Spain: Legal Highlights Of Doing Business In Spain By A Foreign Investor - Part 8 of 17

Last Updated: 1 September 1995 If, irrespective of the actual amount of the investment, branches or establishments are set up or enhanced by a company or an individual with residence or domicile in any of the countries and territories which by regulation are deemed to be tax havens (see list in footnote 44);

The administrative procedure known as "verification" is subject to the following rules: once the application has been filed, the Administration will scrutiny the investment project and will notify its conformity or disapproval in 30 days time. If no reply is given within such period of time, the project is deemed to have been approved. The 30-day term is deemed to be interrupted if the authorities request more information about the transaction. E.g., in the event of acquisitions of shares and/or participations in Spanish companies, the authorities may request the agreement negotiated by the parties.

The Administration may suspend the liberalisation regime if the investment project is deemed to be harmful to the national economy. The latter cause for rejecting an investment project does not apply to investments made by residents of EC countries. For these purposes EC companies controlled by non-EC residents are not deemed to be EC residents.

In a few cases the foreign investment may not exceed 25% of the capital of the Spanish company participating in certain companies limited by shares (45).

In the event of investments in any of the special sectors that have a specific regulation (gambling, radio and T.V. stations, airlines and National Defence) prior approval of the Council of Ministers rather than the more flexible verification procedure described above is required. The foreign investment in companies engaged in the operation of end and carrier telecommunications services is free up to 25% of the equity, thereafter the approval of the Council of Ministers is required although the Council of Ministers may authorise higher investment ceilings. Except for activities related to the manufacturing or trade of arms, ammunition, explosives and war material, or operation of end and carrier telecommunications services, this restriction does not apply to residents of EC countries. Special rules exist for the creation of subsidiaries, branches and representative offices of foreign banks and of insurance companies.

3.4.2 Portfolio investments: Generally portfolio investments are free and require no prior verification; there are however certain qualifications for the issue and placing of Spanish securities outside Spain.

3.4.3 Real estate investments: generally speaking investments are free and require no prior verification except in two cases: (i) if the actual investment exceeds 500,000,000 pesetas; and (ii) if, irrespective of the actual amount, the investment comes from countries and territories which by regulation are deemed to be tax havens (see list in footnote 44).

3.4.4 Other forms of investment: investments are free and require no prior verification except in two cases: (i) where the actual amount of the investment exceeds 500,000,000 pesetas; and (ii) if, irrespective of the actual amount, the investment comes from countries and territories which by regulation are deemed to be tax havens (see list in footnote 44).

3.5 Rights of the Foreign Investor.

Foreign investors have the right to transfer outside Spain the profits they might earn as well as the proceeds of the sale of their shares in Spanish companies or of the liquidation of the same, including capital gains, without limit. The transfer of funds abroad refers to the net sum remaining after relevant taxes and expenses in Spain have been duly paid.

To enjoy the rights attached to foreign investments, the foreign investor must declare, as a condition precedent, the investment on the appropriate form to the Foreign Investments Register. The declaration must be filed within 30 calendar days following the transaction (investment) in question. There are special rules for the declaration of investments made by non-residents in negotiable securities that are regarded as "portfolio investment", in shares listed or in the process of being listed that are regarded as "direct investment" and in certain other negotiable securities(46). This should be understood notwithstanding any other applicable requirements in order to transfer in due course the proceeds of the foreign investment.

3.6 Exchange Control Regulations.

Generally, all acts, transactions and operations of all kinds between residents and non- residents which entail, or from the performance of which, payments or collections to and from Spain are derived or could be derived, may be subjected to exchange control restrictions. Failure to comply with these regulations may in very few cases be considered a criminal offence.

Nevertheless, beginning on 1 February 1992 exchange controls are extremely flexible and virtually all transactions and related payments and collections have been liberalised provided they are channelled through so called "registered entities" (commercial banks which are authorised by the Bank of Spain). The new system is based as a general rule on the declaration and exceptionally on the approval of the transactions to the Authorities(47). Certain safeguards (prohibition and/or approval of certain transactions), may be imposed by the Spanish authorities where the Spanish interest is gravely threatened, but those measures affecting EC citizens must be adopted pursuant to EC rules on movement of capital.

Residents are also allowed to open and keep accounts in foreign currency both in Spain and abroad, whether with registered entities or other Spanish and foreign banks, and make transfers, payments and collections to residents or non-residents. They must, however, file a declaration within 30 days from opening and provide periodical information on the movement of the accounts. Payments and collections between residents and non-residents in coins, bank notes and bearer cashier cheques whether in pesetas or in foreign currency and whether in Spain or abroad are free, although subject to declaration. Non-residents are also allowed to open checking and savings accounts and time deposits both in pesetas or in foreign currency, and move them freely, although subject to declaration. The so called foreign accounts in ordinary pesetas and foreign accounts in convertible pesetas disappeared and are unified in one single non-residents pesetas accounts.

There are a few exceptions to the relaxation of controls which are linked to the import and export of bullion, gold coins, coins, bank notes and bearer cashier cheques whether in pesetas or in foreign currency. Imports for more than 1,000,000 pesetas are subject to declaration. Exports of up to 1,000,000 pesetas per person and trip are free, from 1,000,000 pesetas to 5,000,000 per person and trip are subject to declaration and for more of 5,000,000 pesetas are subject to prior authorisation (see footnote 47).

Other transactions that must be declared to the Bank of Spain are: (i) commercial financing and repayment terms in excess of one year; (ii) offset of commercial credits; (iii) offset of financial credits, and (iv) financial loans between residents and non- residents, including the acquisition of debt instruments (promissory notes, bonds, etc.) which are not traded in the Stock market or in any other organised market, as well as the issue and placing in foreign markets of negotiable securities representing debt issued by resident private or public entities whether of implied or explicit yield, and of financial instruments issued by residents whether offered publicly or placed privately.

With regard to foreign financial loans, the parties are now free to agree the conditions and covenants they may deem appropriate. Administrative intervention is limited to the registration of the loan at the special Register provided for this purpose by the Banco de Espana, the so called NOF (numero de operacion financiera or financial transaction number). The borrower may not draw on the funds before such number has been allocated. The NOF is allocated directly by the Bank of Spain if the principal of the loan exceeds 250,000,000 pesetas or the loan comes from one of the countries and territories which by Regulation are deemed to be tax havens (see list in footnote 44). The NOF is allocated directly by the registered entity involved in the transaction if the principal of the loan does not exceed 250,000,000 pesetas.

Long term (more than five years) loans to Spanish companies aiming at creating or strengthening long lasting commercial, economic or financial ties are treated as direct foreign investment and are subject to the "verification" procedure described in paragraph 3.4.1 above if they exceed 500,000,000 pesetas or come from countries and territories which by regulation are deemed to be tax havens (see list in footnote 44).

There are no restrictions on domestic loans to foreign owned Spanish companies and branches of foreign companies.

(45) E.g.: Sports clubs organised as companies limited by shares, pursuant to article 22.1 of the Law 10/1990 of 15 October, published on 17 October, regulating sports.
(46) Resolution 25 October 1990, published on 7.11.90.
(47) A recent judgement from the European Court has invalidated Spain's right to subject certain transactions to prior approval.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstance.

For further information contact Mr. Jorge Angell, L. C. Rodrigo Abogados, Madrid (Spain) Fax:010 341 576 6716, or enter text search 'L.C. Rodrigo Abogados' and 'Business Monitor'.

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