Foreign investment regime in Spain. How does it affect real estate transactions?

1. Since 2020, the foreign investment regime in Spain has become stricter

New rules regarding foreign investment were adopted in Spain in 2020 as consequence of the COVID-19 crisis. Also, in October that year, the Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investment into the Union entered into force.

Under these rules, Spain moved from a liberalised system, in which the need to obtain authorisation was very exceptional, to a much more restrictive system, in which any operation involving foreign investment (even from within the EU) must be thoroughly examined before it can be concluded that it does not require authorisation.

There are currently two main regulations including the rules on foreign investment in Spain:

(a) Law 19/2003 of 4 July 2003 on the legal regime of capital movements and foreign economic transactions (Spanish Law on Foreign Investment).

(b) Royal Decree 571/2023 of 4 July in foreign investment (Spanish Implementing Regulation on Foreign Investment). For more information on this Royal Decree, see our note on New developments in Spain´s foreign direct investment regime.

2. This strengthening of measures mainly concerns the FDI regime, but reporting obligations have also been revised

Spain's foreign investment obligations can be divided in two distinct blocks:

(a) A mandatory and suspensory notification to the Spanish FDI authorities in certain cases (the so-called FDI regime). This regime may apply to real estate transactions and is something to bear in mind.

(b) Reporting requirements for administrative and statistical purposes. These reporting requirements are relatively common in real estate transactions.

Each of these blocks and their implications regarding real estate transactions are considered below.

3. The FDI regime

3.1 There are cases in which Spanish FDI regime affects real estate transactions

In principle, the acquisition by foreign investors of real estate properties (buildings or land) is out of the scope of the Spanish FDI regime. However, there is an exception: the acquisition by foreign investors of real estate properties attached to a critical infrastructure or not substitutable for the provision of essential services should be notified in the terms which will be analysed in the next section.

In addition, if the transaction does not concern real estate property alone but the acquisition of a real estate business (i.e. a business with a market presence, to which a market turnover can be clearly attributed), through the acquisition of shares or a branch of activity, the FDI regime may apply even if the business is not directly related to critical infrastructure or essential services.

Finally, the Spanish Implementing Regulation on Foreign Investment (Section 20) establishes some special rules for the acquisition of properties for a diplomatic purpose by non-EU Member States.

Therefore, there are three types of real estate transactions that may require pre-closing clearance, and which are analysed separately below:

(a) acquisition by foreign investors of real estate properties (buildings or land) attached to critical infrastructure or which are key for the provision of essential services;

(b) acquisition by foreign investors of a real estate business under certain conditions; and

(c) acquisition by non-EU Member States of real estate properties for diplomatic purposes.

3.2 Acquisition by foreign investors of real estate properties (buildings or land) attached to critical infrastructure or which are key for the provision of essential services

As mentioned above, the acquisition by foreign investors of real estate properties attached to a critical infrastructure or not substitutable for the provision of essential services is subject to pre-closing clearance.

The Spanish FDI regime considers foreign investors:

(a) The residents from outside the EU and EFTA space (including indirect acquisitions through a Spanish vehicle when more than 25% of the capital or voting rights of the Spanish vehicle or its control may be attributed to the foreign resident).

(b) The residents from inside the EU and EFTA space (even if acting through a Spanish branch) but only until 31 December 2024 and provided they invest in listed companies or more than €500 million in private companies.

Regarding the investment in real estate properties attached to critical infrastructures or not substitutable for the provision of essential services, non-EU and non-EFTA residents must apply for authorisation regardless of the amount of the investment, and EU and EFTA residents only if they are investing more than €500 million.

For the purposes of assessing whether a real estate property (building or land) is attached to a critical infrastructure, the latter consists of infrastructures whose disruption or destruction would have a serious impact on essential services, and which are listed as such in the Spanish Catalogue of Critical Infrastructures. The full catalogue is kept as confidential information by the Secretariat of State for Security within the Spanish Department of Domestic Affairs. However, operators of critical infrastructure are aware of their inclusion in the list and must therefore disclose this fact during the due diligence process prior to the acquisition.

