News of the new Royal Decree on foreing investments

The Royal Decree on foreign investments will come into force on September 1. What is the purpose of this regulation? To update a law that had become obsolete after the various amendments made in recent years, especially in an area that is already receiving so much attention in companies, such as the prevention of money laundering.

Specifically, and as the main novelty, this Royal Decree extends the regulation on the general regime for the liberalization of foreign investments in Spain.

Likewise, this Royal Decree on foreign investments seeks to adapt the current regulation to the world standards contained in the "Framework Definition of Foreign Direct Investment" of the OECD in its fourth edition of 2008.

Changes with respect to the former Royal Decree on foreign investments

Having explained the reasons for which it was decided to prepare and approve this Royal Decree on foreign investments, the most important new features are detailed below.

1. New exemption regime

The new Royal Decree on foreign investments establishes a series of new operations exempted from the general authorization regime. Among these operations are the following:

• Investments in strategic sectors, provided that the turnover of the acquired company does not exceed 5 million euros in the last closed accounting period.
• Transitory investments of short duration - hours or days - in which the investor does not have the capacity to influence the management of the acquired company because they are underwriters and underwriters of share issues and public offers for sale or subscription of shares. Where applicable, it is the end-investors who are subject to authorization. 
• Investments through the acquisition of real estate that is not assigned to any critical infrastructure or that is not indispensable and not susceptible to the provision of essential services. 

At the same time, a greater definition is provided of those operations that, as a consequence of the investor's profile, will be subject to the need for authorization. Among others, operations carried out by companies controlled by the government of a third country or those involving a serious risk of illegal or criminal activities stand out, on which this new regulation places emphasis on clarifying. 

2. Shortening of the deadline for resolving the authorization request

Another of the novelties introduced by the legislator is in relation to the deadline for resolving the request for authorization. A maximum term of 3 months is established to resolve this issue, which means a reduction of the term by half, which until now was 6 months. This term seemed too long for investors, therefore, it has been one of the most awaited and celebrated modifications.

3. Internal restructuring within a group and increases in shareholdings without change of control

In order to dispel any doubts that might be raised by the literal interpretation of Article 7 bis of Law 19/2003, which until now regulated this matter, the new Royal Decree on foreign investments confirms what has long been a widespread thought: internal restructurings that do not entail a change of control will not require authorization. The same applies to increases in shareholdings which, as long as they are carried out by a shareholder that already has a shareholding of 10% or more and do not entail a change of control, will not be considered direct investments for the purposes of this Royal Decree.

4. Further definition of strategic sectors

There are many terms referred to in Law 19/2003 in relation to the strategic sectors affected by the suspension of the liberalization regime for foreign direct investment in Spain. Some of these terms, such as "critical infrastructures", "critical and dual-use technologies" or "fundamental inputs", presented certain problems in practice due to their broad interpretation. The need for greater precision of these concepts was considered essential, and to a certain extent, although not in an excellent manner, the new Royal Decree on foreign investments comes to specify these terms offered by the Law.  

In particular, it provides a definition of critical inputs, considering as such the development and modification of software used in critical infrastructure operations in certain sectors, indispensable and irreplaceable inputs to ensure the integrity, security or continuity of activities affecting critical infrastructure or supplies of water, energy and priority raw materials, among others.

5. Ownership of the investment in Mutual Funds 

 Law 19/2003 also generated some uncertainty among investors acting under the figure of investment funds. For this very reason, the new Royal Decree on foreign investments has decided to settle this issue, attributing the ownership of the investment of this type of groups to the management company under two requirements: 

1. that the partners do not have access to inside information of the company, and  
2. who do not legally exercise political rights. Therefore, the management company will be legally obliged to request the authorization as the holder of the foreign investment.

Impact on foreign investors

As regards the effects that this new Royal Decree will have on foreign direct investments (whether foreign investment in Spain or Spanish investment abroad), it introduces several positive aspects. Especially on the procedural level, thanks to the introduction of a system whereby foreign parties intending to make an investment may carry out a voluntary consultation prior to requesting authorization for the operation, as well as the aforementioned reduction of the term for resolving the authorization.

Although it is true that several of the clarifications offered by the new Royal Decree were already being interpreted in this sense in practice, it is unquestionable that the legal protection that this new regulation will offer as of September 1, 2023 provides greater legal certainty for foreign individuals or companies wishing to invest in Spain.

Our team of commercial lawyers can advise you on this new regulation and how it may affect your business and investments. Contact them here.

Ignacio Méndez y Arturo Moya

M&A Mergers and Aquisitions Area