On July 5, 2023, the Spanish Government approved further regulations (Royal Decree 571/2023) governing foreign direct investments (FDI) in Spain. The new regulations bring a number of changes and certainly some clarity to the existing, sometimes unclear, 2020 FDI screening mechanism, which expanded control on foreign investments in response to the COVID-19 pandemic. 

The new regulation came into force on September 1, 2023 and apply to applications filed after that date. Any existing application as of that date will be decided under the previous rules.

Overview of the existing FDI screening mechanism

The screening mechanism set out under FDI law does not prohibit foreign investments in Spain; rather it is a mandatory authorization procedure to be carried out prior to closing specific transactions in Spain. The body responsible for granting the authorization is either the Spanish Council of Ministers or the FDI authority itself, depending on whether the investment value is greater than €5 million.

Broadly speaking, such authorization procedure is required in respect of investments made by non-EU/EFTA residents and EU/EFTA residents beneficially owned by non-EU/EFTA residents, where:

• The investor is (i) directly or indirectly controlled by the government or the armed forces of a non-EU/EFTA third country; or (ii) has made investments or participated in activities affecting national security, public order, and public health in another EU Member State; or (iii) has engaged in illegal or criminal activities affecting public security, public order or public health in Spain (subjective criteria); OR
• The investment is made into certain sensitive sectors/business activities in Spain, including, inter alia, critical infrastructure, critical and dual-use technologies, supply of critical inputs (such as energy), media or other sectors with access to sensitive information, in particular, personal data, in all cases regardless of the characteristics of the investor (objective criteria). 
• And when, as a result of the investment, the investor reaches a stake equal or greater than 10% of the share capital of a Spanish company or acquires effective control over a Spanish company. This stake may be lower for investments in companies engaged in national defense and security and explosives, among others.

The Spanish FDI legal regime also provides for a specific temporary screening mechanism for certain investments made by EU/EFTA residents. 

Gun jumping any FDI screening mechanism (i.e. closing a foreign investment without FDI clearance/authorization) will render the transaction invalid and without any legal effect until (and if) the required authorization is obtained. This means that the economic and voting rights of the foreign investor are suspended. Material fines could also be imposed.

Main changes introduced to the existing FDI framework by the new regulations

Among other aspects, the new FDI regulations provide clarity as to which transactions are caught by the FDI regime, in particular:

• If the threshold that triggers FDI screening (i.e. acquiring more than 10% or control of a qualifying Spanish target) has already been reached, a new filing is only required where further stake-building results in a change of control.
• Investors owned by other non-EU/EFTA governments will not be considered “state-controlled investors” if their governance and operation internal rules show that they are focused solely on maximizing profitability and operate without any political interference.
• Limited partners in a fund will not be deemed as the beneficial owners of an investment if they do not hold governance rights and do not have access to information regarding the target beyond what is publicly available. In such cases, only the general partner will be considered the beneficial owner.
• Changes to the registered office of legal entities, or changes to the residence of individuals, will qualify as an investment abroad or a foreign investment in Spain.
• The new rules set out a number of cumulative tests to determine what investments in the energy sector will be considered sensitive, thus clarifying and simplifying the existing FDI framework for investments in this specific sector.
• Investments in real estate will generally not be considered strategic unless they are linked to critical infrastructure or indispensable and irreplaceable for the provision of essential services.
• For all the other so-called sensitive sectors/business activities, the new rules exempt from FDI screening all investments in companies whose annual turnover is below €5 million, with some exceptions affecting investments made in (i) companies that have developed technologies under programs and projects of particular interest to Spain, (ii) specific electronic-communications operators; and (iii) companies undergoing investigation or exploitation of strategic raw-materials mines.
• Lastly, internal corporate restructurings and purely temporary investments, meaning short-term investments in which the investor lacks the ability to exercise influence over the target company’s management, are also exempted from FDI screening.

Also worth noting are the following changes to the existing FDI framework:

• Legal term: The legal term for issuing decisions in relation to the FDI screening mechanism is reduced from 6 to 3 months. If no decision is issued within said term, the FI authorization request is deemed to be rejected.
• Voluntary pre-filing consultation procedure: the new FDI regulations include a new consultation procedure to confirm whether doubtful investments are subject to an FDI screening mechanism. Consultations must be answered within 30 business days being the resolution biding for the FDI authority.
• The existing fast-track screening mechanism for investment below €5million is removed: until the new regulation, there existed a 30-business-day fast-track screening mechanism for investments below €5 million, which is now removed. All screening mechanisms are now subject to the three-month legal term mentioned above.

Although the new FDI regulations shed some valuable light for the interpretation and enforcement of the existing FDI framework in Spain, some key concepts -such as the definition of investment or the delimitation of the so-called sensitive/critical sectors- would still benefit from additional guidance.