Foreign
With the much-debated reforms to Act 19/2003 of 4 July, on capital movements (“Act 19/2003“), the Spanish foreign direct investment (“FDI“) regime has been expanded over the past few years. The On 1 September 2023 Royal Decree 571/2023 of 4 July, on foreign investments (the “Implementing Regulation“) replaced RD 664/199 maintaining the suspension of the general liberalization regime for investments in “activities directly related to national defense”. Both regimes, i.e., general FDI screening and for investments in defense activities, might apply concurrently to investments in defense in Spain.Below, we will consider the most important questions regarding the Spanish rules on FDI in relation to national defense.
What is considered to be an “activity directly related to national defense” subject to review?
Whereas Article 11 RD 664/1999 merely referred to the “production of or trade in arms, ammunition, explosives and war materials”, Article 18(1) Implementing Regulation provides some more detail. Under the current legal regime, authorization is required for all activities “directly related to national defense, such as those affecting the industrial capabilities and areas of knowledge necessary to provide the equipment, systems and services that will provide the Armed Forces with the necessary military capabilities, as well as those related to the production (understood as the design and manufacture), maintenance or trade of defense material in general.”
Precedents as such are not publicly available. The These It The However, in our experience:
For a target company to be caught by the screening mechanism it must be involved in the development or manufacture of any product that may be used for defense purposes. Thus, it is not relevant whether said company is a contractor of the Spanish Armed Forces, but rather whether it is able to become one on account of its business activities.
In order to assess whether any given company’s business is considered to be defense-relevant, from Spain’s defense authority’s standpoint, there are some useful criteria, including:[i]The target company is regulated by Royal Decree 679/2014, of 1 August, on the Regulation for the control of foreign trade of defense material, other material and dual-use products and technologies.
- The target company holds any level of security clearance.
- Subcontractors are also caught by the screening mechanism. This could be the case for a provider of any input to a direct contractor of Spain’s defense authorities.
- Investments which were authorized by the Council of Ministers include the following:
- The EUR 11 billion investment of Raytheon Systems Limited, a British company, in Raytheon Microelectronics Espana SA in 2014. Ray The Spanish target manufactures guidance systems, microelectronic devices, electronic cards, sub-assemblies and electronic equipment which are used in products for national defense (for further information, see here
- and here
).
- In 2019 US private equity firm Rhone Capital via Prill Holdings SARL, an investment company registered in Luxembourg, acquired 45% of the Spanish Maxamcorp Holding and its subsidiaries, including Expal. The Max Ex The The acquired company is engaged in providing services and consulting in regard to information technology.
- Who authorizes FDI regarding national defense activities?
Investments which result in the acquisition of at least 5% of the share capital or allow the investor to directly or indirectly form part of the management body are subject to the screening mechanism (Article 18(1) Implementing Regulation).
If between 5% and 10% of the share capital is acquired, the investor must notify the General Directorate for Strategy and Innovation of the Defense Industry, and for International Trade and Investment at the Ministry for Economy, Trade, and Enterprise.
However, Article 18(2)(b) Implementing Regulation mentions the possibility that if the notification is accompanied by “a document in which the investor reliably undertakes in a public deed not to use, exercise or assign their voting rights to third parties, or to form part of any of the listed company’s administrative body” no authorization is required. The The The Spanish FDI authorities can require the investor to provide additional information if necessary, i.e., it is fair to say that some kind of minimum review will take place.
Who is considered to be non-resident in Spain?
According to Article 2 Act 19/2003, the following persons are considered to be non-resident in Spain:
(ii) Foreign diplomats accredited to the Spanish Government and foreign personnel rendering services in foreign embassies and consulates or in international organizations in Spain;
(iii) Legal entities with registered offices outside of Spain;
(iv) Subsidiaries and permanent establishments abroad belonging to natural or legal persons resident in Spain; and
(v) Others that are determined by regulation in analogous cases.
EU investors fall within the definition of foreign investors and are subject to the mechanism.
The Spanish legislation has not been challenged before the European Courts in this regard. According The In In this regard, the ruling of the Supreme Court of 20 October 2021, appeal number 5921/2018, serves as a paradigm of the above.
Indeed, in the words of the Court: “(…) following the consolidated case law of the ECJ, investment funds, in general UCITS, both resident and non-resident, must receive the same tax treatment. If Since it involves a violation of the principle of free movement of capital, this can also be extended to investment funds resident in third countries, non-members of the EU and the EEA” (our translation).
Are there any provisions for the investment made by a party resident in Spain that moves their residency outside of the country?
When a person or legal entity that is resident in Spain becomes a non-resident, any investments they hold in Spain will be considered foreign investments (Article 24 Implementing Regulation).
