of that investment in that year. Moreover, Spain has a good telecommunications network. In addition to the extensive fiber optic network (64,000 km) which covers almost all the territory, Spain manages one of the largest international undersea cable networks and has satellite connections with the five continents. In this respect, it is worthwhile mentioning the strong liberalization process undertaken in most industries, including the telecommunications sector, well within the European schedule. Among other benefits, this implies a more competitive and cost effective offering of this type of services, essential for appropriate economic development. Last, it is worth noting the significant investments made in hydraulic infrastructures, which have improved the possibility of guaranteed water availability. 5. ECONOMIC OVERVIEW Spain s GDP increased by 3.9% in 2006, to 899,000 million euros, making it the seventh highest in the OECD. The structure of the Spanish economy is that of a developed country, with the services sector being the main contributor to GDP, followed by 10 Table 4 STRUCTURE OF GDP (% of total, in 1995 constant prices) Sector * Agriculture and fishery Industry Construction Services Source: Instituto Nacional de Estadística (National Statistics Institute). * Eurostat, Third quarter industry. These two sectors represent 85% of Spain s GDP with agriculture s share today representing 3% of GDP, and declining sharply as a result of the country s intense economic growth (see Table 4). Table 5 GROWTH FOR OECD COUNTRIES (Percentages) Real GDP Growth EU countries Germany France Italy United Kingdom Spain Other countries United States Japan Total Euro Zone Total OECD Source: Banco de España (Bank of Spain). Data as of third quarter

12 5. Economic overview Chart 2 GDP GROWTH (% growth rate, 1995 constant prices) 4,5 4 3,5 3 2,5 2 1,5 1 0,5 0 4,2 3,9 3,4 3,4 3 3,1 2,8 2,7 2,7 1,8 1,5 1,3 1 0, Source: Eurostat. Data at end of Spain Euro Zone Spain is a dynamic country, with consistently high economic growth rates, well above the average for other countries including the EU (see Chart 2). The prospects are that Spain will have growth rates above the 3% threshold, in 2007: specifically 3.4% according to both OECD estimates and Spanish Government forecasts, once again exceeding the average for the EU. Inflation in Spain has fallen steadily since the late 1980s. The average inflation rate for 1987 through 1992 was 5.8%. The rate of inflation was kept below 5% for the first time in 1993, and has been further reduced in subsequent years. Year 2006 ended with an annual rate of inflation of 2.4%, the lowest since Also, since 1999 Spain, has engaged in an earnest effort to reduce the budget deficit, including a successful program of major privatizations and of containing public expenditure. Action taken by the Government has once again proved the flexibility of the Spanish economy and has resulted in an important reduction of the deficit with a surplus of 1.8% of GDP achieved in Very noteworthy is the impressive reduction in official interest rates in Spain from 10% in 1993 to the current 3.50%. 6. DOMESTIC MARKET The growth of the Spanish economy in recent years has been driven by strong demand and a substantial expansion of production in the context of an increasingly open economy Today Spain has a domestic market of 44 million people with a per capita income (ppp) of 28,809 as estimated by the FMI for the year 2007, and an additional injection of demand coming from the nearly 56 million tourists 11 who visit the country every year. The close links with Latin America and North Africa and the Table 6 GROWTH OF PRODUCTION AND DEMAND COMPONENTS (Percentages) * Production components Agriculture and fishery Industry Energy Construction Services Demand components Private consumption Public consumption Gross fixed capital formation Domestic demand Exports of goods and services Imports of goods and services Source: Banco de España (Bank of Spain). * Avarage data at November

