Foreign direct investment in Spain

The new draft, a summary of the most relevant provisions of which is set out below, will implement the EU Regulation establishing a European screening mechanism for foreign direct investments (Regulation (EU) 2019/452) in Spain.

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• Foreign direct investment in the Netherlands
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• Foreign direct investment in the US

Spain's FDI regime is set out in the Spanish Law 19/2003 of 4 July regarding the legal regime of capital movement and foreign economic transactions as well as certain measures to prevent money laundering. Previously, in the context of the Covid-19 pandemic, Spain partially amended Spanish Law 19/2003 by means of a Royal Decree on Foreign Investment, which introduced certain new restrictions on FDI.

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 all or part 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

In addition to the restrictions mentioned above, RDL 34/2020 introduced a transitional regime which, after having been extended on various occasions, has now been extended until 21 December 2024 according to Spanish Royal Decree Law 20/2022 of 27 December 2022.

Under this transitional regime, the suspension of the liberalisation scheme also applies, until 31 December 2024, 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.

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.

Potential amendments to the current FDI regime

As the current regime was approved for a transitional period only, the Spanish government has published a draft, on which approval is pending, with the aim of developing the Spanish Law 19/2003.

Under the proposed regime, foreign investment in activities directly related to national defence, weapons and explosives for civilian use, and acquisition of real estate properties when they are intended for diplomatic use, are subject to prior authorisation.

However, foreign investments in activities related to national defence or directly related to weapons and explosives for civilian use shall be exempt from prior authorisation:

• when the investor does not reach 5% of the share capital of the Spanish company, and provided that it does not allow the investor to form part, directly or indirectly, of its governing body; and
• when the investor does not reach 10% of the share capital, provided that the investor notifies the Ministry of the transaction and accompanies such notification to a public deed in which the investor undertakes not to use, exercise or transfer his voting rights to third parties, or to form part of any of the listed company's governing bodies.

In addition, the government, following a report from the Foreign Investment Board (Junta de Inversiones Exteriores), may suspend the FDI regime for foreign investments which, considering their nature, form or conditions of implementation, even if only occasionally, may affect activities related to public order, public safety and public health.

Upon such suspension, the investor must request prior administrative authorisation in respect of the transaction which it intends to carry out, from the time of notification of the suspension. This authorisation may contain certain conditions or measures to mitigate the risk of the investment (for example, continuity of service and fulfilment of obligations with the Spanish state, establishment guarantees, special political rights to certain shareholders, etc.). Authorised investments must be executed within six months.

A voluntary consultation process is also provided for in respect of investments which may affect activities related to public order and public safety.

Unless the government has actually suspended the FDI regime with respect to investments which may affect public safety and public order and they are therefore subject to prior authorisation, the Foreign Investment Board may require the investor, either once the investment has been made or when it is still pending to be made, to submit a notification of the transaction accompanied by an explanatory report outlining the potential effects on public security and public health, as well as any information it deems necessary to assess the potential effect of the transaction on public security and public policy.

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.

In our experience, these restrictions may delay completion of transactions in those cases in which the relevant process to obtain authorisation, when required, is not initiated by the foreign investor until the final phase of the transaction so that the process runs in parallel with the relevant negotiations.

According to the General Subdirectorate for Foreign Investment (Subdirección General de Inversiones Extranjeras), 29 transactions were submitted for prior authorisation in 2020, of which 28 requests were resolved. In 2021, 55 transactions were submitted for prior authorisation of which 48 were resolved and seven archived or dismissed.

Co-written by Rocío García Nardiz of Pinsent Masons.