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Country Commercial Guides for FY 2000: Spain Report prepared by U.S. Embassy Madrid, Released July, 1999   Note*

VII. INVESTMENT CLIMATE

Openness to Foreign Investment

The Spanish government is interested in attracting new foreign investment to modernize the economy. It has created new regulations for investment and foreign exchange to make the country more attractive to investors. Spanish law permits foreign investment of up to 100 percent of equity, except in a few strategic sectors. Capital movements have been completely liberalized.

The 1991 Budget Act (law 31 of December 27, 1990), established that E.U.-resident companies receive the same treatment as Spanish companies in strategic sectors (national defense, radio and TV broadcasting, air transportation, and gambling). Previously, non-Spanish companies required prior authorization from the Executive for investments in these areas and some foreign ownership ceilings existed. Most of these barriers were lifted, except for investment by foreign investors in munitions companies and telecommunications services, which still require prior authorization. At the World Trade Organization negotiations on Basic Telecommunications Service, Spain agreed to open this sector on a reciprocal basis to foreign competition by November 30, 1998. In compliance with the agreement, the telecommunications sector was opened on December 1, 1998.

On February 1, 1992, royal decree 1816/1991 eliminated remaining foreign exchange and capital controls. This legislation provides complete freedom of action in financial transactions between residents and non-residents of Spain. Previous requirements for prior clearance of technology transfer and technical assistance agreements were eliminated. The liberal provisions of this law apply to payments, receipts, and transfers generated by foreign investments in Spain.

The adoption of royal decree 671/1992 on July 2, 1992 reduced the types of foreign investment requiring previous government authorization. At present, authorization is only required in the following cases:

* Direct investments over 500 million pesetas if the foreign holding exceeds 50 percent of the capital stock of the Spanish company; * Certain forms of investments made by parties in tax havens; * Real estate investments in rural land, urban land or business premises if the investment exceeds 500 million pesetas; and * Various forms of joint investments which exceed 500 million pesetas.

Under the new regulation, previous authorization for all forms of portfolio investments has been eliminated.

After the investment is made, the law establishes that it must be registered. Registration requirements are simple and straightforward, except in sectors subject to special consideration. The aim is to verify the purpose of the investment. This procedure does not block any investment.

The law regulates specific safeguards for investments. Some believe that such safeguards are not in Spain's best interest due to the size, nature of investment, and the financial aspects of investments. Depending upon the size of the investment, either the Minister of Economy or the Council of Ministers will invoke these safeguards.

This regulation brings Spain in line with E.U. directive 88/361 which classifies investors according to residence rather than nationality. However, E.U.-resident companies will not be exempt from existing authorization requirements if a non-E.U. resident controls them, directly or indirectly. There is effective control if the non-E.U. resident holds more than five percent of the E.U. company's equity or directly participates in the firm's management.

Conversion and Transfer Policies

There are no controls on capital flows. Capital controls on the transfer of funds outside of the country were abolished in 1991. Remittances of profits, debt service, capital gains and royalties from intellectual property can all be affected at market rates using commercial banks.

Expropriation and Compensation

Spanish legislation sets up a series of safeguards that almost prohibit the nationalization or expropriation of foreign investment. No expropriation or nationalization of foreign investment has taken place recently.

Dispute Settlement

Legislation establishes mechanisms to solve disputes if they arise. The Spanish judiciary system is independent from the executive. Therefore, the government is obliged to follow court rulings. Judges are in charge of prosecution and criminal investigation, which permits greater independence. The Spanish prosecution system allows for successive appeals to a higher Court of Justice. The European Court of Justice hears the final appeal. In addition, the Government of Spain abides by some of the rulings of the International Court of Justice, at The Hague.

Political Violence

The Government of Spain is involved in a long-running campaign against Basque Fatherland and Liberty (ETA), a terrorist organization founded in 1959 and dedicated to promoting Basque independence. ETA regularly targets Spanish government officials, members of the military and security forces, and moderate Basques for assassination. The group has carried out many bombings against Spanish government facilities and economic targets. In recent years, the Spanish government has had more success in controlling ETA due to increased security cooperation with French authorities.

Another smaller leftist terrorist group called GRAPO occasionally acts against government interests.