13 obvious advantages of using Spain as a gateway to those countries are worthy of mention. Table 6 reflects the evolution of basic production and demand components. The growth rate of the Spanish economy has stabilized due to rising domestic demand offset by a less positive contribution from the external sector. In addition to the significant rise in demand, there was a notable acceleration in gross fixed capital formation and all the main areas made positive contributions, with the exception of agriculture. The breakdown by industry of foreign trade is relatively diversified, as can be seen in the following table: During 2006, Spain s main trading partners were the countries of the UE-25. Exports to the European Union amount to 70.3% of total exports represent an increase of 8% from the previous year while sales to the Euro Zone accounted for 56.2% of the total - a 7,8% increase from Imports to Spain from these countries also rose in 2006: 7.8% from the UE and 7.5% from the Euro Zone. 7. FOREIGN TRADE AND INVESTMENT In recent years, rapid growth in imports and exports has made Spain one of the most internationally-oriented countries in the world. In this regard, according to the 2006 UNCTAD World Investment Report, Spanish outflows in 2005 reached $38,772 million, making the country one of the largest EU investors. With regard to the trading of goods, Spain is ranked 17th in the world as an exporter and 12th as an importer; while in the trading of services it occupies 7th place as an exporter and 10th place as an importer 12. The Spanish share of goods and services exports (Spanish exports/global exports) is 1.8%, while its share of goods and services imports (Spanish imports/global imports) stands at 2.6%. 12 WTO International trade statistics 2006 Report. Spain s main trading partners during 2006 have been France and Germany followed by Latin America and then North America. Trading relationships beyond the EU have been very dynamic, with a rise of 17.5% in exports and 19% in imports. With regard to investment, in recent years Spain has been one of the main recipients of foreign direct investment. In 2005, Spain ranked ninth in FDI income and third in the EU in terms of foreign company subsidiaries. The positive trend of productive FDI inflows (13,738 million euros, gross inward investment; and 7,472 million euros, net inward investment) is especially notable. Furthe evidence of Spain s highly developed economy is the fact that, since 1997, outward investment flows have outstripped inward investment flows. As a summary of Spanish foreign trade, the balance of payments is attached. Table 7 DISTRIBUTION OF EXPORTS AND IMPORTS 2005 (As a % of total) Exports Imports Capital goods 22,1% Capital goods 23,6% Automobile industry 18,8% Energy products 15,6% Food 13,6% Automobile industry 14,6% Chemical products 12,7% Chemical products 11,7% Semi-manufactured non-chemical products 12,5% Consumer goods 9,7% Consumer goods 8,6% Semi-manufactured non-chemical products 8,4% Energy products 4,6% Food 9,1% Durable consumer goods 3,3% Raw materials 3,7% Raw materials 2,0% Durable consumer goods 3,1% Other goods 1,9% Other goods 0,6% Source: Ministerio de Industria, Turismo y Comercio (Ministry of Industry, Tourism and Trade). Data available at December

14 8. Legislation on foreign investment and exchange control regulations Chart 3 FOREIGN INVESTMENT IN SPAIN ( ) (Million euros) Source: Registro de Inversiones Exteriores, Ministerio de Industria, Turismo y Comercio (Registry of Foreign Investments. Ministry of Industry, Tourism and Trade). Gross investment Net investment Table 8 SPAIN S BALANCE OF PAYMENTS (Million euros) I. Current account 68,952 64,751 Trade Balance 69,834 59,322 Services Balance 21,089 15,341 Income 18,164 15,425 Net Current Transfers 2,043 5,345 II. Capital Account 8,163 3,164 III. Financial Account 60,641 65,847 Total (excluding Bank of Spain) 62,755 78,246 Direct investment 10,594 41,414 Portfolio investment 45, ,562 Other investment 27,205 36,952 Financial derivatives Bank of Spain 2,115 12,399 Reserves 1, Claims with the Eurosystem 14,855 8,351 Other net assets 18,409 3,657 IV. Net errors & omissions 148 4,260 Source: Banco de España (Bank of Spain). N.B.: A positive sign in the current and capital accounts means a surplus (receipts greater than payments) and represents a net loan from Spain to the rest of the world (increase in assets or decrease in liabilities), whereas in the financial account a positive sign means a net inflow of capital and represents a net loan from the rest of the world to Spain. A negative sign in reserves means an increase. (*) Data available for the period January-September LEGISLATION ON FOREIGN INVESTMENT AND EXCHANGE CONTROL REGULATIONS This section covers the main aspects of the Spanish legislation on exchange control and foreign investments. Although these areas are fully liberalized, there are specific reporting obligations to be accomplished. As a general rule, foreign investments are subject only to notification after the investment has been made. Exchange controls and capital movements are fully liberalized and in all areas there is complete freedom of action Legislation on foreign investment Royal Decree 664/1999 deregulated practically all transactions of this kind (with the provisos and exceptions set forth below), eliminating the requirement for prior verification and adapting Spanish domestic law to the rules on the freedom of movement of capital contained in Articles 56 et seq. of the Treaty of the European Union. The most noteworthy aspects of the applicable rules are as follows: Foreign investments are, as a general rule, subject only to notification after the investment has been made. The only exceptions are: (i) Investments from tax havens, which in general must be notified beforehand, and (ii) foreign investments in activities directly related to national security, and real estate investments for diplomatic missions by States that are not members of the European Union and require prior verification from the Spanish Council of Ministers. 12

