guia para inversion china en españa deloitte_1319643084956

8/14/2019 guia para inversion china en espaa deloitte_1319643084956

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A journey of ten thousand miles begins with justone step

Chinese proverb


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Investing in Spain - A guide for Chinese Businesses 3

Contents

Letter of Endorsements 8

Chinese Embassy in Spain 8

ICBC 9

Foreword 10

1. Introduction to Spain 11

1.1. Location 11

1.2. Population and language 11

1.3. Government 12

1.4. Business environment 12

1.5. Financial centre 12

1.6. Benets to business 13

1.7. Currency 13

1.8. Foreign investment 14

1.9. Operating costs 14

2. Spain China economic and trade relations 16

2.1. Institutional framework 16

2.2. Commercial exchange 17

2.3. Trends and future development 19

3. Chinese investment into Spain 20

3.1. Chinese overview 20

3.2. The appeal of Spain 213.3. Deal rationale 22


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4. Main business structures 23

4.1. The incorporated company 23

4.2. Branch or representative ofce of an incorporated foreign company 31

4.3. Business regulation 36

4.3.1. Reorganisation process: national and international mergersand acquisitions 36

4.3.2. Foreign investments in Spain 41

5. Corporate Governance 44

5.1. Overview 44

5.2. Appliance and compliance 446. Accounting and auditing 46

6.1. Overview 46

6.2. Reporting requirements 46

6.3. Accounting principles and standards 48

6.4. Audit requirements and standards 48

6.5. Frequently asked questions 49

7. Taxation 51

7.1. Overview of Spanish taxation 52

7.2. Principal direct taxes 52

7.2.1. Corporate income tax 52

7.2.2. Personal income tax 63

7.2.3. Non-resident income tax 66

7.2.4. Inheritance and gift tax 68


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7.3. Principal indirect taxes 68

7.3.1. VAT 68

7.3.2. Transfer tax 69

7.3.3. Capital duty 70

7.3.4. Stamp tax 70

7.3.5. Property tax 70

7.3.6. Customs and excise duties 70

7.3.7. Tax on certain means of transport 71

7.3.8. Other taxes 72

7.4. Avoidance of double taxation 72

7.4.1. Foreign tax credits/ Exempt income 72

7.4.2. Tax treaties 72

7.4.3. Republic of China Spain tax treaty 75

7.4.4. Hong Kong Spain tax treaty 76

8. Labour environment 76

8.1. Overview 76

8.2. Employment of foreigners 77

8.3. Employment and remuneration 77

8.4. Social Security and benets 78

8.5. Termination of employment 78

9. Banking sector in Spain 799.1. Entering the Spanish banking market 79

9.1.1. Formalities for setting up a bank in Spain 79


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9.1.2. Branch of an EU bank in Spain 80

9.1.3. Branch of a foreign non EU bank in Spain 80

9.2. Regulation of the banking Business 80

9.2.1. Spanish supervisory authorities 80

9.2.2. Mergers and acquisitions of Spanish banks 80

9.3. Corporate income tax 81

9.3.1. Attribution of prots 81

9.3.2. Minimum amount of free capital for Spanish tax purposes 81

9.3.3. Specic tax computation considerations for branches

of Chinese banks 829.4. VAT 84

9.4.1. Output VAT: the VAT exemption on nancial services 84

9.4.2. Input VAT recovery 84

9.5. Withholding taxes 86

9.5.1. Withholding tax on interest income 86

9.5.2. Withholding tax on interest payments 86

9.6. Reporting obligations 87

9.7. Leasing and asset nance 87

9.7.1. Legal requirements 87

9.7.2. Types of leases recognised (by law) 88

9.7.3. Finance leases 88

9.7.4. Financial regulations / supervisory requirements 89

9.7.5. Regulatory requirements for lease transactions 89


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10. Institutional framework for attracting foreign investment to Spain 90

10.1. Spanish Government Institutions 90

10.2. Support framework in regions and relevant cities 91

10.3. Grants and subsidies to attract foreign investment 96

Appendix 101

I. Chinas 12th Five Year Plan 101

A) Introduction 101

B) Strategic Priorities of the 12th FYP 101

C) Strategic Emerging Industries Plan 101

D) What economic measures will the government be likely to take? 102

E) Major issues and implications 103

II. How Can ICBC Help? 105

III. How can Deloitte help? 109

IV. Deloitte International Tax Source 114

V. Ofce locations 115

VI. Deloitte team involved in this edition 118


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8

Letter of Endorsements

China established the diplomatic ties with Spain in 1973 and upgradedthe relations to comprehensive strategic partnership in 2005. In recentyears, both countries have joined hands together to meet the nancialcrisis, which helped increase political mutual trust, expand cooperation inelds like culture and education and bring economic & trade relations intoa spotlight for both societies.

In 2010, the growth in Spains exports to China surpassed that in its imports from China andthe bilateral trade amounted to US$ 24.4 billion. Spain and China have become each other'smost important trading partner, and the bilateral goods trade, in particular, has reached arelatively mature stage of development. The number of Chinese tourists to Spain is expectedto total 300,000 in 2013.

As more and more commodities and people go global, the pace of international allocation ofChinas capital speeds up as well. In 2010, China reported nearly US$ 60 billion of outwardinvestment in non-nancial sectors, one of the hugest among the developing countries. In thefuture, Chinas inward investment and outward investment will tend to be more balanced andChina will soon become a global investment giant.

Spain is among the most developed countries of the world. With close ties with EU andLatin America markets, it boasts a high degree of market openness, advanced infrastructuresand complete investment promotion systems, thus being an investment destination whichthe Chinese businesses cannot ignore. Chinas aggregate investment in Spain is not huge atpresent, but the operation is generally good and well on a stage featuring accelerated rise.

Either investing in Spain or jointly carrying out global strategic cooperation with Spanishbusinesses is of great signicance to the sustainable development of both economies.

The Chinese government encourages businesses to earnestly study and actively adapt to localinvestment environment, observe laws and rules, follow local customs and merge into localsociety. Mutual understanding is the rst step for future cooperation. Therefore, we hope thecooperative publishing of the guide for investing in Spain can play a positive role in promotingthe investment by Chinese businesses in Spain.

Zhu BangzaoAmbassador of the Peoples Republic of China in Spain


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Going Global has become a strategically important policy for Chinato deepen its opening up and proactively participate to internationaleconomic cooperation. With greater exposure to the world economy,China has built up enormous overseas economic interest with vast ofenterprises and overseas Chinese around the globe. The huge needs fornancial service of overseas Chinese enterprises and individuals have laida solid foundation for Chinese banks to follow their globalized customers to provide support

worldwide.ICBC has been playing an active role in support of Chinese enterprises going globalizationin recent years. By the end of 2010, ICBC had 203 overseas branches and subsidiaries in 28countries and regions, thus the global nancial service network covering Asia, Europe, Africa,America and Australia has been basically established. ICBC has contributed to so many aspectsof overseas Chinese enterprises daily operations such as nancing, merge and acquisition,capital raising and wealth management, that has greatly propelled our clients businessbooming.

Spain is one of the major destination countries for foreign direct investment. The recent yearshave seen a remarkable increase of Chinese investment ow into Spain. The establishmentof ICBCs new branch in Madrid is the most recent highlight of the achievement of Sino-Spanish economic cooperation and development. ICBC becomes the rst Chinese bank to setits footprint in Spain, a meaningful move for the Chinese enterprises exploring the Spanishmarket. We strive to provide excellent nancial services to Chinese and Spanish customers andaim to be a nancial bridge between China and Spain to boost bilateral economic and trade

relationship.

As such, we feel really honored to have the chance of being part of the editor team of thisInvestment Guide in Spain. I hope this book will be a useful tool for Chinese enterprises tobetter understand the investment environment of Spain. ICBC Spanish Branch will alwaysbe ready to partner our customers to make contribution to the enhancement of economicrelationship between China and Spain.

Liu GangGeneral Manager of ICBC Spain Branch


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It is an honour for me to introduce the rst edition of the Investing in Spain guide.This guide couldnt come at a better time, at a moment when Spain has beendeclared as Chinas best friend in Europe; Spain - China economic relations aregetting stronger by the day, and Chinese investment into Spain is growing faster thanever.

China is already Spains principal commercial partner from outside the European Union. Spains importsfrom China have more than quadrupled in the last ten years and our exports are also growing at healthy

rates. Furthermore, all signs point to the fact that this relationship will continue to grow in the future. Thenumber of Chinese companies in Spain is steadily increasing, and the setting up of the rst Chinese nancialinstitutions will make Spain an even more attractive destination for them.