The sectors in which critical infrastructure can be found are very diverse. However, to give an indication of the type of assets we are talking about, here are some of them:

(a) energy (e.g., large power stations, electricity and gas transmission and distribution networks, regasification plants);

(b) transport (airports, ports, intermodal rail facilities; traffic control, public transport networks, aerospace facilities, their surroundings);

(c) water (dams, storage, treatment, and networks);

(d) health (hospitals and laboratories);

(e) the surroundings of defence installations, etc.

For more information on the definition of critical infrastructure and on the Spanish Catalogue of Critical Infrastructure, see Law 8/2011, of 28 April, establishing measures for the protection of critical infrastructure and Royal Decree 704/2011, of 20 May, approving the regulation on the protection of critical infrastructure.

Unlike critical infrastructure, real estate properties that are key for the provision of essential services are not included in a catalogue. Their definition is much vaguer and includes everything that is indispensable and non-substitutable for the maintenance of basic social functions, the health, safety, security, social and economic well-being of citizens, or the effective functioning of Spanish institutions and public administrations. Therefore, even if the target of acquisition is not attached to a critical infrastructure, the need to apply for an authorisation should be carefully analysed if the real estate property in question is necessary for:

(i) strategic connectivity services;

(ii) water supply;

(iii) energy supply (hydrocarbons, renewable gases, biofuels, or electricity);

(iv) the supply of strategic raw materials;

(v) telecommunications services;

(vi) transport services;

(vii) health services;

(viii) food security;

(ix) research facilities; or

(x) the financial or tax system.

In case of doubt, it is possible to submit a consultation to the Spanish Directorate General of International Trade and Investment within the Spanish Department of Economy, Trade and Business.

However, please note that until a reply is received, the investor cannot request authorisation for the investment, so this consultation may delay the completion of the investment for up to 30 working days (or even more if additional information is required by the Directorate). The procedure to file a consultation is set out in section 9 of the Spanish Implementing Regulation on Foreign Investment.

The application for both the consultation and the request for authorisation should be submitted to the electronic registry of the Spanish Ministry of Economy, Trade and Business and the entire process is carried out electronically.

As regards requests for authorisation, the decision will be taken by:

(a) the head of the Directorate to which the application has been submitted, if the amount of the investment is equal to or less than €5,000,000; or

(b) the Council of Ministers in all other cases.

The maximum time limit for the adoption and notification of the decision is three months. However, requests for information may suspend the deadline. If no express decision is issued within this period, the transaction is deemed not to have been authorised.

If the authorisation is refused or subject to conditions or commitments, it is possible to appeal for a reconsideration or file a direct contentious-administrative appeal.

If the acquisition is authorised, it must be completed within the deadline specifically indicated in the authorisation or, if the authorisation did not include a deadline, within six months.

All of the above can be found in section 6 of Spanish Law on Foreign Investment and in sections 11 and 14 of Spanish Implementing Regulation on Foreign Investment.

3.3 Acquisition by foreign investors of a real estate business

In this section, we refer to the acquisition by a foreign investor of a real estate business (i.e., a business with a market presence, to which a market turnover can be clearly attributed), through the acquisition of shares or a branch of activity. We do not refer below to the acquisition of real estate property alone (buildings or land), for which the rules have been detailed in the previous section.

We will refer below separately to the acquisition by the two different types of foreign residents:

(a) Residents from outside the EU and EFTA space

For an authorisation to be required, three requirements must be met cumulatively by the investment:

(i) It must come, directly or indirectly, from a foreign investor from outside the EU and EFTA space.

(ii) It must imply the acquisition of a significant equity interest (i.e., a participation equal to or greater than 10% of the share capital of the Spanish company) or be executed through a corporate agreement, transaction or contract granting control of all or part of the Spanish company.

