Much has been written about the well-known Royal Decree 571/2023 of 4 July on foreign investment and the State's veto authority to limit certain foreign investments in Spain. However, said Royal Decree, which entered into force on 1 September 2023, also contains something that has gone unnoticed by many legal practitioners and that may be quite relevant to intra-group financing transactions. We are referring to the obligation to report to the Ministry of Industry, Trade and Tourism certain financing transactions carried out within the same group.
1.WHAT MUST BE REPORTED?
Pursuant to Articles 4 and 7 of the aforementioned Royal Decree, the financing of Spanish companies or branches by companies of the same group in the form of deposits, credits, loans, negotiable securities, or any other debt instrument, where the amount exceeds one million euros and the repayment period exceeds one calendar year, must be notified to the Ministry of Industry, Trade and Tourism. The same applies to financing granted by Spanish companies to companies or branches not established in Spain.
The literal wording of these provisions raises many doubts. First of all, what entities does the wording of this rule include? When simply referring to ‘Spanish companies’, we understand that the Royal Decree would refer to companies established in Spain; when it mentions ‘branches’, we would find that it refers to branches of foreign companies; when it speaks of ‘groups’, it would appear to refer to subsidiaries of groups where the parent company is a foreign company and, when it refers to ‘non-residents’, we assume that it refers to any foreign company... But this wording is actually quite confusing and should therefore be clarified.
Moreover, what companies would be considered to be in the ‘same group’ for the purposes of the obligation to notify the financing transaction? The most reasonable answer, in the absence of an express definition in this regard in the Royal Decree and its necessary implementing regulations, would be to resort to the subsidiary definition provided in the long-established Article 42 of the Spanish Code of Commerce.
The Royal Decree also does not specify whether the €1 million threshold should be considered on an individual or aggregate basis. However, it is reasonable to consider it as an aggregate amount, as to avoid attempts to fraudulently circumvent the law, as would occur if successive financing transactions below the legal threshold were permitted for the purpose of avoiding the application of the Royal Decree.
As can be seen, the Royal Decree is not very clear on some fundamental and capital aspects, so we will have to wait for the promised implementing regulations to be drafted to gain more certainty on the matter.
Finally, it is interesting to point out how Spanish lawmakers have included this reporting obligation on intra-group financing in a Royal Decree that was, in theory, intended to control foreign investment. Who knows if lawmakers are simply trying to avoid that a non-resident may capitalise their credits in the future and, therefore, participate in a company established in Spain without having to report the investment as it does not exceed the statutory thresholds…
2.WHICH PARTY IS OBLIGED TO REPORT THE FINANCING TRANSACTION?
Generally speaking, the Royal Decree sets out that the investment will be reported by the non-resident holder when the financing is granted to Spanish companies and by the resident holder when the financing is granted to foreign companies.
In any case, the Royal Decree itself allows the investment to be reported by any third party on behalf of the person obliged to notify the transaction, when the latter has provided the necessary information for such a notice.
3.WHAT IS THE DEADLINE FOR REPORTING THE FINANCING?
The Royal Decree requires the financing operation to be reported ‘after the transaction has taken place’, without establishing a clear and specific deadline, beyond the generic reference to Law 19/2003 of 4 July 2003. It will be necessary to await the enactment of the implementing regulations of the Royal Decree to obtain greater clarity in this respect.
4.HOW IS THE REPORT MADE?
The Royal Decree refers, for these purposes, to its implementing regulations and, until these come into force, to the regulations mentioned in its Second Transitional Provision, mainly Law 19/2003, of 4 July, and other implementing legislation.
To date, there is no specific template or form for reporting financing transactions, although there is every indication that the Ministry of Industry, Trade and Tourism will publish one in the coming months.
5.WHAT WOULD BE THE LEGAL CONSEQUENCES OF NOT REPORTING THE FINANCING TRANSACTION?
Article 25 of the Royal Decree refers again to Law 19/2003 of 4 July 2003 considers as a serious offence the failure to report financing transactions where the amount exceeds six million euros and, as a minor offence, when the amount does not exceed six million euros.
Serious offences are punishable, inter alia, by a fine of not less than six thousand euros and minor offences are punishable by a fine of not less than three thousand euros.
6.WHO WOULD FACE THE ABOVE PENALTIES IN SUCH A CASE?
The person liable to pay the penalty should be whoever is obliged to report the transaction, i.e., the non-resident holder when the financing is granted to Spanish companies, and the resident holder in the case of financing granted from Spain to foreign companies. However, the fact that the Royal Decree does not, for the time being, clearly establish a specific deadline for notifying the financing may make the imposition of penalties very difficult.