As we can see in the 12th Five Year Plan approved in March 2011, it is clear that Chinas Government willcontinue to push for a rapid development of the country. Economic growth targets are set to continueat high single digits during the 2011-2015 period. The main driver of this outstanding growth will be anincrease in private consumption. According to the 12th FYP, Chinas development model will undergo majorchange from an exports driven economy to a consumption driven one. Domestic demand will grow fasterthan the economy, and its contribution to Chinas GDP will also increase signicantly.

In order to achieve these targets, Chinas consumption of natural resources from abroad will continue toincrease, and the import to China of western brands and technologies will rise dramatically, as Chinesecompanies use them to satisfy their customers needs. In this context, Spain will strengthen its position as abenchmark destination for Chinese investors.

Deloitte and its Chinese Services Group (CSG) are committed to developing long-term partnerships withthe Chinese business community and to support the entrance of Chinese companies in Spain. We areconvinced there are considerable opportunities to strengthen our mutual trade and investment relationships,and will do our utmost to promote them. Our professionals, with extensive experience and knowledge ofthe Spanish market, are in a unique position to help any Chinese investors understand the Spanish marketand bridge any cultural gap that would otherwise pose a major challenge for them. The CSG, at all timesin cooperation with the China rm, serves as the unifying force to market, facilitate and deliver Deloitteprofessional services to our Chinese clients in Spain.

Both China and Spain have much to offer each other. I hope this guide, coordinated and tailored forChinese investors, with the full support of the Chinese Embassy in Spain and ICBC, will become the toolof reference when targeting Spain. I am condent it will help you make the right choices when decidingwhether to invest in Spain and it will be a pleasure for me to offer you all our help when doing business in

Spain.

Fernando RuizCEO of Deloitte Spain

Foreword


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1. Introduction to Spain1.1. LocationSpain is one of the fty largest countries in the world, with an area of 505,955 squarekilometres.

Most of its territory is the Iberian Peninsula, while the rest is composed of the Balearics andthe Canary Islands plus the cities of Ceuta and Melilla -situated on the coast of Africa.

Because of its privileged geographical situation -the Iberian Peninsula is located in the extremesouth west of Europe and only 14 kilometres away from Africa- Spain has great strategicvalue: it acts as a bridge between the Mediterranean on one side and Africa and America onthe other. The Spanish coastline runs along the Mediterranean Sea and the Atlantic Ocean.

The climate in the different parts of Spain can vary greatly:

In the North, the weather is temperate. Often with little change from summer to winter, andrain is common year round.

The Centre is characterised by hot summers and cold winters. In this area it does not rainvery often, but when it does, it rains heavily.

In southern Spain, the summers are hot and winters range from cool to cold.

1.2. Population and languageIn 2011 the Spanish population is estimated to stand at around 47 million, some 5.7 million ofwhom are foreign residents.

The population of Spain is concentrated mainly in large cities.

Madrid, the capital city of Spain, has more than 3 million inhabitants -more than 6 million ifwe take into account the outlying area. Barcelona, with an ofcial population of 1.6 million,is the second largest city in Spain. They are followed by Valencia (809,267 inhabitants), Seville(704,198 inhabitants), Zaragoza (675,121 inhabitants), Malaga (568,507 inhabitants) andBilbao (353,187 inhabitants).

The ofcial language of Spain is Castilian Spanish. However, Spanish is not the only languagespoken in Spain. There are many other ofcially-recognised languages in the followingAutonomous Communities: Catalonia, Galicia, the Basque Country, Valencia and the BalearicIslands.


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1.3. GovernmentSpains political regime is a constitutional monarchy, with a hereditary monarch and aparliament based on a two-House system. The maximum institution is the Spanish Crown.Juan Carlos I is both the King and the Head of State. He is in charge of moderating the regularfunctioning of the institutions, as well as being the highest representative of the Spanish state

in international relations.

The Spanish Constitution is the legal framework of the political organisation of the Spanishnation. According to the Constitution, the powers of the state are separated into threebranches: legislative, executive and judicial. Legislative power is held by parliament, whileexecutive power is represented by the government. The head of the government is proposedby the King and elected after the renewal of parliament.

Spain is divided into provinces and into other larger units the Autonomous Communities.There are 17 Autonomous Communities: Andalusia, Aragon, Asturias, the Balearic Islands, theCanary Islands, Cantabria, Castilla-Len, Castilla-La Mancha, Catalonia, Extremadura, Galicia,Madrid, Murcia, Navarre, Basque Country, La Rioja and Valencia. There are also two cities Ceuta and Melilla each with a Statute of Autonomy. Each Autonomous Community has itsown parliament and regional government.

The Constitutional Court must safeguard the constitutionality of the laws and resolves anyconict arising between the Autonomous Communities and the state.

Spain is a democracy based on the supreme values of its legal system which are the conceptsof freedom, justice, equality and political pluralism.

1.4. Business environmentSpain is an EU member state and a member of the OECD.

Spain is a large economy and a popular destination for foreign investment. The services sector

dominates the economy, with retail, tourism, banking and telecommunications accountingfor a signicant proportion of economic activity. The tourism industry is particularly importantand Spain is one of the most popular tourist destinations in the world. The most prominentmanufacturing industry is vehicle production. The bulk of Spanish trade is with the EU,although trade with Latin America and Asia has grown in recent years.

1.5. Financial centreThe city of Madrid is considered to be the nancial centre of Spain. In this regard, the two

largest banks in Spain Santander and BBVA- have established their headquarters in Madrid.

The prestigious business schools Instituto de Empresa and IESE are also located in Madrid.


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The regulation and supervision of the Bank of Spain safeguards the soundness of the Spanishbanking system. This system has been acknowledged by news agencies such as the DowJones International News, multilateral institutions such as the European Central Bank andother central banks like the Bank of England.

The Spanish stock index is a leader in contracted xed-income products and has been growingat a rate far above the international average.

1.6. Benets to businessCurrently, Spain is one of the most internationally-oriented countries in the world. With regardto the trading of goods, Spain is ranked 16th in the world as an exporter and 13th as animporter; while in the trading of services it occupies 7th place as an exporter and 9th place asan importer (WTO International Trade Statistics 2010 report.)

Spains human and technological resources make it a very attractive country for theinternational business community. Spain has a highly developed infrastructure network andit is very well communicated by road, train highly developed network of high-speed trains:AVE-, air - two of the biggest airports in Europe- and sea.

The Spanish market is one of the biggest in Europe with 47 million consumers and spendingpower above the European average.

As a member of the EU, Spain is directly connected to the members of the European Union.

Spain has the highest number of double taxation and investment protection agreementssigned with Latin America. Moreover, many Spanish companies are leaders in the LatinAmerican markets.

Because of its geographical proximity to North Africa, Spain is an important connection pointbetween Europe and the African market.

The Spanish language is also a key factor as there are currently more than 450 million Spanishspeakers and it is the ofcial language of 22 countries.

1.7. CurrencyAs Spain is a member of the European Union, its ofcial currency has been the euro since2002.


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Exchanges rates in June 2011:

1: June 2011

China () 9.3UK () 0.8

United States (US$) 1.4Hong Kong (HK$) 11.1Japan (Yen) 116.8Switzerland (SFr) 1.2

1.8. Foreign investmentSpain has liberalised its foreign investment rules to attract foreign capital and to bring

domestic rules into line with the principles of the Treaty on the Functioning of the EuropeanUnion.

Foreign investments generally only have to be reported after they have been made, exceptin the case of investments from tax havens, which as a general rule must be reported to theInvestments Registry of the Ministry of Economy and Finance in advance; the same appliesto foreign investment in activities directly related to public order, national security and publichealth systems, and real property investments for diplomatic missions by states that are not EUmember states.

The Spanish government protects strategic sectors of the economy, and industry-speciclegislation restricts foreign investment in the following sectors: air transport and radioindustries; areas relating to raw materials of strategic interest; private security and television;industries linked to manufacturing, marketing or distributing arms and explosives; andactivities related to national security. In addition, special rules govern investments in certainsectors (e.g. the pharmaceutical industry and mining).

1.9. Operating costsThe main factors that a company must take into account when deciding on a suitable locationinclude the recurring expenses related to the operation of a business, or to the operation of adevice, component, piece of equipment or facility.

