Foreign direct investment reviews 2021: Spain
Measures enacted to protect the Spanish economy against the COVID-19 crisis may persist longer than expected
7 min read
The exceptional circumstances brought about by the COVID-19 outbreak led the Spanish government to enact a number of urgent regulations in 2020, establishing a new screening mechanism for certain foreign investments by virtue of Royal Decree Laws 8/2020, 11/2020 and 34/2020.
The amended Law 19/2003 incorporated—by virtue of these urgent regulations—a new Article 7bis, suspending the liberal regime of foreign direct investments in Spain, particularly in relation to a number of critical industries.
Spanish foreign direct investment measures before the COVID-19 outbreak included a post-investment notification for any foreign investment, and prior authorization for a number of limited investments, such as investments from countries considered tax havens, activities related to national defense and security, and (for non-EU investors only) investments in gambling, airlines and audiovisual media, among other sectors. Regardless of such authorizations, former Spanish regulations proclaimed a liberal ethos for foreign direct investment in Spain.
In response to COVID-19, and in order to avoid opportunistic investments in critical sectors for the national public security and health, the Spanish government enacted a number of amendments to Law 19/2003, anticipating the yet-to-be transposed rules of Regulation (EU) 2019/452, of March 2019. The amendments created a new screening mechanism for certain foreign direct investments.
Foreign direct investment is defined as an investment as a result of which a non-EU/non-EFTA resident directly or indirectly acquires control over a Spanish company (listed or unlisted) and/or at least 10 percent of its share capital.
Under the new regime, foreign direct investments exceeding €1 million need prior authorization if any of the following criteria are met:
- The investment is made in a strategic sector, such as critical infrastructure, critical technologies, supply of critical inputs, food security, sectors with access to sensitive information, media and any other sector that may impact public health, safety or public order as determined by the Spanish government
- The investor is controlled by a third EU Member State government
- The investor has already invested or been involved in security, public health or public policy in another EU Member State
- The investor is at serious risk of engaging in illegal or criminal activities
In addition, until December 31, 2021, EU and EFTA resident investors are also subject to these restrictions if they make investments through which they acquire more than 10 percent of the capital and/or control of a Spanish company, provided that the investment exceeds €500 million if the company is unlisted or €1 billion if the company is listed on the Spanish stock market.
As confirmed by public officials from the relevant cabinet on foreign investment, the Royal Decree Laws adopting the new regime are undergoing enacting legislative processes. The precise content of the future legislation is still uncertain, although once enacted in the form of law, further developments and details regarding the screening mechanism may follow.
FILING OBLIGATION AND CONSEQUENCES
For tax haven approval applications, a standard form must be filed electronically at least six months prior to the transaction.
For purposes of the 2020 regime and the new screening mechanism, filing for an authorization prior to conducting the investment is required when a restricted foreign direct investment exceeds €1 billion.
If the restricted foreign direct investment exceeds €1 million but does not surpass €5 million, the transaction shall be dealt with through the interim simplified process provided for in the 2nd Transitory Provision (Disposición Transitoria 2ª) of the Royal Decree Law 11/2020. This provision specifies that requests shall be addressed to the public official in charge of the relevant department of the Spanish government (i.e., Subdirección General de Comercio Internacional e Inversiones, the "Investment Department") that will approve or deny the request.
Investments under €1 million are thus exempt from the filing obligation of the new screening mechanism, although the relevant Spanish regulations mention that this point may be subject to adjustment once further legislation is enacted.
If the restricted foreign direct investment exceeds €5 million, the general regime set forth in Article 7bis of the Law 19/2003 applies. In this case, the investor is required to file the authorization request with the Investment Department, subject to final approval from the Spanish Council of Ministers.
Once an authorization request is submitted, the Spanish Council of Ministers has up to six months to reply. The absence of a response from the Spanish Council of Ministers after six months from filing a request will be interpreted as a denial.
Failure to file the required authorization requests when required will render the transaction null and void, and may also involve the imposition of significant fines, up to the value of the intended investment.
TYPES OF DEALS REVIEWED
The types of deals reviewed are directly related to the conditions and criteria already set forth. The review process varies on a case-by-case basis, depending on the amounts, the investor and the key strategic sector where the investments are intended to be made.
PRE-FILING ASSESMENT MECHANISM
Due to the broad drafting of the applicable provisions, it is difficult to determine whether certain investments fall within the scope of the law. Consequently, the Investment Department has made available to investors a questionnaire that can be sent informally via e-mail to clarify whether the investment is subject to authorization. Once submitted, the relevant department will confirm the need for an authorization request.
SCOPE OF THE REVIEW
The precise scope of the review that will be conducted by the Investment Department and the Spanish Council of Ministers in accordance with the new screening mechanism is not yet known. As a general rule, they will examine any concerns of security, public health or public policy that the investment may pose, and grant or deny authorization. More information will be available about the scope of review when new legislative regulations have been enacted.
HOW FOREIGN INVESTORS CAN PROTECT THEMSELVES
Foreign investors should be cautious when entering into a transaction involving a Spanish company operating in any of the key strategic sectors. The operational strategy of the investment must be reconsidered in light of the current review process of the Spanish authorities, bearing in mind that a number of laws may restrict the investment.
Anticipating any regulatory amendments and obtaining the correct legal counsel is key, as well as liaising in due time and form with the relevant governmental authority. Managing the expectations of investors, sponsors and stakeholders, and keeping them all aligned with foreign direct investment restrictions, is also crucial in these times of uncertainty.
REVIEW PROCESS TIMELINE
The legally established timeline for the review of investments and for granting the required authorization, pursuant to the interim simplified process, is 30 days. The ordinary process of Article 7bis provides a generic estimated timeline of six months.
According to conversations with public officials from the Investment Department, the review under the pre-filing assessment may take four to five weeks, depending on the authority's workload, whereas the review under the ordinary process may take up to three months.
Although limitations have been imposed on foreign direct investments and these limitations may persist, governmental authorities are imposing a business-friendly approach to these restrictions. They are likely to maintain this approach to the review process, to the extent that investments do not significantly pose a threat to the national security, public health or public order in Spain.
Given that these rules were imposed in a time of crisis and have not yet been properly developed and enacted, restricting foreign investments that can bring prosperity and economic growth to the country during a downturn period may seem counterintuitive. However, further developments may bring more legal certainty to this scarcely regulated regime.
- So far, only 10 percent of pre-assessments have resulted in the obligation to submit formal investment authorization requests, none of which has been denied as of this writing
- Requesting a pre-assessment of the investment transaction is recommended if it potentially falls under the scope of the law, since the chances of eventually needing to request a formal investment authorization are low. Additionally, the time spent in the pre-assessment may shorten the response time in case a formal authorization has to be requested later
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