Performance Requirements/Incentives

Performance requirements are not used to determine the eligibility or level of incentives granted to investors. A range of investment incentives exist in Spain, and are provided according to:

* the authorities granting incentives; and * the type and purpose of the incentives.

Authorities that provide incentives in Spain:

The European Union:

The European Union provides incentives in the form of subsidies in general development programs such as FEDER and F.S.E. FEOGA- Guarantee. They also provide programs targeting specific sectors such as SPRINT, JOULE, VALOREM, ESPRIT, DRIVE, BRITE-EURAM, ECLAIR, COMETT II, STAR, etc. The Government of Spain manages these incentives locally.

The central government:

The central government grants these incentives out of its annual budget. Usually, these incentives match E.U. financing. Central government incentive programs are easily available for direct investment plans. Both the Ministry of Industry and the Ministry of Economy play active parts in granting the incentives.

The Foreign Investment Department, under the Ministry of Economy, counsels new market investors in the application for government incentives. The Ministry of Industry's sector-related departments negotiate directly with the old market investors to inform them of incentives available for new investment.

The regional government:

Regional governments, called Autonomous Communities, also maintain specific programs to attract investment, which are often designed to complement central government incentives.

Municipal aid:

Municipal corporations offer incentives to direct investment by facilitating infrastructure needs, granting licenses, and allowing for the operation and transaction of permits. Usually they are designed to help ease the initial operations of direct investment.

Generally, the regional governments are responsible for the management of each type of investment. This provides a benefit to investors as each autonomous community has a specific interest in attracting investment that enhances its economy.

Types of incentives available:

* Financial subsidies * Exemption from certain taxes * Preferential access to official credit * Reduction of burdens, with social security discounts to companies * Bonuses for acquisition of certain material * Customs exemption for certain imported goods * Real estate grants, and gratuitous or favorable land grants * Guarantees granted in credit operations * Loans with low interest, long maturities, and grace periods * Guarantee of dividends * Professional training and qualification * Indirect aid by means of supplying infrastructure facilities (accesses, services, communications, etc.)

Incentives from national, regional, or municipal governments and the E.U. are granted to Spanish and foreign companies alike without discrimination.

Right to Private Ownership and Establishment

The Constitution protects private ownership. Spanish law establishes clear rights to private ownership. Except for some limitations in "strategic" sectors (national defense, radio and television broadcasting, air transportation, and gambling), foreign firms receive the same legal treatment as Spanish companies.

Competitive equality exists between public and private firms with respect to local access to markets, credit, licenses and supplies. Foreign firms have participated in the privatization process on equal footing with Spanish buyers.

Protection of Property Rights

Spanish law protects property rights with enforcement carried out at the administrative and judicial levels. Any decision, by the Administration, pertaining to property rights, can be appealed first at the administrative level and then at the judicial level, which has three levels of court appeals. Property protection is effective in Spain, although the system is slow. Certain property rights, because of their complexity, are more difficult to protect than others, i.e., intellectual property rights.

Public and private sector enforcement actions (especially private sector initiatives), using Spain's new patent, copyright, and trademark legal framework, have greatly increased the number of criminal and civil actions taken against intellectual property pirates. Overall, Spain's illegal market for videos, records, and tapes has declined sharply. In 1984, according to trade association sources, illegal videos, records, and tapes made up 50 percent of Spain's market. In 1994, according to the same source, illegal products in this market declined to 5 percent.

Spain's annual video cassette retail market, which is heavily dominated by U.S. production, is estimated at USD 200 million. Currently, pirated video cassettes represent only 25 percent of the market compared to 85 percent five years ago. Trade associations attribute this decline to the application of Spain's new intellectual property laws, particularly successes in some criminal cases, and more efficient policies.

Despite overall improvement, software piracy remains a serious problem in Spain; the Business Software Alliance (BSA) estimates that 73 percent of PC software in use has been copied illegally. An amendment to the law in December 1993 allows unannounced civil search procedures. If a software developer has reasonable suspicion of an infringement of his copyright, he or she may ask a judge to permit a search of the alleged wrongdoers' premises without warning. This measure has already produced some searches and prosecution of software pirates.

The United States has held informal consultations with Spain regarding the importance the United States attaches to the protection of intellectual property. Spain was dropped from the Special 301 "watch list" in April 1995.