The tables below show electricity and natural gas prices for industrial use in Spain:

Electricity prices in Spain

(euro per Kilowatt-hour, VAT excluded)Comsumption priceLess than 10 KW 0.14More than 15 KW 0.16


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On the other hand, the price of water depends on variables such as the consumption or theseason. In this regard, the price in Madrid for 2011 varies between 0.38 /m3 and 1.39 /m3.

Another major cost that must be analysed is that relating to the rental of ofce space that abusiness occupies. It is important to stress that rentals in Spain vary notably depending on the

region. In this regard, the following gure shows the average price for 2010 depending onthe area of Madrid (as a reference of a rst tier city):

Natural gas prices in Spain

(euro per Kilowatt-year, VAT excluded)Comsumption price5,000 KWh or less 0.145,000 KWh-50,000 KWh 0.1650,000 KWh-100,000 KWh 0.39More than 100,000 KWh 0.36

70

370

270

170

/m 2 /Year

Max Avg Min

C B D C i t y c e n t r e r

P e r i p h e r y

N o c i t y c e n t r e r

Source: BNP Paribas Real Estate Research


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2. Spain China economic and trade relations2.1. Institutional frameworkIn the modern era, diplomatic relations were established by both the Chinese and SpanishGovernments in 1973.

Furthermore, a few years ago in 2005-, the two economies decided to embark on a newproject in which they would become strategic partners and provide mutual aid throughthe signing of the Strategic Association Agreement. For the purpose of clarication, saidagreement recognised the ongoing commercial relationship established between China andSpain under the same conditions that others, such as France, the UK and Germany, alsoenjoyed at that time.

Institutional relations have been notably strengthened in recent years. To mark the recent

opening ceremony of Expo Shanghai 2010, numerous dignitaries such as the Minister ofIndustry, Tourism and Trade, the Director General of the Public Treasury, the Prime Minister andothers had the opportunity to visit China. In addition, Spain was visited by the Deputy Ministerof the Chinese National Committee for Development and Reforms (NDRC), the main economicadvisor to the Prime Minister, Zhu Zhixin, the deputy minister for trade, Zhong Shan, theDeputy Minister of the Ministry for Railways, An Limin, and the Deputy Chairman of the CCPIT,Zhang Wei (in a ceremony with the Spanish Employers Confederation -CEOE-, its Spanishcounterpart).

Recently, in 2011 the Spanish Prime Minister along with the Ministry of Industry, Tourism andTrade and the State Secretary for the Economy visited China. Furthermore, in January 2011 thedeputy Prime Minister Li Keqiang visited Spain.

Among the most signicant projects and agreements recently signed between both nations,the following should be mentioned:

Economic and industrial cooperation treaty (1984).Scientic and technical cooperation agreement (signed 1985).

Double tax treaty (in force since 1992).Mutual investment protection and promotion agreement (in force since 2008).


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2.2. Commercial exchange Spanish exportsThe total volume of Spanish exports to China in 2009 amounted to nearly 2,000 M whereasthose registered in 2010, amounted to 2,650 M a rate of growth of 33.13%.

The total volume of exports in 2010 related mainly to the sale of:Raw materials and semi-nished plastic products (10.46%)Automotive accessories (9.49%)Steel products (4.48%)

The data for 2009 and 2010 is as follows:

Main Spanish Export Products(millon Euros)

2009 2010 Growth

Amount % Amount % %

Raw materials and semi-nished plastic products 231.87 11.67% 277.11 10.46% 19.51%

Automotive equipment, components and accesories 102.33 5.15% 251.25 9.49% 145.53%

Iron and steel products 114.00 5.74% 118.72 4.48% 4.14%

Pharmachemicals products 80.27 4.04% 102.62 3.88% 27.85%

Organic chemicals 115.60 5.82% 102.41 3.87% -11.41%

Marble and related goods for construction 59.99 3.02% 87.60 3.31% 46.01%

Copper and its alloys 60.00 3.02% 86.51 3.27% 44.19%

Semi-nished copper products and the related alloys 33.98 1.71% 84.53 3.19% 148.78%Metal and non-metal ores (except copper and zinc) 63.86 3.22% 71.59 2.70% 12.11%

Raw and tanned hide and leather 43.15 2.17% 71.47 2.70% 65.63%

Source: Spanish Customs Authorities

Spanish ImportsThe total volume of Spanish imports from China in 2009 amounted to nearly 14,500 Mwhereas those registered in 2010, amounted to 18,870 M a rate of growth of 33.13%.

The total volume of imports in 2010 related mainly to the purchase of:


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The data for 2009 and 2010 are as follows:


2009 2010 Growth

Amount % Amount % %

Womens clothing 1,688.16 11.68% 1,927.48 10.22% 14.18%

Computer hardware 964.99 6.67% 1,557.14 8.25% 61.36%Telecomunications equipment 926.87 6.41% 1,108.45 5.88% 19.59%

Electronic parts 484.93 3.35% 851.76 4.51% 75.65%

Footwear 569.98 3.94% 764.40 4.05% 34.11%

Organic chemicals 430.01 2.97% 556.54 2.95% 29.42%

Mens clothing 506.74 3.51% 553.53 2.93% 9.23%

Iron and steel products 357.00 2.47% 537.14 2.85% 50.46%

Toys 402.26 2.78% 505.23 2.68% 25.60%

Leathers goods 381.41 2.64% 492.36 2.61% 29.09%

Source: Spanish Customs Authorities

Evolution of Spains balance of tradeSpains balance of trade is usually marked by severe decits due to the low volume of Spanishexports entering the Chinese market. However, it has been observed that Spanish sales havebegun to increase slightly over the last two years.

In fact, in 2010 the Spanish trade decit reached 16,219 M. Also, the foreign trade coveragerate has improved to the extent that in 2010 it reached 14% pointing to greater growth in thevolume of exports than in imports.

Foreign capital companies represent half of Chinese imports, with approximately one thirdof the imports relating to the manufacturing trade. Foreign direct investment (FDI) in Chinaconstitutes the main source of Chinese imports.

In principal, it could be argued that the current weak level of industrial placement andpositioning of Spanish companies in the Chinese economy could have a signicant impacton the access of Spanish exports, together with other factors such as access barriers and theprole of the Spanish export companies.


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The data for 2008, 2009 and 2010 are as follows:


2008 2009 2010

Amount % Amount % Amount %

Spanish Exports 2,152.60 1.2% 1,989.40 -7.6% 2,648.09 33.1%

Spanish Imports 20,492.60 10.8% 14,454.20 29.5% 18,867.09 30.5%Trade Balance 18,339.80 12.1% 12,464.90 32.0% 16,219.02 30.1%

Trade Coverage Rate 10.5% - 13.8% - 14.0%

Source: Compiled by Deloitte Spain based on previous charts.

Chinese investment in Spain may appear to be still relatively low and although certain Chinesecorporations, such as ICBC bank (since January 2011), HNA (which acquired 20% of NHHoteles in May of this year), CITIC, ZTE, Huawei and Air China all have a presence in Spain, i

has yet to become a signicant destination for outward Foreign Direct Investment ("FDI") incomparison with other large economies located in the European Union.

In 2007, Chinese investment in Spain surpassed 2.15 M but in 2008 it dropped signicantlyto 1.05 M. Although the highest level of investment ( 2.76 M) was recorded in 2009, itsubsequently fell to 2.2 M in 2010.

2.3. Trends and future developmentSeveral wealthy Chinese territories have recently been faced with a decrease in theircompetitive advantage based on low salaries. Rich areas have witnessed a signicant degreeof relocation of labour-intensive and consumer-goods industries (toys, clothing, footwear.etc.) to other Asian economies. As a consequence, the former competitive pressure exertedby these territories on the European Union market has tended to become less price-orientatedand based more on the range, quality and innovation of the products.

Furthermore, the population of these territories is acquiring a pattern of consumption andinvestment which is increasingly similar to that of Europe, a factor that indirectly allows for

an increase in the volume of EU products to be traded. Previously, exports were based mainlyon the sale of high-quality equipment and luxury goods, which would tend to become lesslimited as new more basic products gained access to the Chinese economy. Accordingly,those competitors that focused their main competitive advantage on the price-factor shouldgradually adjust to their new scenario.

