Spain extends foreign investment control mechanism to 2024: Implications fo

The Spanish government has extended the application of this mechanism to certain investments made by residents in countries of the European Union (EU) or the European Free Trade Association (EFTA) other than Spain, as well as by Spanish entities whose ultimate ownership corresponds to residents in these territories (referred to as "Non-Spanish Europeans").

Furthermore, the definition of foreign direct investment for investors resident outside the EU and EFTA, or whose ultimate ownership corresponds to residents outside the EU and EFTA (referred to as "Non-European Investors"), has been modified. This modification clarifies that the concept of foreign direct investment is not limited exclusively to the acquisition of shares or participation in a Spanish company, but also includes the acquisition of control over assets or business units. 

It should be noted that these modifications are not due to the approval of the Royal Decree that regulates the Control Mechanism, whose draft was published in November 2021 and is still pending approval. However, the Control Mechanism does not prohibit foreign investment in Spain but is a mandatory and prior process to the closure of certain operations, based on reasons of security, public order, and public health. 

We would like to remind that the Control Mechanism incroporates in Spain the framework for foreing investment control provided for in EU legislation, in particular, Regulation (EU) 2019/452, which regulates the possibility for Member States to impose controls on foreign direct investments in the EU. 

It is important to bear in mind that the extension of the Control Mechanism until December 21, 2024, and the modifications to its definition, may affect foreign investment operations in Spain. 

Changes in the definition of foreign investment: 

In the recent modification of the Foreign Investment Control Mechanism in Spain, a change has been introduced in the definition of foreign direct investment for investors residing outside the EU and EFTA, or whose real ownership corresponds to residents outside the EU and EFTA (the "Non-European Investors"). Previously, foreign direct investment was understood to be limited exclusively to the acquisition of shares or stakes in a Spanish company. However, this definition has now been expanded to also include the acquisition of control over assets or business units, that is, the acquisition of all or part of a Spanish company. 

It is important to note that although the new wording is not entirely clear, according to the explanatory memorandum of the modification and the practical application of the Foreign Investment Control Mechanism to date, it can be understood that the reference to "part" of a Spanish company refers to its assets or a business unit. It should be noted that this amendment does not constitute a substantive change with practical implications, since the Foreign Investment Control Mechanism was already being applied to this type of operation. 

However, an interpretative doubt that may arise from this modification is that the reference to the acquisition of control over part of a Spanish company has not been included in the regulation of the Foreign Investment Control Mechanism applicable to Non-Spanish Europeans, extended until December 31, 2024. 

Impact of the extension on companies with the investments in the European Union (EU) or European Free Trade Association (EFTA) other than Spain: 

If your company has investment made by residents in countries of the European Union (EU) or in the European Free Trade Association (EFTA) other than Spain, the extension of the Foreign Investment Control Mechanism should not negatively affect your operations. The mechanism does not imply a prohibition on foreign investments in Spain but establishes a process of prior administrative authorization for certain investment operations in Spain, based on reasons of security, public order and public health. 

In any case, if you have any doubts about how the extension of the control mechanism could affect your company, at Gentile Law we are prepared to help you. 

Operations subject to the Control Mechanism:

According to the established by the Mechanism of Control of foreign investments, the following investments operations in Spain are subject to prior administrative authorization of the closing, not of the signature, and includes: 

• Direct or indirect acquisition of control of a Spanish company. 
• Directo or indirect acquisition of startegic assets in Spain. 
• Direct or indirect acquisition of any participation that allows significant influence in the management of a Spanish company that develops activities in sectors considered critical for security, public order, or public health. 
• Any other type of investment that, under applicable regulations, must be subject to prior authorization for reasons of security, public order, or public health. 

It´s important to consider that the application of the Mechanism of Control doesn´t imply a prohibition of foreign investment in Spain. Instead, it`s an obligatory and prior process to the closing of certain investment operations, based on reasons of security, public order, and public health. 

Prior administrative authorization: 

The administrative prior authorization is a necessary step in the Mechanism of Control of foreign investments in Spain. If an investment operation is subject to this mechanism, obtaining the administrative prior authorization before closing the operation is mandatory. This means that the investment operation cannot be carried out without the prior approval of the Spanish authorities. 

The role of the administrative prior authroization is to ensure that foreign investment does not negatively affect security, public order, or public health in Spain. The authorization is granted after the Spanish authorities have carried out a thorough analysis of the operation and have determined that there is no risk to national security or public interest. 

If you plan to carry out an investment operation in Spain and believe that it may be subject to the Mechanism of Control, it is important to contact a lawyer or advisor specialized in foreign investment law to obtain advice on the requirements and deadlines necessary to obtain the administrative prior authorization. 

Relationship between Control Mechanism and EU legislation: 

The Mechanism of Control of Foreign investments in Spain incorporates the framework for controlling foreign investments provided for in the European Union (EU) legislation. In particularly, it is based on the Regulation (EU) 2019/452, which regulates the possibility for Member States to impose controls on foreign direct investments in the EU. 

The objective of this framework is to protect security, public order and public health in the EU and its Member States. Therefore, the Mechanism of Control in Spain applies to direct foreign investments in Spanish territory that may affect these interests. 

Although the Mechanism of Control is a national regulation, its application is based on  EU legislation and is coordinated with other Member States. Additionally, Spanish authorities may request information or cooperation from other EU Member States in the framework of application of the Mechanism of Control. 

Marta Batall Eguidazu

martabatalla@gentile.law

+34 91 435 45 19