Direct Foreign Investment in Spain (“DFI”) is a crucial element for productivity and fundamental for international cooperation. Through DFI, long-term economic ties are established between countries which promote an agile economic development, the strengthening of productivity and economic integration. Direct Foreign Investment in Spain covers both Spanish investment abroad as well as foreign investment in Spain.
Royal Decree 571/2023 of 4th July on foreign investment, which was published in the Spanish Official State Gazette on 5th July, entered into force on 1st September 2023. This decree modifies the regime of foreign investment in Spain, in particular, (i) the control of investment which was introduced in March 2020 pursuant to article 7bis of Law 19/2003 on foreign investments (“LFI”) and, (ii) the procedures for the declaration of foreign investment in Spain and Spanish foreign investment abroad.
In turn, it repeals the provisions of the former Royal Decree 664/1999 of 23rd April and transposes into the Spanish legal system the regulations and principles of Regulation 2019/452 on the control of Investments in the European Union, in force since October 2020.
The most recent new developments of the foreign investment system.
Since the controversial system of liberalisation of certain foreign investments was introduced in Spain in March 2020, the sector demanded a regulation which would offer improved legal security and clarity for investors, since the first decree did not clearly define the strategic sectors, or the profile of the investors requiring prior administrative authorisation.
The new regulation aims at determining, with greater precision, operations subject to the new rules, taking into account the profile of the investor, the obligated investors, the subject sectors and the procedures to be followed. Among these new developments we can highlight:
Material new developments
- It is established that foreign investment will be considered to be any investment whereby the foreign investor acquires a participation equal or greater than 10% of the capital of a Spanish company.
- Internal restructuring within a group or increases in participation which are not accompanied by changes in control are not considered to be direct investment.
- Companies which manage investment funds shall now be parties obligated to submit to the control as the holder of the investment.
- A new framework of control for investments in national defence, for which a specific system is established, through which the Government may veto these operations when investment exceeds 5% of company capital. That is to say the threshold below which exceptions to the control of foreign investments are established is reduced from 10% to 5%.
Procedural new developments
- Reduction in the term for the resolution of applications for prior authorisation for DFI from 6 to 3 months. Failure on the part of the administration to respond shall constitute refusal. On the other hand, the simplified procedure of 30 working days is eliminated, therefore, all applications now have the same term for resolution of three months.
- The voluntary consultation procedure is consolidated, which previously existed in practice, but lacked legal protection. With this system, investors will be able to learn, within a maximum period of 30 days, whether or not a specific operation is subject to authorisation. In addition, this resolution will be binding and confidential for the Administration in relation to the investor.
- New system of exemptions. Previously investments below a million Euros (1,000,000€) were exempt, and now this threshold disappears and the criteria will vary depending on the sector of activity of the company which is being invested in, in the same way as certain operations in the energy sector, which are now exempt.
- However, for the sectors covered by article 7 bis.2 of Law 19/2003, foreign investment remains exempt from prior authorisation when the turnover of the acquired companies does not exceed five million Euros (5,000,000€) in the most recently closed financial year.
- Likewise, the consequences of the infringement of the control mechanisms are defined and it is established that any failure to comply with the decree will be subject to the penalties set forth in the LFI.
Telefónica Case
This decree is more relevant in relation to the recent and controversial acquisition of a 9,9% stake in Telefónica by the Saudi telecommunications giant STC.
Even though 10% is the limit for any foreign investor acquiring shares in a Spanish listed company without Government authorisation; as mentioned above, this new regulation allows the Spanish Government to veto operations which exceed 5% of capital in activities directly related to defence, given that Telefónica has communications, fibre optic and cybersecurity supply contracts with the key defence sector.
The acquisition planned by STC was divided into two parts: (i) acquisition of 4,9%, staying below the threshold, and (ii) a compromise to obtain a further 5% through financial contracts. This second phase which would elevate STC’s stake to 9,9% has been suspended and is subject to the authorisation of the government to analyse whether or not it will allow the conversion into shares with voting rights of the 5% that it now holds in derivatives. In fact, over the past few days, we have learnt that the STC group has unofficially communicated its intention to renounce this conversion to settle the controversy.
Furthermore, according to the stipulations of article 7.2 of the Law on Competition, the liberalisation system of foreign investments is suspended if the investor is controlled directly or indirectly by the government of a third country, applying specific criteria for determining this control, which becomes relevant in the case of the Saudi company STC, which is partly owned by the Saudi state.
Conclusions
Therefore, this new regulation comes to consolidate, to no surprise, the system for suspending the liberation of foreign investment, implemented during the Covid-19 pandemic, which implies a fundamental update in the regulation of the declarations of direct investments both abroad and in Spain. However, the simplification of the procedure and the reduction of some burdens and possible administrative obstacles are noteworthy.
In conclusion, Royal Decree 571/2023 represents a significant attempt to bring clarity and legal security to the system of foreign investment in Spain. However, the extent of some aspects still leaves room for the discretion of the competent authorities, which will probably generate uncertainty in practice, therefore, it will be necessary to continue to pay attention to how the new criteria will be applied, particularly in files resolved by the Directorate General of International Commerce and Investment.
It is crucial to understand and closely follow the application of the criteria established by the corresponding administrations, since those operations without prior authorisation will not be valid and may incur fines. This decree aims to safeguard strategic companies, such as Telefónica, against direct investments, with the intention of coming into line with European legislation and complying with the Sustainable Development Objectives and the 2030 Agenda, as stated in the recitals of the Royal Decree.
Entry into force
- The regulation entered into force on 1st September 2023, although the previous regulation contained in Royal Decree 664/1999 of 23rd April shall be applicable to the procedures initiated before said date.
- The submission to authorisation of determined operations of DFI contained in article 62 of Royal Decree-law 20/2022 shall remain in force temporarily, until 31st December 2024.
Julio González
Vilá Abogados
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