Spain: The Spanish Government Approves A Royal Decree On Foreign Investments

On 5 July, Spain's Official State Journal (Boletín Oficial del Estado, or BOE) published Royal Decree 571/2023, of 4 July, on foreign investments (RD 571/2023), which implements Law 19/2003, of 4 July, on the legal regime applicable to the movement of capital and financial transactions abroad (Law 19/2003), which will enter into effect on 1 September 2023.

Background

Following the approval of Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union (Regulation 2019/542) and in the context of the measures approved as a result of the Covid-19 health crisis, the Spanish government modified the provisions for screening foreign investments in Spain.

Specifically, as explained here, Royal Decree-law 8/2020, of 17 March, on extraordinary measures to tackle the economic and social impact of Covid-19 (RDL 8/2020) included a new article 7 bis in Law 19/2003¹.

As a result, the former framework of liberalisation was replaced by a system of prior authorisation for certain investments made in Spain by investors that were not resident in the European Union (EU) or in the European Free Trade Association (EFTA) (or made by resident investors whose beneficial owners were not resident in the EU or in EFTA) as a result of the sector that was being invested in or, in some cases, because of the characteristics of the investor.

Equally, Transitional Provision One of RDL 34/2020 applied that system of prior authorisation to certain foreign investments made by the residents of other EU or EFTA countries (or by investors resident in Spain whose beneficial owners are residents of other EU or EFTA countries), provided that those investments affect one of the restricted sectors referred to in article 7 bis.2 of Law 19/2003 and are made in listed undertakings, or unlisted undertakings if the value of the investment exceeds €500 million. The validity of that provision was initially limited to 30 June 2021, but was subsequently extended successively until 31 December 2021, 31 December 2022 and, finally (by article 62 RDL 20/2022), until 31 December 2024

On 24 March 2020, almost immediately after the approval of RDL 8/2020, the Spanish Council of Ministers authorised the urgent administrative processing of the draft royal decree on foreign investments, which would replace the pre-existing Royal Decree 664/1999, of 23 April, on foreign investments (RD 664/1999) by implementing the new provisions. The Ministry of Industry, Trade and Tourism submitted the draft royal decree to public consultation between 17 and 25 November 2021.

The newly approved RD 571/2023 is substantially identical to the draft royal decree that was submitted to public consultation and implements the provisions of Law 19/2003, in particular, its article 7 bis and related articles concerning the suspension of the framework of liberalisation regarding certain foreign investments.

It should be pointed out that, in general, this new regulation consolidates and implements certain criteria that had, implicitly or explicitly (it was even included in the foreign investments questionnaire that had to be completed to raise a consultation or obtain authorisation), been followed and that the Directorate General of Foreign Trade and Investment had been applying since RDL 8/2020 entered into effect; therefore, it is unlikely that this will have a significant change on how the provision is being applied in practice.

We set out below the essential content of RD 571/2023, with a particular reference to the elements that develop the provisions of Law 19/2003.

Effectiveness and application

RD 571/2023 enters into effect on 1 September 2023, although it is established that foreign investment authorisation procedures that start before that date will continue to be governed by the former regulation.

Delimitation of the concept of foreign investment: exclusion of internal restructuring and shareholding increases exceeding 10% that do not entail a change of control

Article 14 RD 571/2023 points out that the following will not constitute foreign direct investments, subject to authorisation pursuant to article 7 bis.1 of Law 19/2003:

1. Internal restructurings performed by groups of undertakings².
2. Shareholding increases by a shareholder that already holds an equity interest of more than 10% if the shareholding increase does not result in a change of control³.

It is also established that, if two or more foreign investment transactions take place between the same sellers and buyers within a period of two years, those transactions shall be taken as a single investment made on the date of the last transaction (which might prove significant from the perspective of the quantitative thresholds that trigger certain exemptions, as explained below). Although RD 571/2023 does not say so explicitly, it would seem reasonable to assume that this rule will require that successive investments have a certain degree of homogeneity among them.

Delimitation of the investor in certain circumstances: fund managers and collective investment schemes and the criterion of the beneficial ownership of EU and EFTA investors

Article 10.2 RD 571/2023 establishes that the fund managers of the following institutions or entities are understood as being the owners of the foreign investment, provided that the shareholders or the beneficiaries do not legally exercise shareholder rights or have privileged access to the undertaking's information:

1. Collective investment schemes or closed-ended collective investment entities resident in the EU or in the EFTA, or entities or similar undertakings that are resident in third countries.
2. Employment pension funds or other retirement investment institutions that are authorised or resident in the EU or in EFTA, or entities or similar undertakings that are resident in third countries.

As the fund manager is understood as being an investor, the place of its corporate office will determine whether or not it is understood as being a foreign investor or even a foreign investor resident outside the EU and EFTA, irrespective of the place of residence of the fund or collective investment scheme.

Equally, article 7 bis.1 Law 19/2003 defines a foreign investor as an investor resident in the EU or EFTA but whose beneficial owner is a non-resident investor, pointing out that it shall be understood that beneficial ownership exists "when the latter hold or ultimately control, directly or indirectly, more than 25% of the share capital or voting rights of the investor, or when it exercises direct or indirect control over the investor by any other means". RD 571/2023 now specifies that beneficial ownership will exist then that percentage or control is held or exercised either individually or in concert.

Footnote

1. This new wording of article 7 bis of Law 19/2003 was later partially amended (including a number of minor details) by Royal Decreelaw 11/2020, of 31 March, which adopts supplementary urgent social and economic measures to tackle COVID-19, by Royal Decreelaw 34/2020, of 17 November, on urgent measures to support business solvency and the energy sector, and in matters of tax (RDL 34/2020) and by Royal Decree-law 20/2022, of 27 December, on measures in response to the economic and social impact of the War in Ukraine and to support reconstruction on the island of La Palma and other situations of vulnerability (RDL 20/2002).

2. Law 19/2003 does not make an express reference to restructuring, although it is true that the Directorate General of Trade and Foreign Investment had laid down a certain standard practice in this regard which entailed exemption from prior authorisation: this criterion has been provided for in RD 571/2023.

3. This can be inferred, a sensu contrario, from the literal wording of article 7 bis.1 of Law 19/2003 and is now provided for explicitly in RD 571/2023. It should be remembered that, in order to ascertain that control exists, article 7 bis of Law 19/2003 refers to the criteria of article 7.2 of the Spanish Competition Law 15/2007, of 3 July.