Regulatory System: Laws and Procedures

Spain modernized both its commercial laws and regulations following its 1986 entry into the E.U. Local regulatory framework compares favorably with other major European countries. Bureaucratic procedures have been streamlined and most red tape has been eliminated. Labor laws and regulations have been the exception, although the 1994 Labor Reform Laws and the pact signed between labor and business, in April 1997, may signal a change.

Bilateral Investment Agreements

Spain concluded bilateral investment agreements with Hungary (1989), Morocco (1989), Bolivia (1990), the Czech Republic (1990), Russia (1990), Argentina (1991), Chile (1991), Tunisia (1991), China (1992), and Uruguay (1992).

OPIC and Other Investment Insurance Programs

As Spain is a member of the European Union, OPIC insurance is not applicable, nor are other insurance programs. Various E.U. directives, as adopted into Spanish law, adequately protect the rights of foreign investors.

Labor

Employment estimates for 1998 show that there were about 13.3 million Spaniards in the work force. This figure was expected to climb to 14.0 million for 2000. Meanwhile, unemployment is expected to continue its decrease from the 1994 high of 24.2 percent down to 18.8 percent in 1998. Conservative estimates predict unemployment will decline to 17.0 percent in 2000.

Despite recent improvements in job creation, Spain continues to have the worst unemployment figure in the E.U. Employers have long criticized Spanish labor law (much of which originated in the Franco era) as unusually inflexible with very high severance payments, thus discouraging new hiring. Labor market reforms in 1994 and 1997 have eased but not fundamentally changed this situation, with the result that one third of all employed Spaniards are Temporaries. The government is unlikely to address this situation with further reforms until after general elections, which are due by March 2000, if then.

Though dues-paying union membership is among the lowest in the E.U. (generally estimated to be about ten percent), unions are involved in negotiating collective agreements for over half the work force. Under the Spanish system, workers elect delegates to represent them to the management every four years. If a certain proportion of those delegates are union-affiliated, those unions form part of the workers' committees. Large employers generally have individual collective agreements. In industries characterized by smaller companies, collective agreements are often industry-wide or regional.

The constitution guarantees the right to strike, and it has been interpreted to include general strikes called to protest government policy. There have been many strikes in recent years, the most recent being a major truck-drivers strike in February 1997 which paralyzed road transportation in northern Spain for 11 days.

Foreign-Trade Zones/Free Ports

Manufacturers mainly use free ports, foreign-trade zones, and other customs-free areas for exporting purposes. Manufacturers that set up an operation in this area enjoy the advantages of importing their supplies without any customs duties. These companies have to abide by Spanish labor laws.

Capital Outflow Policy

The government actively encourages Spanish investment abroad as a way to diversify the Spanish economy. However, Spain's presence is still small in most regions of the world, with the notable exception of Latin America where investment in energy, utilities, construction, finance, insurance nad telecommunications has taken off dramatically in the past four years. Spanish companies (some of them ex state-owned monopolies, recently privatized) have acquired a controlling interest in some of the largest companies in these sectors in Brazil, Argentina, Chile, Peru and Venezuela. In 1999, Spain's dominant energy company Repsol bought YPF, the Argentine petroleum company for USD 13.5 billion. In 1998, Telefonica, Spain's newly privatized telecommunications company, paid almost USD 5 billion for one of the companies that formed part of Brazil's telephone monopoly Telebras when it was privatized in addition to other acquisitions in the Brazilian telecommunications market. Other Spanish enterprises have established a growing presence in some to the smaller economies of Central America as well. As a general policy, the Spanish government supports investments in developing countries through tied-aid credits or development assistance programs.

In addition, a handful of private companies, mostly in the food and beverage industries, have operations abroad stretching from Europe to Asia and the Western Hemisphere.

Major Foreign Investors

Foreign investment has played a significant role in modernizing the Spanish economy over the past 35 years. Attracted by Spain's large domestic market, export possibilities, and growth potential, foreign companies in large numbers have set up operations. Spain's automotive industry is almost entirely foreign-owned. Multinationals control half of the food production companies, a third of chemical firms and two thirds of the cement sector. Several foreign banks have acquired networks from Spanish banks, and foreign firms control close to one third of the insurance market. In 1998, Spain recorded a record USD 21.4 billion in new foreign direct investment - more than five times the amount invested in 1994. In 1998, the largest investors in Spain remained the Netherlands, France, the United States, the United Kingdom and Germany.