15 There is no obligation for foreign investments to be formalized in the presence of a Spanish notary public (unless specific legislation provides otherwise). Investments in the air transportation and radio industries, in industries relating to minerals and raw mineral materials of strategic interest and mining rights, in the television, gaming, telecommunications and private security industries, in industries concerned with the manufacturing, marketing or distributing of arms and explosives for civilian use, and in national security-related activities (these latter activities are subject to the clearance rules contained in the Royal Decree), will be subject to the requirements imposed by the relevant body established by industry-specific legislation Investors Investors can be: non-resident individuals (that is, Spanish nationals or foreigners domiciled abroad, or who have their principal place of residence there); legal entities whose registered offices are located abroad; and public agencies of foreign States. A Spanish company in which foreign shareholders have a majority holding is not deemed to be an investor. A change of registered office of legal entities or a change of residence of individuals is enough to change the classification of an investment as a Spanish investment abroad or a foreign investment in Spain Regulated Investments The following types of investments are subject to notification or previous authorization requirements: Participation in Spanish companies, including their incorporation and subscription and acquisition of shares in corporations or the subscription of shares in limited liability companies, and any legal transaction under which voting and other non financial rights are acquired. Establishment of, and increase of capital allocated to branches. The subscription and acquisition of marketable debt securities issued by residents (debentures, bonds, promissory notes). Participation in mutual funds recorded in the Registers of the Spanish National Securities Market Commission. The acquisition by non-residents of real estate located in Spain valued at more than?3,005,060, or where the investment originates from a tax haven, whatever its amount. The formation, formalization or participation in joint ventures, foundations, economic interest groupings, cooperatives and joint-property entities, with the same characteristics as in the previous paragraph regarding the value of the investment. Foreign investments not included in the above list (such as participating loans), are totally deregulated, and no notice is required. Notwithstanding the foregoing, said investments may be subject to industry-specific regulations and the rules on exchange control and notification of monetary flows to or from other countries remain in force The party required to report foreign investments As a general rule, the owner of the investment and, in addition, any Spanish notary public acting in the transaction, is obliged to report the investment to the authorities. However, investments in certain assets (mutual funds, securities, registered shares) may require other individuals to report the investment (credit, financial, deposit-taking or management entities, the Spanish company receiving the investment) Reporting rules (i) General rule As a general rule, foreign investments indicated in section above and the liquidation thereof must be reported after the event to the Investments Register at the Ministry of Industry, Tourism and Trade 13. (ii) Exceptions Investments from tax havens must be reported before and after the event, except in the following cases: Investments in marketable debt securities issued or offered publicly, whether or not they are traded on an official secondary market, and units in mutual funds recorded in the Registers of the Spanish National Securities Market Commission

16 8. Legislation on foreign investment and exchange control regulations Where the foreign interest does not exceed 50% of the capital stock of the Spanish company in which the investment is made. It is important to stress that this prior reporting obligation is not equivalent to a verification or authorization requirement, and, once the investment has been reported, the investor may make his investment without having to wait for any reply from the authorities Monitoring of foreign investments The General Directorate for Trade and Investments 14 ( DGCI ) of the Ministry of Industry, Tourism and Trade can require Spanish companies which have foreign shareholders and Spanish branches of non-resident persons specifically or generally to file an annual report on the status of their foreign investments. The General Directorate may also require the parties required to report foreign investments to provide the information necessary in each particular case. Owners of investments, Spanish companies with non-resident shareholders, public authenticating officials, companies providing services, or investment companies and credit entities and other finance entities that have taken part in investment transactions may also be required by the General Directorate to provide the information necessary in each particular case Suspension of the deregulation rules The Spanish Council of Ministers can suspend the application of the deregulation rules in certain cases, which will require investments concerned to undergo a prior procedure to obtain administrative clearance from the Council of Ministers. Up to date, the Council of Ministers has exercised the powers of suspension described above only in respect of foreign investments in Spain in activities directly related to national security, such as the production or marketing of arms, munitions, explosives and other armaments (except in the case of listed companies, in which case only acquisitions by non-residents of more than 5% of their capital stock, or acquisitions of less than 5% that enable such investors to form, directly or indirectly, part of their managing bodies, will require clearance) Exchange control regulations Exchange controls and capital movements are fully liberalized and in all areas there is complete freedom of action. In this sense, Law 19/2003, on Movement of Capital and Foreign Transactions and for the Prevention of Money Laundering, repealed Law 40/1979, on Exchange Control Legal System (with the exception of chapter II), and modified Law 19/1993, on Certain Measures for the Prevention of Money Laundering, but maintained the principle of liberalization of movements of capital. Law 19/2003 should have been implemented by regulations before January 8, 2004, but this has been done only partially. In this regard, Royal Decree 54/2005 has modified the regulations of Law 19/1993, approved by Royal Decree 925/1995. However, no other regulations have been implemented and, until they are, according to the First Temporary Provision of Law 19/2003, all regulations approved implementing Law 40/1979 will remain in force in everything not opposed to Law 19/2003. The main features of the Spanish exchange control scenario currently in force can be summarized as follows: Freedom of action As a general rule, all acts, businesses, transactions and operations between residents and non-residents which involve or may involve payments abroad or receipts from abroad are completely deregulated. This deregulation includes payments or receipts made either directly or by offset of the underlying transactions, as well as transfers to or from abroad and variations in accounts or financial debtor or creditor positions abroad. It also covers the import or export of means of payment Safeguard clauses and exceptional measures The EU provisions will be able to prohibit or restrict the performance of certain transactions and the respective collections, payments, bank transfers or variations in accounts or financial positions in respect of third countries. The Spanish Government may also impose prohibitions or restrictions in respect of one or a group of States, a certain territory or an extra-territorial centre, or suspend the system of liberalization for certain acts, businesses, transactions or operations. 14