In this light, the indicators for 2010 and this current year 2011 so far show an increase inthe bilateral trade ows between both economies. It must therefore be emphasized that the

Chinese development priorities could give rise to opportunities for Spanish companies, in twodifferent ways:


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As an advantage for technological-intensive sectors (e.g. renewable energies, watertreatment and biomed) before Chinese companies operating in these sectors develop thesubsequent technologies in their own right.

As a more stable form for medium and high-range consumer goods (fashion, food and

beverages).

Nevertheless, in the medium and long term horizon, the development and growth of bilateralrelations would be determined by factors such as the growth of current modest Spanishproduction investment in China.

Most importantly, the future of Spains bilateral relations with China would signicantlydepend on (i) the capacity of China to continue to open up and the growth of its economy

(ii) growth of household disposable income above the actual GDP and promotion ofpersonal consumption, as the main element to drive demand, (iii) an in-depth analysis ofthe intervention procedures adopted by the public sector in the economy through publicenterprises and highly active nancial and industrial policies.

3. Chinese investment into Spain3.1. Chinese overviewThe strengthening of the Chinese economy, growing at 11.9% and 10.3% during the rsttwo quarters of 2010, is behind the rise in outbound investment that we are seeing fromChina. Such a rapid rate of development has resulted in further M&As, as Chinese investorsare becoming victims of their own success. Chinas economy is rapidly moving up the valuechain, as Chinese consumers are seeing their purchasing power increase. Therefore, Chinesemanufacturers are being pushed to seek more cost effective centres of production and arefacing increasing challenges to meet the demands of their customers for higher qualityand design. Chinese investors are now looking to diversify their operations away from themainland and are looking for reputed brands, technology and resources. Spain is a goodtarget that meets their requirements.

In the near future, Chinese banks will play a very important role in facilitating Chineseoutbound investments. Over the past few years Chinese nancial institutions have openeda large number of branches around the world, including Spain, and we expect this trend tocontinue as Chinese companies and investors will continue to focus on overseas markets todiversify their investments.

Spain offers a number of benets to a potential investor, which is why many Chinese

companies chose to establish their operations here, and many others are considering Spainas their target country for investments. Benets such as incentives for foreign investors, thebroadest network of double taxation and investment protection agreements, and stronggovernment commitment to attracting foreign investment are oriented towards helpingforeign companies to set up in Spain and take advantage of the market for their individualneeds.


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Spain is the third largest recipient of Chinese FDI in Europe, and according to ofcial data,Chinese FDI into Spain grew at a Compound Annual Growth Rate (CAGR) of 44.3% between2003 and 2009. The overall stock of Chinese FDI in Spain is already over 8 million. Althoughthe gure might not seem too big, the underlying trend is outstanding, meaning that Spainis becoming an increasingly attractive destination for Chinese investment. As proof of this

afrmation, and according to several reports, the number of Chinese companies in Spain isforecast to double by 2013.

Since Spain started receiving FDI from China, the sector pattern of Chinese investmentappeared to be in intermediate commercial goods, real estate and textiles; nowadays theinvestment focus is changing and the Spanish renewables and electronic components sectorsare gaining appeal as investment targets. Spain is becoming a very attractive location forChinese investors looking to start their European and Mediterranean operations. The fact that

Spanish multinationals have a strong position and experience in Latin American markets is alsoan attractive point for Chinese companies seeking to prot from their experience.

Following the implementation of the 12th Five-Year Plan, we expect a surge in Chineseinvestment entering Spain, not only with the aim of entering the Spanish or Europeanmarkets, but also as a way of acquiring renowned brand and world-class technologies toimport them back to their home markets. Foreign brands acquisition and importing to theirdomestic markets by Chinese investors have become the new way for Chinese companiesto gain a competitive advantage over their counterparts, especially in those sectors whereChinese domestic markets are already saturated such as retail, food and beverage or aviationspaces.

3.2. The appeal of SpainAs China develops and its domestic consumption markets start to gain speed, Chinesecompanies are starting to feel increasing pressure from both foreign and Chinese competitors.This trend will not only continue in the coming years, but will become even stronger, puttingpressure on companies margins and market share. Therefore, Chinese companies have had to

look at foreign markets in search of the competitive advantages that they are losing at home.Furthermore, Chinese companies wish to become the leaders in their home markets and toachieve this objective it will not be enough to try to outpace their domestic competitors, theywill also need to beat multinational competition from abroad to become global leaders.

In their search for competitiveness and new markets Spain has much to offer Chineseinvestors. According to the World Bank, Spain is the 49th country in the world, and 10thin Europe, in terms of ease of doing business in the country. The country is the fth biggest

economy in Europe with a GDP per capita of US$ 31.946, and historically it has been amongthe biggest consumer markets of the European Union, with average per capita spendingabove the EU average. Additionally, Spain was ranked as the most popular and friendlydestination for expatriates in Europe.


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When targeting European and Latin American markets, Spanish companies can be the perfectpartner for Chinese companies. Our companies already have vast experience, deep knowledgeand a good reputation in both markets. Therefore, cooperating with a Spanish companywould place any Chinese company in a much better position when entering these markets,and would enable them to benet from our companies reputation and knowledge of the

target market.

In terms of the countrys resources and infrastructures, Spain offers a pool of highly qualiedworkers at a very competitive cost, lower than their European peers; some of the bestinfrastructures in Europe, including the best high-speed train network; two of Europes biggestairports and the busiest ports in southern Europe. Spains extensive logistics network hasdirect connections with Europe, Latin America and the entire Mediterranean area.

As an investment opportunity for Chinese investors, Spain offers a range of high potentialbrands and companies with European level standards of design, technology and management.Spanish brands and technologies are acknowledged around the world for their top qualityand high level of design, placing them in an unbeatable position to be exported abroad.The countrys strategic geographical location, with access to North Africa, Europe and LatinAmerica, together with its economic openness and competitiveness, makes it a very attractivelocation for foreign investors.

Spain is not only a big consumer market with a high degree of purchasing power, but alsooffers a range of domestic high quality brands easily exportable to and marketable on theChinese market. Spains renewable energies such as wind and solar power generators areamongst the most advanced technologies in the world. Brand acquisitions, as well as thepurchase of advanced technologies are also crucial for Chinese outbound appeal and in thissense, Spain has a lot to offer Chinese corporate investors looking to strengthen their positionand expand market shares not only in the international, but also in their domestic markets.

3.3. Deal rationale

Are earliest matches the best matches? This is a good question that should be raised beforeany overseas investment.

Indeed, one of the main risks that Chinese acquirers have traditionally faced was theirinexperience in the eld of cross-border purchases.

Ensuring that the reasons for acquiring any foreign target are duly checked from a professionalperspective is a key driver for a successful investment strategy.

Being surrounded by good quality advice, especially by teams with solid internationalbackground, is the best guarantee to avoid succumbing to the so-called window shoppermentality where the inexperience of Chinese acquirers can lead them to take wrong decisionsbased on unreal synergies.


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The process of searching for outbound investment goes from target origination through topost-merger integration, including detailed valuation exercises or tax structuring support inorder to close the acquisition under a complete long-term strategic vision.

Fluent communication with the counterparts and the development of soft skills at the time of

running the deal process are excellent ingredients to reach a win-win situation for all.

Lastly, understanding the importance of cultural barriers when transacting is a paramountconcern in the outbound investment process.

Chinese investors need to realise that their international growth should be based on in-depthknowledge of the cultural framework of each jurisdiction involved.

Involving a professional team with extensive experience at international and local level is anexcellent approach to be able to bridge any cultural gaps.

Although it is true that over the years Chinese investors have improved their ability in the artof deal-making when buying foreign assets, addressing all of these concerns remains a mustin any potential foreign acquisition.

4. Main business structures.4.1. The incorporated company.The incorporation of companies in Spain is mainly governed by the Consolidated SpanishLimited Liability Companies Law 1/2010 of July 2nd (Texto Refundido de la Ley de Sociedadede Capital). It recently adapted Spanish legislation to incorporate European Communitycompany law directives and substantially amends the former Companies Law of 1989 andLimited Liability Companies Law of 1995.

Chinese companies setting up a company in Spain may do so by creating a wholly-ownedsubsidiary (a company whose shares are 100% owned by the Chinese parent company, or

may join others in establishing a company that is jointly owned by various shareholders).

This chapter explains the most common types of companies / joint ventures that can beregistered in Spain as well as their differences and advantages/ disadvantages.