(iii) It must fall within the scope of the objective restriction (protected strategic sectors) or, alternatively, the subjective restriction.

(A) The objective restriction is triggered when the investment is in a real estate business that also plays a role in the following strategic sectors:

• critical infrastructure;
• critical and dual-use technologies, key technologies for industrial leadership and capacity building, and technologies developed under programmes and projects of particular interest to Spain;
• the supply of critical inputs;
• sectors with access to sensitive information; and
• the media.

Section 15 of the Spanish Implementing Regulation on Foreign Investment clarifies on the scope of each sector with reference to specific activities.

(B) The subjective restriction is triggered if the investor qualifies as "risky" regardless of the sector in which the target operates, i.e.:

• If the investor is directly or indirectly controlled by the government, including public bodies or the armed forces, of a third country. Such direct or indirect control may be articulated through significant funding, including subsidies.
• If the foreign mediate or immediate investor has made investments or participated in activities in sectors affecting security, public order, and public health in another Member State.
• If there is a serious risk that the foreign mediate or immediate investor engages in criminal or illegal activities affecting public security, public order, or public health in Spain. In order to ascertain this risk, account shall preferably be taken of final administrative or judicial sanctions imposed on the investor in the last three years, in particular in areas such as money laundering, the environment, taxation or the protection of sensitive information.

The procedure for applying for authorisation, the deadlines and appeals are the same as those mentioned in the previous section ‎3.2. In these scenarios, it is also possible to submit a consultation to the Directorate.

(b) Residents from inside the EU and EFTA space

The treatment of investments by EU/EFTA residents is very similar to that of investments by non-EU/EFTA residents in "protected strategic sectors". However, unlike non-EU/EFTA residents, the authorisation regime for EU/EFTA residents is temporary (authorisation will no longer be required in January 2025) and its scope is limited to large investments (in listed companies or where the investment exceeds €500 million).

On the other hand, EU/EFTA residents are not considered as risk investors in any case (i.e., the subjective restrictions referred to above do not apply to them). If they invest outside the "protected strategic sectors", they do not need to seek authorisation.

3.4 Acquisition by non-EU Member States of real estate properties for diplomatic purposes.

Direct or indirect investment in Spain by non-EU countries for the acquisition of real estate intended for their diplomatic or consular representations is subject to prior authorisation unless there is an agreement for its reciprocal liberalisation. This is authorisation is regulated by section 20 of the Spanish Implementing Regulation on Foreign Investment.

Applications for authorisation shall be submitted to the competent administrative body of the Spanish Department of Foreign Affairs, European Union and Cooperation and decided by the Council of Ministers.

No consultation procedure is foreseen and the maximum time limit for resolution will be three months.

3.5 If the required authorisation is not requested, the transaction will have no legal validity and substantial penalties may be imposed

If the express mandatory authorisation is not requested or obtained, the transaction will have no legal validity or effect. Furthermore, if the investment has been instrumentalised through a share deal, the investor will not be able to exercise its political and economic rights in the Spanish target.

However, a subsequent express authorisation could legalise the investment.

In any case, an investment made without prior express authorisation could result in a penalty, including a fine of up to the amount of the investment made.

This is set out in sections 7bis(5), 8(2)(b) and 9(2) of Spanish Law on Foreign Investment and section 11(a) of Spanish Implementing Regulation on Foreign Investment.

4. Reporting requirements for administrative and statistical purposes in real estate transactions

4.1 Real estate transactions carried out by foreign investors are in many cases subject to reporting requirements

As mentioned in previous section ‎2, the second block of obligations arising from the Spain Law on Foreign Investment are reporting requirements for administrative and statistical purposes. The obligation to report for statistical and administrative purposes is independent of the need to obtain prior authorisation for FDI purposes; the two obligations are compatible.