17 Statistical information In order to calculate the Spanish balance of payments and to maintain statistical control of monetary flows there are certain mechanisms for payments to and receipts from abroad. Currently, these mechanisms are as follows: As a general rule, payments, receipts and transfers between residents and non-residents, denominated either in euros or in foreign currency, should be made through deposit-taking entities (normally banks) registered in the Bank of Spain s Official Register 15 to whom the resident party must provide with certain data (e.g. names and addresses of both parties) and specifically with a description of the transaction giving rise to the payment, receipt or transfer. The debits and credits posted to bank accounts held in Spain by non-residents are also subject to this regime. The debits and credits posted to bank accounts held abroad by residents must be notified to the Bank of Spain using specific forms if they exceed a specified threshold or if expressly requested by the Bank of Spain. Payments and receipts between residents and non-residents can be made, in Spain or abroad, in coins, bank notes and bearer checks, denominated either in euros or in foreign currency, and must be declared by the resident party within 30 days if they exceed 30,000. Non-residents intending to credit bank accounts held in Spain by non-residents by means of bank notes or bearer checks, in euros or foreign currency, or to transfer abroad such means of payment, are obliged to evidence the origin of such funds. Otherwise, the registered entities will not be able to proceed with these transactions. Exceptionally, the Spanish Ministry of Industry, Tourism and Trade may, by making the relevant regulations, require prior clearance or declaration for payments, receipts or transfers to or from abroad arising from certain transactions yet to be specifically defined Specific transactions to be reported to the Bank of Spain For purely statistical and informative reasons, residents involved in businesses or transactions abroad should declare them in the following cases: 15 Financing and deferrals of payments and receipts for more than one year between residents and non-residents deriving from commercial transactions or the provision of services. Offsets of credits and debits between residents and nonresidents deriving from commercial transactions or the provision of services. Offsets of credits and debits deriving from intermediation in financial markets by intermediary entities. Financial loans received by residents from non-residents or granted by residents to non-residents. Securities such as bonds, promissory notes, etc. not traded on Spanish stock exchanges issued by Spanish residents and acquired by nonresidents are considered as financial loans from nonresidents. Additionally, the Spanish authorities and the Bank of Spain may request any data in order to monitor such transactions for statistical and tax purposes Import and export of certain means of payment The export of coins, bank notes and bearer checks, denominated either in euros or in foreign currency, although deregulated, is subject to prior declaration for purely informative purposes if the amount involved exceeds 6,000 per individual per trip. If the declaration is not made, the Spanish customs officials will retain these means of payment. The import of the above-mentioned means of payment by non-residents is subject in certain cases to prior declaration to the Spanish customs authorities if higher than 6,000 (per individual per trip) Types of bank accounts Non-resident individuals and legal entities can hold bank accounts on the same conditions as resident individuals and legal entities. The only requirement is to provide documentary evidence, on opening the bank account, of the non-resident status of the holder of the account. Additionally, such status must be confirmed to the authorized bank every two years. Other minor formalities are stipulated. Moreover, residents may, subject to certain declaration requirements, freely open and hold bank accounts abroad either in euros or in foreign currency (the opening of such bank accounts by resident parties must be declared to the Bank of 15

18 Spain)and bank accounts in Spain denominated in foreign currencies at registered entities (without being subject to any information requirement) Residence for exchange control purposes For exchange control purposes, individuals are deemed to be resident in Spain if they have their customary place of residence in Spain. Legal entities with registered offices in Spain, and the permanent establishments and branches in Spain of legal entities or of individuals who are resident abroad, are likewise resident in Spain for exchange control purposes. Non-residents for exchange control purposes are individuals with their customary place of residence abroad, legal entities with registered offices abroad, and the permanent establishments and branches abroad of Spanish resident individuals or entities. Individuals or entities are deemed to have their customary residence in Spain if they comply with the requisites set forth in the tax legislation to be considered as residents in Spain for tax purposes (please refer to the applicable Chapter), but with the specifications established by regulations (currently there are no regulations on this matter). 16

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20 Prepared by: MINISTERIO DE INDUSTRIA, TURISMO Y COMERCIO SECRETARÍA DE ESTADO DE TURISMO Y COMERCIO