Accordingly, set out below is a brief explanation of the principal forms of Company in Spain:the Public Limited Liability Company (Sociedad Annima S.A.), Private Limited LiabilityCompany (Sociedad de Responsabilidad Limitada S.L.), New Enterprise Limited Company

(Sociedad Limitada Nueva Empresa- S.L.N.E.), General and Limited Partnerships (SociedadColectiva and Sociedad Comanditaria), Joint Ventures, and European Public Limited-LiabilityCompany (Societas Europaea SE).


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A. Public Limited Liability Company (Sociedad Annima - S.A.)As in other countries, an S.A. in Spain is distinct from its members. It provides limited liabilityfor its members and the possibility of unrestricted transfer of shares without its own continuitybeing affected. Nevertheless, in certain circumstances, a sole shareholder and / or thedirectors may become liable in respect of the companys debts.

1. ShareholdersAn S.A. may be listed on a stock exchange or it may be owned by only a few shareholders;it may also be a wholly owned subsidiary of another entity (sole shareholder entity). If thecompany has only one shareholder, the following further requirements must be met to complywith Spanish regulation:

i. The identity of the sole shareholder must be led at the Mercantile Registry ("Registro

Mercantil").ii. A Register of Agreements entered into between the sole shareholder and the company

must be legalised at the Mercantile Registry in a similar way to the Register of Minutes.These agreements must be transcribed into this Register.

iii. The fact that the company has one shareholder must be stated on all documentation,correspondence, orders, invoices and in all publications which must be made inaccordance with the law or the of the company by-laws.

iv. The Notes to the nancial statements ("Memoria") should make express and individualreference to agreements between the sole shareholder and the company indicating theirnature and terms and conditions.

The founder-shareholders may be Spanish nationals or foreigners, individuals or legalentities. There are no residence or nationality requirements. However, the foreign legal entityshareholders must obtain a taxpayer identication number, for statistical purposes only. If the

shareholders are foreign individuals, they must obtain a resident alien identication number(NIE) in order to register the company with the Spanish tax authorities. The procedure toobtain a NIE may take over one month. The NIE must be applied for at a Spanish consulate orby someone (i.e. Deloitte lawyers) in Spain with a power of attorney.

2. Share capitalAn S.A.'s share capital must be at least 60,000. There is no maximum share capitalestablished by law for an S.A. All shares must have a par value and shares may not be issued

for less than that par value, although they may be issued at a premium (paid-in surplus).Shares must be nominative (registered) until they are fully paid in; thereafter, they may bebearer shares.


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In order to establish the par value of the shares representing the share capital correctly, it isadvisable to set an exact amount of euros as share capital which can be divided into the entirenumber of shares (i.e. 60,000 of share capital divided into 6,000 shares of a par value of 10).

The initial share capital with which the S.A. proposes to be incorporated (its authorisedcapital) must be stated in the by-laws and, therefore, in the public deed of incorporation andregistered at the Mercantile Registry. Any change to the capital involves an amendment to theby-laws and must be registered at the Mercantile Registry.

An S.A. cannot be set up unless its share capital is fully subscribed and at least 25% of the parvalue of each share is paid. As for the remaining 75%, any disbursement of that percentage tobe made in the form of non-cash assets must be paid in within ve years following the initial

subscription; if the disbursement is in cash, the maximum term during which the 75% balancemust be paid in is established by the by-laws.

Cash contributions must be made in euros; if made in a foreign currency, the euro equivalentmust be determined in accordance with the law. Cash contributions must be evidenced bybank deposit receipts issued by the bank, in which the cash contribution has been made,delivered to the Notary Public concerned when the deed of incorporation is executed.

Contributions may also be made in a form other than in cash, as long as certain conditions aremet (i.e. report of an independent expert).

An S.A. may acquire its own fully paid-in shares, amounting to up to 20% of its authorisedcapital, provided that various formalities are complied with, but (i) such an acquisition cannotentail that the net equity be reduced to less than the amount resulting from the sum of sharecapital plus legal or by-law restricted reserves; and (ii) it must then constitute a restrictedreserve of an amount equal to the value of the controlling companys shares recognised onthe asset side of the balance sheet. If the S.A. is listed on the stock exchange, this 20% limit is

reduced to 10%.

The shareholders' liability to third parties is limited to the par value of the shares that theyhave subscribed.

3. Shareholders' rights:Shareholders' rights include a share in prot distribution, preferential right of subscriptionin capital increases (except for contributions in kind) and participation in the allocated share

capital in the event that the company is wound up.

Shareholders' general rights include attendance at the Annual General Meetings and theexercise of the right to vote as per capital participations rather than as per person.


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Main differences between an S.L. and an S.A.:

4. Directors liability:The provisions in respect of directors liability have become much more stringent underSpanish law in recent years. Directors of both S.A.s and S.L.s may incur civil liability when thecompany, shareholders or creditors have suffered damage due to an unlawful act or omissionof the Directors or one carried out without due diligence. Under company legislation,

directors may also become jointly and severally liable for all the companys debts where, incircumstances in which the company ought to be wound-up (in practice, particularly whenlosses reduce the net worth to below half the value of the share capital), they do not take thenecessary steps. However, in such cases the directors shall only be held jointly and severallyliable for the debts incurred after the legal grounds for dissolution have arisen.

Directors may also be held liable in relation to the taxes. They may be held criminally liable andfailure to comply with Labour Law and Social Security obligations may also lead to directors

being held liable when their conduct has been unlawful or negligent.Directors liability may extend not only to directors who have been legally appointed as such,but also to de facto directors.

B. Private limited liability company (Sociedad De Responsabilidad Limitada - S.L.)An S.L., like an S.A., may be founded by only one shareholder. The additional requirements inthis case are the same as detailed above (point A. Shareholders. points i - iv) in respect of soleshareholder status.

As with an S.A., the shareholders' liability is limited to their contribution to the share capital.

Minimum initial capital of 3,000 is required, which must be paid in full on the companysincorporation. The capital is divided not into shares but into equal quotas ("participacionessociales"). Each quota carries one vote and must be fully paid before the company cancommence trading. There is no minimum size for a quota and there is no maximum sharecapital established by law for an S.L. Quotas must be in registered form.

In order to establish the par value of the quotas representing the share capital, it is advisableto set an exact amount of euros as share capital which can be divided into the entire numberof quotas, (i.e. 3,000 of share capital divided into 300 quotas of par value of 10 Euros).

Public Limited Liability Company (S.A.) Private Limited Liability Company (S.L.)

An S.A.s capital is divided into shares. An S.L.s capital is divided not into sharesbut into equal quotas.

An S.A.s share capital may not be less than 60,000. An S.L.s capital may not be less than 3,000.


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Public Limited Liability Company (S.A.) Private Limited Liability Company (S.L.)

An S.A. can be set up with at least 25% of its share capitalpaid (minimum 15,000, for a 60,000 share capital).

An S.L.s capital must be fully paid up onincorporation ( 3,000).

An S.A. may issue bonds or other marketable securities. An S.L. may not issue bonds or othermarketable securities.

Any contributions made by the shareholders in non-cashassets must be veried by an independent expertappointed by the Mercantile Registry.

Contributions in non-cash assets do notrequire verication by an expert.

Purchases that do not form part of the ordinary courseof business and which amount to more than 10% of theshare capital within the two rst years after incorporationmust be approved by the shareholders at the GeneralMeeting and be checked by an expert.

Such purchases do not require the approvalof the shareholders at the General Meetingor verication by an expert.

The shares may be in registered or bearer form. The quotas must be in registered form.The transfer of shares is essentially free, although it ispossible to state limitations in the by-laws if the shares arein registered form.

The transfer of quotas to third parties isessentially limited.

The calling of a General Meeting requires several formalities(publicity, etc.).

The calling of General Meetings is not soformal.

There is no maximum number of members of the Board ofDirectors, the minimum being three members.

The maximum number of members ofthe Board of Directors is twelve, and theminimum three.

The duration of the term of appointment of the directorsmust not exceed six years, unless renewed.

The duration of the appointment of thedirectors has no limit unless stated in theby-laws.

Only one type of governing body can be chosen in theby-laws, (there are four possibilities: sole director, joint andseveral directors, joint directors and Board of Directors).If it is intended to change the governing body, the by-lawsmust be amended and executed in a public deed prior to

the new director / s appointment / s, which must then beled at the Mercantile Registry.

The four possibilities can be included in theby-laws.If it is intended to change the governingbody, the by-laws do not need to beamended but the change from one to

another must be executed in a public deedbefore a Notary Public and led at theMercantile Registry.