4.2 Type of reportable real estate transactions and applicable forms

For administrative and statistical purposes, the following transactions, onerous or lucrative, involving real estate in Spain and carried out by a non-resident must be declared:

(a) Investments and disinvestments of more than €500,000 in Spanish real estate (including the acquisition of ownership, usufruct, bare ownership, time-sharing rights, quotas of ownership or other rights, etc.). The €500,000 threshold applies separately to each property acquired (i.e. if the investor acquires two properties for €300,000, there is no reporting requirement, even if the acquisitions are made simultaneously). These investments are reported on Form D-2A, one form for each property acquired over €500,000. Disposals are reported on Form D-2B. For the purposes of the disinvestment, the threshold of € 500,000 refers to the selling price, regardless of what the price of the acquisition was.

(b) The incorporation or liquidation of Spanish real estate companies (listed or unlisted), or the acquisition or transfer of shares, quotas, convertible instruments or voting rights in Spanish real estate companies (quoted or not) when an equity interest equal to or greater than 10% of the share capital or voting rights is held or attained. Once the 10% threshold is reached, the investor must report any new investment in the same company. These transactions will be reported on Forms D-1A (investments) and D-1B (divestments).

(c) The acquisition of quotas or of rights to acquire quotas in real estate investment funds representing an interest equal to or greater than 10% on the assets or capital of the fund, when the fund's management company is established in Spain. These transactions will be reported by the management company on Forms D-1A (investments) and D-1B (divestments).

(d) Contributions to the net worth of a Spanish real estate company by non-residents with a shareholding of 10% or more. These transactions will be reported on Forms D-1A (investments) and D-1B (divestments).

(e) The incorporation or increase in the economic allocation in Spain of branches of non-resident real estate companies. These transactions will be reported on Forms D-1A (investments) and D-1B (divestments).

(f) Financing of Spanish real estate companies or branches by companies of the same group through deposits, credits, loans, negotiable securities, or any other debt instrument, provided that the financing meets two requirements: (i) its amount exceeds €1,000,000; and (ii) its repayment term is more than one year. The granting of financing will be reported within one month on Form D-1A. The divestment shall be recorder yearly on Form D-1B which will contain information on all the repayments done during the year and which should be filed within one month from the date of the last repayment made.

(g) The incorporation or participation in real estate joint ventures in Spain (through cuentas en participación, uniones temporales de empresa, agrupaciones de interés económico or comunidades de bienes) when two conditions are met: (i) the foreign investor's percentage in the joint venture is at least 10% and (ii) the shareholding exceeds €1,000,000. These transactions will be reported on Forms D-1A (investments) and D-1B (divestments).

In addition, companies resident in Spain, branches in Spain of non-residents and management companies of Spanish collective investment schemes and closed-ended collective investment schemes with foreign participation (hedge funds, real estate funds, venture capital funds, alternative investment funds and others of a similar nature provided they are incorporated as SICAVs)) must file an annual report with the Foreign Investment Registry on the performance of the investment. This report is mandatory for branches if they have an allocation or net assets of more than €3,000,000 and for companies if they are dominant in a group or have a share capital or net assets of more than €3,000,000, provided that in both cases the non-resident investor's interest in the share capital or in the total voting rights is equal to or greater than 10%. This annual report will include information on the reinvestment of profits. The annual report is filed on Form D-4 (Annual Memorandum of Foreign Investment in Spain), which must be filed within seven months of the end of the financial year (or within the first seven months of the year in the case of collective investment schemes) and must be accompanied by the annual accounts.

4.3 The concept of non-resident for reporting purposes is broad

The reporting obligations applies to the following non-residents:

(a) individuals with their habitual residence in foreign territory (including Spaniards);

(b) foreign diplomats and foreign personnel working in embassies, consulates, and international organisations in Spain;

(c) legal entities with registered offices abroad (inside or outside the European Union), as well as public entities under foreign sovereignty; and

(d) branches and permanent establishments abroad (inside or outside the European Union) of natural or legal persons resident in Spain.

