Main novelties on the mechanism for controlling foreign investment in Spain, introduced by Royal Decree Law 34/2020 of 17 November

On 18 November 2020, Royal Decree-Law 34/2020 of 17 November on urgent measures to support business solvency and the energy and tax sector (the "RDL") was published in the Official State Gazette. This regulation modifies the regime of subjecting certain foreign investments in Spain to administrative authorisation or the mechanism for controlling foreign direct investments, which was introduced by the Spanish government in March 2020 due to the health crisis caused by Covid-19[1] (the "Investment Control Mechanism").

Some of the innovations introduced by this RDL are of a temporary nature, being applicable, in principle, until 30 June 2021. These amendments entered into force on 19 November 2020.

The main developments related to the Investment Monitoring Facility are set out below:

1. Amendment to the definition of foreign direct investment

The previous definition of foreign direct investment is generally modified in order to link the criterion of acquisition of control to the provisions of Law 15/2007, of 3 July, on the Defence of Competition ("Law 15/2007"), which establishes a broader criterion for determining the existence of control than the traditional one in Article 42 of the Commercial Code. After the new wording, foreign direct investment subject to the Investment Control Mechanism will be considered to be those investments made by a person whose beneficial owner does not reside in the European Union (EU) or the European Free Trade Association (EFTA)[2], in which either of the following two criteria are met:

(i) acquisition of a stake equal to or greater than 10% of the share capital of the Spanish company; or

(ii) acquisition of control of that company in accordance with the criteria of Article 7.2 of Law 15/2007.

The exception of the prior authorisation regime for investments of less than EUR 1 million, which was established on a transitional basis by Royal Decree Law 11/2020, is maintained, as is the power of the Government to establish by regulation the amounts to which the exception extends. Likewise, and as a new development, the RDL empowers the Government to limit the definition of the sectors subject to the foreign investment control regime.

2. Transitional regime until 30 June 2021 for investments by EU and EFTA residents

On a temporary basis, until 30 June 2021, the RDL provides that the Investment Control Mechanism will also be applied to foreign investments in companies listed in Spain or unlisted (in the latter case, provided that the value of the investment exceeds 500 million euros) made by investors whose beneficial owner resides in other EU and EFTA countries.

Until now, these investments were exempt from administrative authorisation, as they were not considered as foreign direct investments. The RDL applies criteria equivalent to those currently laid down to determine what is meant by a beneficial owner for these purposes (ultimately possession of more than 25% of the investor's capital or voting rights or control, by other means, of the investor).

3. Extension of some of the sectors subject to the authorisation scheme

Some additional cases are added to the list of sectors subject to the Investment Control Mechanism listed in Article 7 bis of Law 19/2003. In particular, a reference is added to technologies developed under programmes and projects of particular interest to Spain and, in relation to the supply of key inputs, reference is added to strategic connectivity services.

4. Changes in the case of investments subject to administrative authorisation

Modifications have been made to some of the cases of foreign investment provided for in Article 7 bis.3 of Law 19/2003, which provides that certain cases of direct foreign investment are subject to the Investment Control Mechanism, regardless of whether the criteria for acquisition of 10% of the capital or control of the Spanish company are met:

• The definition of an investor controlled directly or indirectly by a foreign government is modified in order to link such control to the criteria of Law 15/2007, in line with the new concept of foreign investment.
• In relation to investors who may carry out criminal or illegal activities, the reference to the existence of administrative or judicial proceedings against the foreign investor is replaced by the more indeterminate reference to the existence of a serious risk that the foreign investor will carry out criminal or illegal activities affecting public safety, public order or public health in Spain.

[1] Royal Decree-Law 8/2020 of 17 March on extraordinary urgent measures to deal with the economic and social impact of Covid-19 amended Law 19/2003 of 4 July on the legal regime of capital movements and economic transactions abroad and on certain measures to prevent money laundering ("Law 19/2003"), by introducing a new Article 7 bis, so that the regime of liberalisation of certain foreign direct investments in Spain was suspended. Subsequently, Royal Decree-Law 11/2020 of 31 March adopting additional urgent measures in the social and economic field to deal with Covid-19 and Royal Decree-Law 34/2020 of 17 November on urgent measures to support business solvency and the energy sector and in the field of taxation have modified this regime of compulsory administrative authorisation prior to certain foreign direct investments in Spain.

[2] Switzerland, Norway, Liechtenstein and Iceland.