Certain amendments to the by-laws (change of name,registered ofce, objects clause) require publications to bemade on the companys website or, should the latter notexist, in two newspapers of the related province.

In most cases, no publications arenecessary.

In order to amend the by-laws a report must be preparedsupporting the amendment.

In most cases, no report is required toamend the by-laws.

There is less shareholder control at an S.A. than at an S.L. There is more shareholder control at an S.L.than at an S.A.

The shares may be listed on the stock exchange and theprocedure to transfer the shares is easier than at an S.L.

The quotas cannot be listed on the stockexchange and the procedure to transferthem is more complex.


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C. New Enterprise Limited Company (Sociedad Limitada Nueva Empresa- S.L.N.E.)This corporate entity is a special type of limited liability company.

As with an S.A. and an S.L., the S.L.N.E. must be set up by public deed, which must beregistered at the corresponding Mercantile Registry. However, the procedure is simplied and

the use of new technologies is permitted with the aim of expediting the process of setting upcompanies of this type.

There are, however, a number of characteristics of the S.L.N.E. which make it unlikely to beof interest, in principle, to foreign investors; for example, the founder shareholders must beindividuals and on incorporation they may not exceed ve. Subsequent transfers may only beto individuals (although after incorporation, transfers of shares may result in there being morethan ve shareholders).

The name of the S.L.N.E. must be the name and surnames of one of the founders, followedby an alphanumerical code and the indication Sociedad Limitada Nueva Empresa or itsabbreviation SLNE. The share capital may not be less than 3,012, or more than 120,202.The S.L.N.E. cannot have a Board of Directors and it is necessary to be a shareholder to be adirector.

Legal steps to set up a company (S.A./S.L.)

i. In general terms, the legal steps in order to set up a company are very similar for anS.A. and an S.L.:

ii. Make a prior declaration to the Directorate-General of Commerce and Investments,should the shareholder of the Spanish company be a company from a tax havencountry.

iii. Obtain a certicate on behalf of one of the shareholders from the CentralMercantile Registry to the effect that the proposed name of the company has notalready been entered in the Register.

iv. Draft the company's by-laws (Estatutos Sociales).v. Draft powers of attorney appointing any person in Spain, who will appear before

a Notary Public in Spain to incorporate the company acting for and on behalf ofthe shareholder(s). Such power of attorney must bear the Apostille of The HagueConvention of 5 October 1961, abolishing the requirement for legalisation forforeign public documents, in order to have legal effects in Spain.

vi. Liaise with the chosen Bank regarding the preparation of the bank certicateevidencing that the funds have been remitted from overseas and credited in the

company's account.vii. Prepare the companys public deed of incorporation, which must be signed in thepresence of a Notary Public by the shareholder(s) or by their attorneys, as the casemay be.


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viii. Declare the foreign investment at the Directorate-General of Commerce andInvestments so that it may be recorded for statistical purposes.

ix. Obtain a taxpayer identication number for each of the shareholders in thecompany (Nmero de Identicacin Fiscal - NIF) for statistical purposes only.

x. Obtain the provisional taxpayer identication number card for the company (Tarjeta

Provisional de Nmero de Identicacin Fiscal - NIF).xi. File a capital duty return (1% on the share capital). Said tax is currently exempt.xii. File the public deed of incorporation of the company at the provincial Mercantile

Registry.xiii. Legalisation of the Register of Shareholders, Register of Minutes and Register of

Agreements entered into between the Company and its sole shareholder (the latteronly if it is a sole-shareholder company).

It usually takes approximately one week to set up the S.A. / S.L. once all the information anddocuments are gathered plus a further three to four weeks to register it at the MercantileRegistry.

Lastly, it must be noted that the Spanish tax authorities currently require that the non-Spanishresident directors or individual shareholders of Spanish companies obtain a resident alienidentication number (NIE) in order to register the company with the tax authorities.

D. General And Limited Partnerships (Sociedad Colectiva and Sociedad Comanditaria)Spanish commercial law allows for both general and limited partnerships. In a generalpartnership, the members are normally jointly and severally liable for all the debts andobligations of the partnership, whereas a limited partnership is created by one or moregeneral partners (socios colectivos), who are jointly and severally liable without limit for thepartnerships debts and one or more limited partners (socios comanditarios), who are liableonly up to the amount of their respective capital contributions.

Limited partnerships in which the limited partners interests are in the form of transferable

shares are called share partnerships (Sociedad Comanditaria por acciones).

E. Joint VenturesSpanish legislation envisages several types of co-operation companies:

Unincorporated Temporary Joint Ventures (Uniones Temporales de Empresas): entitycreated by several companies when setting up a sort of temporary association which is toexist only for a limited period of time and to undertake a specic project. These types of

associations do not have separate legal personality and are not corporations.


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Economic interest grouping (EIG) (Agrupacin de Inters Econmico AIE): is a vehiclefor a joint venture between Spanish participants. It is similar in concept to a partnership, itsparticipants having joint and several liability for its debts.

To form an AIE, the participants must execute a public deed, incorporating the by-laws. This

deed must be led at the Mercantile Registry. The internal operation of an AIE is similar tothat of an S.A.

European economic interest grouping (Agrupacin Europea de Inters Econmico- AEIE): is a cross-border version of the AIE. A Spanish AEIE is a separate legal entity and must haveits registered ofce in Spain. It must be registered at the Mercantile Registry, and in almostall respects it is similar in constitution and operation to an AIE.

However, S.A. and / or S.L. companies may also form joint-ventures.

F. European Public Limited Liability Company (Societas Europaea SE)The introduction of the SE is an important company law development in the EU and mayprovide easier cross-border mergers and changes of registered ofce and cost savings.However, as many issues affecting the SE are subject to national law, it is not an entirelyuniform new entity. Although this type of company has been included in Spanish law since2005, very few entities have opted for this type of corporation.

Some of the basic characteristics of the SE are: the minimum share capital is 120,000; theregistered ofce of the SE must be located in the same Member State as its head ofce; thereis no central registration and an SE shall be registered in the Member State in which it has itsregistered ofce at the registry designated by its law.

The formation of an SE requires involvement of entities of at least two different MemberStates. There are four ways in which an SE may be formed: merger; formation of a holding SE;incorporation of a subsidiary SE and conversion of an existing company into an SE. An SE may

itself set up one or more subsidiaries in the form of SEs.

The Regulation also provides for the possibility of an SE transferring its registered ofce fromone Member State to another.


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As regards the structure and management of the SE, the Regulation provides that the SE shallcomprise:

i. A general meeting of shareholders; and

ii. Either a supervisory body and a management body (two-tier system) or a governing body(one-tier system).

Directive 2001/86/EC is designed to ensure that employees have a right of involvement inissues and decisions affecting the life of their SE.

4.2. Branch or representative ofce of an incorporated foreign companyChinese companies wishing to expand their business activities into new territories will often

consider establishing a branch or even a representative ofce instead of incorporating a newcompany.

A. Branches Of Foreign Companies (Sucursal Extranjera)From a tax point of view, branches are permanent establishments of non-resident entities.

It is important to take into account that a branch in Spain is not a separate legal entity from itsparent company. Nevertheless, the branch has certain autonomy of operation. As with an S.A.and an S.L., any type of activity can be performed by a branch although the parent companyis fully liable for the debts of the branch.

The branch must have the same name as the parent company plus the words "Sucursal enEspaa" ("Branch in Spain").

It is important to note that for scal and foreign transactions, the arms length principleapplies to operations between the parent company and the branch. Separate accounts mustbe kept.

A branch of a non-resident company must appoint a resident individual or legal entityto represent it. The representative appointed will be the person who deals with the taxauthorities before the expiry of the deadline for ling the declaration of income earned inSpain. The appointment of a representative to act as tax representative must be reportedto the local tax administration ofce within 2 months of the date of the appointment. Thisrepresentative is normally one of the branchs legal representatives, as registered in theMercantile Register, but if those legal representatives are themselves non-resident, a resident

individual or legal entity must be appointed instead.


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The representatives may be held jointly and severally liable for the tax debts of the permanentestablishments of the non-resident entities they represent.

If the parent company's nancial statements are not led at the Mercantile Registry of itscountry of origin (or if they are so led but do not comply with the requirements of Spanish

law, the nancial statements of the branch itself must be led at the Mercantile Registryin Spain. When led in Spain, the nancial statements of the branch are open to publicinspection.