The change of registered office of Spanish companies to another country or the transfer of residence of individuals who were previously resident in Spain will mean that the investments that these companies or individuals had in Spain will be transformed into foreign investments in Spain. In these cases, it is also compulsory to file foreign investment declarations.

4.4 Reporting requirements increase when the investment originates in a non-cooperative jurisdiction

With some exceptions, the declaration is made after closing and within one month. However, investments with an immediate or ultimate origin in non-cooperative jurisdictions have their own rules.

Such investments from non-cooperative jurisdictions must be declared:

(a) ex ante, if the foreign participation exceeds 50% or, in the case of real estate, if more than €500,000 is invested; and

(b) ex post within one month without limit, i.e. irrespective of the amount of the investment or stake held or acquired ((the thresholds referred to in the previous section ‎4.2 do not apply if the investment comes directly or indirectly from a non-cooperative jurisdiction).

These investments coming from non-cooperative jurisdictions are reported ex ante on forms DP-1 (prior foreign investment from non-cooperative jurisdictions in unlisted companies, branches, and other forms of investment) and DP-2 (prior foreign investment from non-cooperative jurisdictions in real estate).

Even if a prior declaration has been made, it is still necessary to submit the subsequent declaration.

At the time of writing, the list of non-cooperative jurisdictions includes the following (see the annex to Order HFP/115/2023 of 9 February): Anguilla, Bahrain, Barbados, Bermuda, Dominica, Fiji, Gibraltar, Guam, Guernsey, Isle of Man, Cayman Islands, Falkland Islands, Mariana Islands, Solomon Islands, Turks and Caicos Islands, British Virgin Islands, Virgin Islands of the United States of America, Jersey, Palau, Samoa, as regards the harmful tax regime (offshore business), American Samoa, Seychelles, Trinidad and Tobago and Vanuatu. However, this list is regularly updated, and double-checking is always recommended.

4.5 If the transaction is carried out before a Spanish notary, it is the notary who submits the form

Investment reporting is always made electronically through a programme called AFORIX, developed by the Foreign Investment Registry of the Spanish Department of Economy, Trade and Business. For filing the form, the foreign investor needs a certified electronic signature approved by a provider recognised by the Spanish Department.

The general rule is that the declaration is made by the non-resident investor itself, and this is the case for all ex-ante declarations (see previous section ‎4.4), However, for ex post declarations, if the transaction is carried out before a Spanish notary, it is the notary who, in collaboration with the Spanish General Council of Notaries, submits the relevant form to the Foreign Investment Registry. In any case, the investor is responsible for filling in the form and providing the notary with the documents certifying the transaction.

Regarding the acquisition of quotas or of rights to acquire quotas in real estate investment funds, the declaration is never made by the non-resident investor himself. The obligation lies with the management company (or, where applicable, the notary).

4.6 Failure to comply with reporting requirements results in fines up to half the amount of the transaction

Failure to report transactions in excess of €6,000,000, or the lack of veracity in such reporting, is considered a serious breach and is punishable by a fine of up to half the amount of the transaction (with a minimum of €6,000).

Failure to report transactions below €6,000,000 is punishable by a fine of up to a quarter of the amount of the transaction (with a minimum of €3,000).

Late filing of the relevant form is considered a minor offence and is punishable by a fine of between €600 and €300, if more than six months have elapsed, and with fines between €150 and €300, if less than six months have elapsed.

5. Our services

We have been actively involved in some of the most significant transactions that have been notified following the changes to the foreign investment regime. We also have many years of experience in assisting clients with foreign investment reporting. Please do not hesitate to contact us if you have any doubts or questions arising from the above. We will be happy to assist.

The intellectual property rights of this note belong to Ashurst Madrid and its reproduction, distribution, transfer, or any other type of use without prior consent is prohibited.