Spain brings in long-awaited update of foreign direct investment laws

The Royal Decree 571/2023 of 4 July on foreign investments (RD 571/2023), which will become effective on 1 September 2023, approves the regulatory implementation of Law 19/2003 of 4 July on the legal regime of capital movements and economic transactions abroad and on measures to prevent money laundering (Law 19/2023).

This is a long-awaited regulation since the inclusion, in 2020, of the controversial article 7 bis in Law 19/2023, which suspended the liberalisation of foreign direct investments (FDI) in Spain and required prior administrative authorisation to carry out foreign investments. 

There were a range of considerations regarding article 7 bis of Law 19/2003 following the suspension of the liberalisation of FDI in Spain, as a result of the Covid-19 pandemic in March 2020. Now, in this article we will focus on the new measures introduced as part of the FDI authorisation mechanism, although RD 571/2023 also modifies the procedures for declaring foreign investments in Spain and Spanish investments abroad and revokes the previous guidelines outlined in RD 664/1999.

Main new features of the FDI authorisation regime of article 7 bis of Law 19/2003

Scope of application

The following transactions are excluded from the obligation to obtain FDI authorisation:

• Internal restructuring within a group. 
• Increases in shareholdings by investors who already hold 10% of the share capital or voting rights, as long and they do not involve a change of control of the Spanish company invested. 
• Transactions with low or no impact on the protected legal assets, in accordance with the criteria of article 17 of the RD 664/1999 that governs specific exemptions for investments in the energy sector and other strategic sectors, provided that they meet specified requirements.
• Transactions carried out by vehicles through which public funds are invested, if their investment policy is independent and is without political influence from a third country.

Sections 2 and 3 of article 7 bis of Law 19/2023, which establishes objective and subjective criteria for determining when a foreign investment is subject to the prior authorisation mechanism, are regulated. In particular:

• Objective criteria: Criteria is established to allow determining the strategic sectors identified in section 2 of article 7 bis. Specifically, it defines critical and dual-use technologies, key technologies for industrial leadership and industrial capacity, technologies developed under programmes and projects of particular interest to Spain, and companies with access to sensitive information, in all cases, by referring to the definitions contained in the applicable European sectoral regulations. The concept of critical inputs is also developed.
• Subjective criteria: Section 3 of article 7 bis specifies the rules that determine when a foreign investor is subject to the FDI authorisation regime regardless of the sector in which it invests.

When an investor is an investment fund, the criterion that the holder of the foreign investment is the management company is given effect, provided that the shareholders or beneficiaries of the fund do not legally exercise their political rights or have access to inside information.

Exempt investments

A list of generally exempt investments is also provided, depending on the sector in which the investee company operates. In particular, the following are exempt:

• in the energy sector, transactions where the company (i) does not engage in regulated activities, (ii) does not become a dominant operator in the market, and (iii) meets other quantitative requirements based on the specific type of energy transaction;
• in the infrastructure sector, acquisitions of real estate not assigned to critical infrastructure or that are not indispensable or not substitutable for providing the services.
• for other sectors, investments in companies with a turnover of less than €5 million in the last accounting year. However, there are exceptions to this rule that limit the scope of this exemption. For instance, companies that have developed technologies under specific programmes and projects of particular interest to Spain, certain electronic communications operators, research activities, and mineral deposits of strategic raw materials.
• transitory investments, that is, those that are for a short duration and in which the investor does not have any influence over the management of the acquired company –  in particular, this includes transitory acquisitions made by underwriters of share issues and public offers for the sale or subscription of shares are mentioned.

Surprisingly, RD 571/2023 fails to mention the provisional limit of €1 million per transaction. This threshold exempted the FDI from the requirement to submit it to the administrative authorisation regime, as per the second transitional provision of Royal Decree-Law 11/2020. It remains unclear whether this limit has been implicitly abolished, since the regulatory implementation of article 7 bis is approved without provision to this regard.

Procedural aspects

• The deadline for resolving all authorisation requests is reduced from 6 to 3 months. However, the authority responsible for authorising the transaction varies depending on the transaction amount: up to €5 million, the Directorate-General for International Trade and Investment (Dirección General de Comercio Internacional e Inversiones (DGCII)), and above €5 million, the Council of Ministers.
• The absence of a response from the authorities implies the rejection of the application. The authorities may request more details, which will suspend the countdown for the decision. Failure to provide further information will result in the application being withdrawn.
• The voluntary consultation procedure is regulated, but, because it had been already implemented by the DGCII, it lacked any legal basis coverage. This procedure is voluntary and is addressed to the DGCII for obtaining a confidential and binding answer within a maximum of 30 working days, with a prior positive outcome from the Foreign Investment Board (Junta de Inversiones Exteriores). The answer concerns whether or not a specific operation needs to be submitted for authorisation. During the 30 days, the possibility of applying for authorisation is suspended. Furthermore, additional information may be requested, which suspends the calculation of this period.
• The simplified procedure for transactions involving less than €5 million, which was provided in the second transitional provision of Royal Decree-Law 11/2020 of 31 March and allowed for completion within 30 working days, is abolished.

Standard authorisation regime

• The effects of the failure to request prior authorisation are reiterated and reinforced since "investments carried out without the necessary authorisation will be invalid and legally ineffective until they are legalised". Foreign investors will not be able to exercise their political or economic rights in the Spanish company until the required authorisation is obtained. Any breach of RD 571/2023 will also be subject to the sanctions provided in Law 19/2003.
• As a general rule, authorised investments shall be executed within the period specified in the authorisation or within 6 months if no deadline is provided. Failure to invest within this period will result in the authorisation becoming null and void, unless an extension is granted through the appropriate procedures.
• If the terms of an authorised investment change, then the competent authority that processed the application must be notified. The investment must be resubmitted for prior approval if the changes are deemed substantial (the previous consultation procedure may be used to determine their substantiality).
• It will also be possible to authorise transactions subject to conditions determined by the competent authority. 
• It is clearly stated that the information shared during the authorisation process is confidential.

Further transaction rules

• When two or more foreign investment transactions take place within two years between the same parties, they will be treated as a single transaction carried out on the date of the last transaction.
• Investment transactions carried out by agreement between two or more investors to exercise joint control over the investment object require a single application from all of them.
• The DGCII is responsible for informing the National Securities Market Commission of any potential administrative authorisation required for "acquisitions resulting from a public offer to buy, sell or subscribe to shares traded on a regulated market in Spain, (…) so that the offeror may include this information in the documentation that may need to be circulated regarding the offer."
• The notary who becomes aware of a transaction subject to prior authorisation needs to inform the investor of this requirement.

Osborne Clarke comment 

RD 571/2023 seeks to provide more clarity and legal certainty in the application of the FDI authorisation mechanism of article 7 bis of Law 19/2003 by defining the strategic sectors and investor profiles that require prior administrative authorisation for foreign investments in Spain. This is done with the aim of preserving and protecting national security, health, and public order.

Without prejudice to this aim, the broad language used in RD 571/2023 means there is still significant decision-making left to the competent authorities, which may generate uncertainty. Therefore, it is essential to pay attention to the criteria applied by the DGCII in the cases that it has resolved.