1. Main advantages and disadvantages:

Advantages Disadvantages

There is no minimum working capitalrequirement.

More risk, because branches are liable to thirdparties up to the full amount of the parentcompany's equity (in the case of a Spanishcompany, only the equity in that company is atrisk).

It is an inexpensive way to break into anunknown market.

It is not the ideal vehicle for substantial projects,because the parent company runs the entirerisk and there is no division between theactivities of the parent company and those ofthe branch.

It is an appropriate vehicle for low costprojects and those with a low turnover.

The fact that it is a foreign company couldmake some clients or creditors less willing todo business with it, thus making it difcult toobtain loans, contracts, etc.

Possibility for the parent company ofoffsetting the branch's losses for taxpurposes in the same nancial year inwhich they are incurred.Corporate income tax payable by the

branch is normally deductible by theparent company, as well as the transferof working capital.The branch is more solvent, because theparent company is liable to third partiesup to the full amount of its equity.

Spanish law does not allow the simpleconversion of a branch into a subsidiarycompany.


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2. Main differences between a branch and a public limited liability company (S.A.) and aprivate limited liability company (S.L.):

i. Public and private limited liability companies must be wound up if their accumulated lossesreduce their net worth to less than the 50% of their share capital, unless that capital is

reduced or increased, or if the capital is reduced below the legal minimum. Moreover, theshare capital of public limited liability companies must be formally reduced when losses havereduced net assets to less than two-thirds of the share capital and equilibrium is not restoredin the following nancial year.

ii. Public and private limited liability companies must transfer 10% of net prot for each year tothe legal reserve until the balance of this reserve reaches at least 20% of the share capital.Until the legal reserve exceeds 20% of share capital, it can only be used to offset losses,

provided that sufcient other reserves are not available for this purpose.iii.S.A and S.L. companies are taxed in the same way. Branches are considered to be

Permanent Establishments (PE) and, in general terms, they are taxed in Spain applying thesame rules as those applicable to subsidiaries, with certain exceptions.

The main difference between subsidiaries and branches is that, in order to determine taxableincome, the payments which the PE makes to its Head Ofce (or any other PE the HeadOfce may have) for royalties, interest, commissions, or in exchange for technical assistanceor for the use or assignment of other assets or rights, are not deductible in the calculation ofnon-resident income tax.

On the other hand, management and general administrative expenses incurred by the HeadOfce are deductible to the extent that they are allocated to the branch, they are provided forin the accounts of the PE, that the amounts, criteria and method of distributing the costs areset out in a document led with the tax return, and the costs are allocated on a rational andcontinuous basis.

A Spanish subsidiary, on the other hand, may claim as deductible expenses any paymentsmade to the parent company in respect of management fees, technical assistance, interestand royalties, the cost of which must be xed on an arm's length basis since the companiesare related. Specic formal requirements have to be met for certain expenses.

Nonetheless, please bear in mind that the tax deductibility of expenses on transactions carriedout between related entities (applicable to certain types of entity, i.e., subsidiaries, branches,

representative ofces, etc) would depend on whether these transactions represent a realadvantage or use for their recipient.


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Moreover, it should be highlighted that Royal Decree 1793/2008, of 3 November amendingthe Corporate Income Tax Regulations, was published on 18 November 2008. MainlyArticles 18 to 20 of that Royal Decree regulate the documentation obligations affecting (i)transactions between related entities; (ii) the group to which the tax payer belongs; and (iii)the tax payer itself. In accordance with Transitional Provision Three of the Royal Decree, these

obligations have had to be complied with since 19 November, 2008, three months after theentry into force of the Royal Decree. Please note that pursuant to Article 18.3 of Royal Decree1793/2008, transactions between entities in the same tax consolidation group are exemptfrom the above-mentioned documentation obligations.

3. Legal steps to set up a branch

A branch must be set up in the presence of a Spanish notary public who will require the

following documents:i. A certicate from a bank in Spain to the effect that the working capital, if any, of the

branch has been transferred and credited to a current account opened in the branch'sname.

ii. A certicate issued by a notary public stating that the parent company has been dulyincorporated, that the Memorandum and By-laws have been duly approved and that thedirectors have been duly appointed.

iii. A certicate of the minutes of the General Meeting or Board Meeting of the parentcompany at which it is resolved to set up the branch, detailing the allocated capital, ifany, the objects, registered ofce and nancial year of the branch. Representatives ofthe branch should be appointed and their powers dened and an individual must beempowered to appear before a notary public in Spain to execute the public deed settingup the branch. A tax representative should also be appointed.

iv. A sworn translation into Spanish of the parent company's Memorandum and By-laws.

It will also be necessary to:

a. Make a prior declaration to the Directorate-General of Commerce and Investmentsshould the parent company be resident in a tax haven.

b. Record the foreign investment at the Directorate-General of Commerce and

Investments so that it may be recorded for statistical purposes only.


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c. Obtain a non-resident taxpayer identication number (Nmero de Identicacin Fiscal -N.I.F.) for the foreign company

d. Obtain a provisional taxpayer identication number (Nmero de Identicacin Fiscalprovisional - N.I.F.) for the branch.

e. File the public deed setting up the branch at the corresponding Mercantile Registry.

f. File a capital transfer tax return.

4. Main disbursements:

i. Fees of the notary public (the amount will depend on the working capital, if any);

ii. Mercantile Registry fees (the amount will depend on the working capital, if any);iii. Translation costs for obtaining a sworn translation of the parent companys Memorandumand By-laws.

It usually takes approximately 1 week to set up the branch plus a further 3 to 4 weeks toregister it at the Mercantile Registry.

B. Representative Ofce (Ocina De Representacin)A representative ofce is one that, unlike a branch or a company, has no power to concludecontracts with customers of any type in Spain.

It is very important to stress that if the idea is to conduct business activities in Spain, therepresentative ofce would not be the most appropriate vehicle. Therefore, since the nalpurpose of these entities is very different, it is crucial to determine the exact type of structurerequired in Spain. Although representative ofces are very simple in principle, they shouldonly be used for certain activities.

1. Legal steps to set up a representative ofceAs with a branch, a representative ofce must be set up in the presence of a Spanish notarypublic who will require the following documents:

i. A certicate from a bank in Spain to the effect that the capital of the representativeofce, if any, has been transferred and credited to a current account opened in therepresentative ofce's name.

ii. A certicate issued by a notary public stating that the parent company has been dulyincorporated, that the Memorandum and By-laws have been duly approved and that thedirectors have been duly appointed.


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iii. A certicate of the minutes of the General Meeting or Board Meeting of the parentcompany at which it is resolved to set up the representative ofce, detailing theallocated capital, if any, the objects and the registered ofce of the representative ofce.Representatives should be appointed and their powers dened and someone must beempowered to appear before a notary public in Spain to execute the public deed setting

up the representative ofce. A tax representative should also be appointed.

iv. A sworn translation into Spanish of the parent company's Memorandum and By-laws.

It will also be necessary to:

a. Sign the public deed opening the representative ofce in the presence of a notary public.b. Obtain a non-resident taxpayer identication number (Nmero de Identicacin Fiscal -

N.I.F.) for the foreign company.c. Obtain a provisional taxpayer identication number (Nmero de Identicacin Fiscalprovisional - N.I.F.) for the representative ofce.

d. Appoint a tax representative for non-resident income tax purposes.e. File a capital transfer tax return.

2. The main disbursements will include:i. Fees of the notary public.

ii. Translation costs for obtaining a sworn translation of the parent companys Memorandumand By-laws.

It is not necessary to le the public deed opening the registered ofce at the MercantileRegistry.

It usually takes approximately 1 week to open the representative ofce once all theinformation and documents have been gathered.

4.3 Business regulation 4.3.1 Reorganisation process: national and international mergers and acquisitions A. Overview Mergers and acquisitions are partnering strategies used by businesses to meet currentchallenges and to take advantage of the opportunities afforded by the new Europeanframework.

The Law on structural changes to companies (March 2009) unies Spanish law on the subjectof mergers and, in certain aspects, it differs from European Union regulations, since theSpanish law envisages new methods and simplies certain procedures.


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It introduces a new regulatory framework for structural changes to companies (alterations ofa companys legal form, mergers and spin-offs; transfers en bloc of assets and liabilities; thetransfer of the registered ofce abroad), and establishes a common legal framework for allcompanies in Spain.

Likewise, it regulates cross-border mergers for the rst time, by transposing Directive 2005/56/ EC into Spanish law and, specically, regulates mergers between Spanish and non-EUcompanies.