Likewise, when a person or legal entity that is non-resident in Spain becomes a resident, any investments they hold in Spain will stop being considered foreign investments.
Who is responsible for filing a screening request? Who I The The The The If the General Directorate for Strategy and Innovation of the Defense Industry, after consulting the Foreign Investment Board, considers that the modifications are of little relevance in terms of public health, safety and order, no new authorization is needed (Article 11(1)(f) and (g) Implementing Regulation).
In addition, there is the so-called “consultation” which allows the investor to formally ask whether the transaction is subject to the screening mechanism, e.g., in cases where it is not clear whether the target is involved in activities directly related to national defense. After The The outcome of the consultation is (i) either the transaction requires authorization, i.e., is subject to a formal review process before the Council of Ministers or (ii) the transaction does not require authorization.
Yes, there are three possible outcomes of the review process before the Council of Ministers:
(i) The transaction is authorized as proposed by the parties;
(ii) The transaction is subject to conditions which need to be implemented; or
(iii) The transaction is blocked and cannot be executed.
How do parties submit a filing? Does There The The This Translations need to be certified by an authorized translator (see, unfortunately in Spanish only, here
).
Can transactions be concluded before screening process is finished? If If 8(2)(b) Act 19/2003).
Furthermore, closing a transaction without filing a screening request or without waiting for the authorization, as well as untruthfulness in the process, is punishable by: (i) a fine of up to the economic value of the transaction, with a minimum of EUR 30,000; and (ii) a public or private reprimand.
What happens if the parties fail to comply with the conditions imposed?
If the parties do not comply with the conditions imposed by the Council of Ministers, the investor is subject to the sanctions described in Section 10 above. In addition, failure to comply with the conditions means that the transaction will be null and void as it is deemed unauthorized.
How are sanctions set out?
In order to determine the value of the applicable sanction, Article 10 Act 19/2003 refers to the following criteria:
(i) Nature and magnitude of the infringer;
(ii) Degree of responsibility and intention of the infringer;
(iii) Time elapsed between the infraction and the attempt to correct it on the interested party’s own initiative;
(iv) Financial standing of the infringer;
(v) Past conduct of the infringer, regarding capital movements and foreign investment, for which any final sanctions imposed in the last five years will be considered.
As a matter of fact, there is one decision from the Spanish Supreme Court of 4 March 2013 (See here
) in which the Court reduced a fine of EUR 1 million for gun jumping under the defense regime to EUR 250,000. The I This This Additionally, if a Spanish notary has been involved in the transaction, be it due to a legal obligation or by agreement of the parties, the notary will make this declaration (Article 5(3)(b) Implementing Regulation).
The Spanish authorities have not always been consistent but tend to require these filings only in the case of direct acquisitions.
Are sanctions imposed if an ex-post declaration is not filed? There Articles 8 and 9 Act 19/2003 establish sanctions for failure to submit the statistical filing, as well as for untruthfulness, omission, or inaccuracy in the declaration, and for late submission.
Failure to declare transactions exceeding EUR 6,000,000 or, alternatively, untruthfulness, omission or inaccuracy in the data provided for transactions exceeding said amount, is considered a serious offense and is punishable by: (i) a fine of up to half of the value of the transaction, with a minimum of EUR 6,000; and (ii) a public or private reprimand.
Finally, late submission of the declaration, without prior action by the Administration, is punishable by: (i) a fine between EUR 150 and EUR 300, when the delay does not exceed six months; (ii) a fine between EUR 300 and EUR 600, when the delay exceeds six months.
Spanish law provides no criminal sanctions for breaches of these rules.
We are not aware of any case in which the Spanish FDI Authorities have imposed such fines for the failure to submit a statistical filing.
What is the statute of limitations?
In line with Article 11 Act 19/2003, the following infringements are subject to a statute of limitations of five years:
(i) Closing a transaction without submitting an ex-ante screening request;
(ii) Closing a transaction before obtaining authorization from competent authorities; and
(iii) Untruthfulness in the presented ex-ante filing.
The statute of limitations is three years for:
(i) Failure to submit a statistical filing for transactions exceeding EUR 6,000,000; and
(ii) Untruthfulness, omission or inaccuracy in the data provided in the statistical filing for transactions exceeding EUR 6,000,000.
The following infringements are subject to a statute of limitations of one year:
(i) Failure to submit a statistical filing for transactions under EUR 6,000,000;
(ii) Untruthfulness, omission, or inaccuracy in the data of an ex-post declaration filed for transactions under EUR 6,000,000; and
(iii) Late submission of a statistical filing, when there has been no prior action or request by competent authorities.
