Foreign direct investment in Spain

This is the first step taken by the Spanish government towards implementing the EU Regulation establishing a European screening mechanism for foreign direct investments (Regulation (EU) 2019/452, which has to be implemented in the member states by 11 October 2020.

The suspension of the previous liberalisation scheme for certain foreign investments, implemented in Spain in 1999 was introduced by the Spanish Royal Decree-Law 8/2020 on 17 March 2020 ("RDL 8/2020"), the Spanish Royal Decree-Law 11/2020 on 31 March 2020 ("RDL 11/2020") and the subsequent Spanish Royal Decree-Law 34/2020 on 17 November 2020 (“RDL 34/2020”) which modified the former regime of capital movements and economic transactions abroad (LMC). This was initially introduced during the state of alarm period in order to protect Spanish companies from foreign investors who may have seen the Covid-19 pandemic as an opportunity to acquire them at a price under its market price.

The regulations have been approved for an indefinite period, although there have been several doubts regarding the term of their validity.

Spain’s FDI rules

Under Spanish law, FDI is that in which:

• a foreign investor (as defined below) becomes the owner of a stake equal to or higher than 10% of the company's share capital; or
• as a result of the relevant corporate transaction, legal act or business, the foreign investor takes  control of the company by means of: (i) being able to exercise decisive influence over the company under rights of ownership or use of all or part of the company’s assets; (ii) being able to exercise decisive influence on the company’s management bodies; or (iii) by virtue of any of the circumstances set out in Article 42 of the Spanish Commercial Code (majority of voting rights, control of the management body, etc.).

FDI will be subject to prior administrative authorisation when carried out by:

• residents of countries outside the EU or the European Free Trade Association (EFTA); or
• residents in EU or EFTA countries whose ultimate beneficial ownership corresponds to residents of non–EU and non-EFTA countries (such ultimate beneficial ownership will be understood to exist when the latter, directly or indirectly, owns or controls a percentage higher than 25% of the share capital or voting rights of the investor, or when it has control, directly or indirectly, by other means over the directly investing company); and
• in cases where the FDI affects the main strategic sectors of Spain and/or the relevant foreign investor has certain characteristics.

The extension of this restriction to investors which are effectively owned by residents of third countries is designed to prevent the rule from being avoided by using intermediary companies with a registered office in the EU or EFTA.

Effectively, there are two kinds of restrictions: those of an objective nature, which consist of certain sectors of activity; and those of a subjective nature, where certain characteristics are met by the investor.

Restrictions on strategic sectors

FDI in Spain will require prior administrative authorisation when carried out in sectors which affect public order, public safety and public health. These are:

• critical infrastructure, both physical and virtual (energy, transport, water, health, media, data storage and processing, defence, finance or sensitive facilities);
• critical technology and dual-use products (robotics, cyber-security, aerospace, defence, energy storage or biotechnologies);
• essential supplies (energy, hydrocarbons, electricity, raw materials and food);
• sectors with sensitive information such as personal data or with the ability to control such information (at this point it is worth asking which company currently has no access to personal data); and
• media.

The list is particularly broad and does not offer any delimitation within each section. Any company participating in these sectors within the Spanish market of any size, and without prejudice to the exemptions included below, will require prior authorisation.

Restrictions on certain investors

FDI in Spain will also require prior administrative authorisation where:

• the foreign investor is directly or indirectly controlled by a third country government;
• the foreign investor has made investments or participated in activities in the sectors affecting security, public order and public health in another EU member state (without any time limit being established); or
• there is a serious risk that the foreign investor will engage in criminal or illegal activities affecting public safety, public order or public health in Spain.

Transitional regime

RDL 34/2020 introduced a transitional regime, later extended by the Spanish Royal Decree-Law 12/2021 on 24 June 2021, which was in force until 31 December 2021.

Under the transitional regime, the suspension of the liberalisation scheme also applied, until 31 December 2021, to FDI made by residents of EU or EFTA countries other than Spain; or by residents of Spain whose ultimate beneficial owner is located in another EU or EFTA country, provided that the company in which the investment is made is either a Spanish company listed in an official secondary market, or a non-listed Spanish company where the value of the investment exceeds €500 million.

Furthermore, Article 4 of the Spanish Royal Decree-Law 27/2021 on 23 November 2021, amended the transitional provision established by RDL 34/2020. Accordingly, the transitional regime has been subsequently extended until 31 December 2022.

Authorisation procedure

FDI affected by these restrictions will be subject to prior authorisation. In accordance with the provisions of section 6 of the LMC, the relevant application for authorisation will be addressed to the General Director of Commercial Policy and Foreign Investments (Director General de Política Comercial e Inversiones Exteriores). The council of ministers will be in charge of issuing the relevant resolution at the proposal of the Minister of Economy and Finance, and where appropriate, the head of the competent department, following a report to be issued by the board of foreign investments. As an exception, a simplified regime is envisaged for obtaining the aforementioned authorisation when the following requirements are met:

• investments that prove the existence of an agreement between the parties or a binding offer dated prior to the entry into force of RDL 8/2020 (excluding any non-binding agreement of intent, which is customary in practice); or
• investments equal to or greater than €1 million and less than €5m, until the regulations implementing the amended article 7 enter into force.

Investment transactions for an amount under €1m will be provisionally exempt from the prior authorisation obligation until a different amount is established by law.

The government may establish the categories of transactions and the amounts below which FDI transactions shall be exempt from the prior authorisation regime, on the grounds that they have little or no impact. The relevant regulations regarding such aspects have not been implemented yet, so the provisional regime described above on small value investments remains in force.

Legal consequences

In the event of non-compliance with the new restrictions, investment transactions executed without prior authorisation will be void and will lack legal effect although they may be legalised on a later stage following the authorisation procedure established above. However, carrying out FDI without the required prior authorisation is considered a very serious infringement that may result in the imposition of a fine of between €30,000 and the economic value of the transaction, and public or private reprobation of the offender.

Due to the recent implementation of the restrictions on FDI in Spain, it is impossible to determine the legal consequences of its implementation in the Spanish legal regime. As of December 2021, no information is publicly available regarding investors who have requested prior authorisation to execute FDI. However, we have been informed by the General Directorate for Trade and Investment that information concerning prior authorised investments will be available shortly. In addition, a draft of a Spanish Royal Decree regarding Foreign Investments has been published and awaits to be approved.

Co-written by Olimpia Ortega Mélida and Rocío García Nardiz of Pinsent Masons.