B. National and international mergers and other structural changes to companiesStructural changes are those alterations of a company that go beyond the basic amendmentsof the companys by-laws and affect the equity structure or corporate form of the company.

These structural changes which Spanish companies are able to undertake are, mainly, thealteration of a companys legal form, mergers and spin-offs; transfers en bloc of assets andliabilities and the transfer of the registered ofce abroad.

1. Alteration of a companys legal form.The alteration of a companys legal form is a structural modication whereby a companyadopts a different legal structure while preserving its legal status.

In addition to further legal requirements, the alteration of a companys legal form requiresa resolution of the General Meeting. This resolution has to be published in the OfcialGazette of the Mercantile Registry and in an important newspaper (however, the resolutiondoes not have to be published if an individual notication of the resolution is sent to all theshareholders and creditors).

Afterwards, the resolution is executed as a public deed and must be recorded at theappropriate Mercantile Registry.

2. Mergers.There are a number of ways to acquire a company, other than simply purchasing it, one ofwhich is a merger with another company.

There are two main types of merger: merger by absorption, and merger by setting up a newcompany. The merger by absorption entails the acquisition of one company by another. Inthis case, the company that is taken over is wound up and its assets become the property ofthe company that takes it over.


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On the other hand, two or more companies may join forces to establish a new company.The original companies are wound up and their assets become the property of the newly-created company.

Mergers between companies quoted on the stock market are sometimes carried out by

means of a public takeover bid, whereby a company publicly announces its intention toacquire a number of shares in another company, allowing it to take control of that company.

Depending on the industry or activity in which the companies are involved, mergers maybe horizontal (between companies competing in the same industry), vertical (a companymerges with the company which supplies its raw materials, for example, or with thecompany that distributes its nal products) or conglomerates (merger between companieswhich do not have any connection with each other, with the aim of sharing services such as

management, accounting, etc.).In order for a merger to take place, the boards of directors of all the companies involvedmust approve the corresponding draft terms of merger . After the required time has elapsedto allow creditors to express their right of objection (one month), only two procedures needbe carried out to make the merger ofcial:

formalising the merger resolutions in a public deed before a notary public, and registering the said public deed at the corresponding Mercantile Registry.

Finally, it should be highlighted that not only intra-EU cross-border mergers but alsointernational cross-border mergers are regulated for the rst time in the Spanish Law onstructural changes to companies.

3. Spin-offs.The spin-off of a company is a structural change by means of which a part of a company (orthe whole company) is divided into two or more parts and these parts are transferred to a

new company or to an existing company. The shareholders of the company carrying out thespin-off would receive a number of shares of the beneciary company in proportion to thenumber of shares they own in the original company.

4. Transfers en bloc of assets and liabilities.Through a transfer en bloc of assets and liabilities, a company may transfer all of its assets toa partner or to a third party, for a fee which must not include stocks, shares or membershipfees of the assignee.

5. Transfer of the registered ofce abroad.The transfer of the registered ofce of a Spanish company abroad is possible and, likewise, aforeign company may transfer its registered ofce to Spain.


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C. Acquisition of companiesAnother alternative to be considered when deciding to wind up a business is the sale or thetransfer of the business. This type of transaction allows the seller to receive a nancial returnon the investment and work put in, while maintaining economic activity and saving jobs. Thebuyer, on the other hand, acquires a business that is up and running.

The sale and transfer could be performed through a sale of the shares of the company orthrough the sale of the assets and goodwill comprising the business (thus attempting to leavethe debts with the company).

The sale of shares is a way to indirectly acquire all the components of the business of acompany (assets and liabilities, rights and obligations). On the other hand, through thepurchase of assets, the purchaser acquires all or a portion of the elements that make up

the business of the company (assets and rights), whereas, where possible, the liabilities andobligations are excluded.

The acquisition of the business assets and goodwill entails peculiarities that, under certaincircumstances, make this transaction more complex than the acquisition of the companysshares:

The acquisition of certain rights, such as the rights assigned by the seller under certainagreements, may require the other partys consent to the transfer.The transfer of the clients goodwill could be difcult in certain situations.The transfer of rights may lead to a worsening of nancial conditions (e.g. rent increases forthe lease of premises).Impossibility of transferring certain rights held by the seller (permits, licenses, authorisations,subsidies held by the seller, etc.).

Should an individual or a legal entity wish to purchase a company, the following steps must bemet:

1. Qualifying round.The seller may prepare a sale prospectus which is a document showing the actual situationof a company, its assets and liabilities, etc. This prospectus enables the buyer to conduct alimited nancial assessment of the company, to establish its real value and proceed with abid at a fair price.

During this qualifying round, the buyer has access to condential information about the

seller and thus both parties should enter into a non-disclosure agreement (NDA) to makesure that the buyer does not use condential information about the seller for purposes otherthan assessing its interest in acquiring the company.


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Finally, this qualifying round may lead to a memorandum of understanding (MOU)being entered into by the parties. This MOU expresses a convergence of will between theparties, indicating an intended common line of action. In some cases, depending on theexact wording, MOUs can have the binding power of a contract (although in Spain, thisenforceability has been argued).

To obtain such a prospectus, as well to assess or even participate in the complex process ofbuying a business, prospective buyers and sellers can get in touch with companies offeringprofessional intermediation and advice on mergers and acquisitions.

2. Due diligence review process.Afterwards, the parties may start a due diligence review process whereby the buyerexamines the nancial, legal, tax and labour-related aspects of the potential target (and

during this process, the buyer may be able to identify any deal breaker issues).The ndings of the due diligence enable the buyer to obtain a favourable position in thenegotiation of the purchase agreement (the issues arising as a consequence of the duediligence review may affect the purchase price, the payment conditions or the guarantees tobe requested from the seller).

In addition, this due diligence review process is useful for determining the scope of therepresentations and warranties of the purchase agreement.

3. Purchase agreement.Finally, the seller and the buyer enter into a purchase agreement, the terms and conditionsof which vary depending on whether the buyer is acquiring the shares of the target or theassets and other rights of the target.

The main aspects to be taken into consideration when acquiring a company (either itsshares or its assets) are:

The price and terms of payment. The sellers liability. Representations and warranties. The sellers guarantees.

Under certain circumstances, the parties may sign the purchase agreement, but thetransaction (the acquisition of the ownership of the target and the payment of the purchase

price) may be completed after the conditions precedent agreed upon between the partieshave been fullled (e.g. authorisations from public authorities or compliance with specicobligations set forth in the purchase agreement).


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D. Anti-trust mattersMergers and acquisitions of a certain size (in terms of turnover and / or market share) must bereported to the Spanish National Competition Commission for authorisation. This process aimsto avoid mergers and acquisitions that could jeopardize free competition.

The Spanish National Competition Commission (Comisin Nacional de la Competencia) isthe government agency in charge of ensuring and promoting effective competition in Spanishmarkets and consistent enforcement of the Competition Law.

When turnover and / or market share breach certain thresholds, the merger or acquisitionmust be authorised by the European Competition Authority.

4.3.2 Foreign investments in Spain

Many years ago Spain liberalized its foreign investment rules to attract foreign capital from(i) non-resident individuals (Spanish nationals or foreigners domiciled outside Spain); (ii) legalentities with registered address outside Spain; and (iii) public agencies of foreign countries.

Foreign investments must generally be notied to the Spanish authorities after they havebeen made, except in the cases of (i) investments from tax havens, which generally must bedeclared to the Investments Registry of the Ministry of Economy and Finance in advance;and (ii) foreign investments in activities directly related to public order, national security andpublic health systems, and real estate property investments for diplomatic missions by statesthat are not EU Member States, which must be previously approved by the Spanish Council ofMinisters.

Certain foreign investments in Spain below 3,005,060.52 do not need to be reported unlessthe investment comes from a tax haven.

Regulated investments in Spain. These are:

1. Investments in Spanish companies (such as the incorporation of Spanish subsidiaries and theacquisition of shares of Spanish companies).

2. The setting up of branches of foreign companies in Spain.

3. The acquisition of securities that by their nature give the owner the right to participate inthe share capital or carry voting rights in a Spanish company.

4. Investments in mutual funds registered in the Register of the Spanish National SecuritiesMarket Commission.


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5. The acquisition of property situated in Spain when the total amount exceeds 3,005,060.052, or for any amount, in the case of investments made from tax havens.

6. Incorporation of or participation in coo

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