guide to business in spain

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This guide was researched and written by Garrigues Abogados y Asesores Tributarios on behalfof the Spanish Institute for Foreign Trade (ICEX) and the General Directorate for Trade and Investment(DGCI).

This guide is correct to the best of our knowledge and belief at the time of going to press. It is, however,written as a general guide so it is recommended thatspecific professional advice be sought before any actionis taken, and therefore no responsibility whatsoever is assumed for the contents, including opinions, contained in this guide or for any actions based on such contents.

Madrid, January, 2004

© Spanish Institute for Foreign Trade (ICEX)

Instituto Español de Comercio Exterior (ICEX)

Paseo de la Castellana, 14-16, 28046 Madrid

Ph: 00 (34) 91 349 61 00

Fax: 00 (34) 91 431 61 28

E-mail: [email protected]

Web: www.icex.es

Creación y realización: Bravo Lofish, S.L.

Imprime:

ISBN: 84-7811-513-7

ISSN: 1137-2907

N.I.P.O.: 381-04-024-0

Depósito Legal:

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This publication has been edited with thetechnical advice of the General Directorate forTrade and Investment. The Directorate withinSpain’s Ministry of Economy is in charge ofpromoting foreign investment in Spain.

Acknowledgements:

General Subdirectorate of Regional Incentives

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Spain: a profile

The Spanish financial system

Company andcommercial law

Tax system

Investment aidand incentives in Spain

Accounting and auditingrequirements

Labor and social securityregulations

Useful addresses

Practical guidelines

Legal framework and tax implicationsof e-commerce in Spain

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S p a i n : a p r o f i l e

7

Spain:a profileI. Introduction 9

II. The country, its people and its institutions 101. Geography, climate

and living conditions 102. Population and

human resources 103. Political institutions 12

III. Spain and the European Union 14

IV. Infrastructure 15

V. Economic overview 17

VI. Domestic market 19

VII. Foreign trade and investment 20

Spain: a profile1

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9

Spain is, at the beginning of the twenty-firstcentury, one of the world’s most developedcountries, with a very important role in theinternational political and economic arenas.The country has well proved its capacity toeffectively translate consistent economicgrowth into significant investments, includingcommunication networks comprisingthousands of kilometers of highways, high-speed train services and satellite facilities.This capacity and the constant effort madeto ensure the competitiveness of itseconomic structure have enabled Spain to beplaced among the world’s main economicplayers.

The process of development andenlargement of the EU has led to thedecision of including in May 2004 ten newcountries in the Union, the biggestenlargement ever in terms of scope anddiversity. This enlargement will boosteconomic growth in Spain, thereforeenhancing the opportunities of the Spanishmarket.

The single currency introduced in 2002 intwelve countries of the EU, the Euro Zone,has proved to be a success. The Euro Zoneis a monetary zone comparable to theUnited States and a consolidated, tariff-freemarket of more than 379 million consumers.With the euro, the opportunities of growthand development for Spain have been furtherincreased.

The effective economic performance of Spainis the result of the legislative reformsundertaken and of the heavy investmentsmade by Spanish enterprises to ensurecompetitiveness, develop foreign networksand join multinational projects.

I. Introduction

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10

I. Geography, climate andliving conditionsThe Kingdom of Spain occupies an area of506,013 square kilometers in the southwestof Europe, and is the second largest countryin the EU. The territory of Spain coversmost of the Iberian Peninsula, which it shareswith Portugal, and also includes the BalearicIslands in the Mediterranean, the CanaryIslands in the Atlantic Ocean, the NorthAfrican cities of Ceuta and Melilla and somesurrounding rocky islands.

Despite the differences among the variousregions of Spain, the country can be said tohave mainly a typical Mediterranean climate.The weather in the northern coastal region(looking onto the Atlantic and the Bay ofBiscay) is mild and generally rainy throughoutthe year, with temperatures neither very lowin the winter nor very high in the summer.The climate on the Mediterranean coastline,including the Balearic Islands, Ceuta andMelilla, is mild in the winter and hot and dryin the summer. The most extremedifferences occur in the interior of thePeninsula, where the climate is rather dry,with cold winters and hot summers. TheCanary Islands have a climate of their own,with temperatures constantly around 20Celsius degrees and only minor variations intemperature between seasons or betweenday and night.

Spain has an excellent quality of life and isvery open to foreigners. Over four thousandkilometers of beaches, abundant sportingfacilities and events and social opportunitiesare crowned by the diversity of the country’scultural heritage as a crossroads ofcivilizations (Celts, Romans, Visigoths, Arabs,Jews, etc.).

2. Population and humanresourcesThe population of Spain in 2002 was 41.838million people, with a population density ofnearly 83 inhabitants per square kilometer.The last forecast offered by the “InstitutoNacional de Estadística” (National StatisticsInstitute) is the figure for the Spanishpopulation for year 2003, which will increaseto 42.8 million people.

Spain is a markedly urban society (see Table1), as evidenced by the fact that more than34% of the population lives in the capitals ofthe provinces of Spain.

The official national language is Spanish,which is used jointly with other officialregional languages (Catalan, Basque, Galicianand Valencian) in specific AutonomousCommunities. Education is compulsory untilthe age of 16 and English is the main foreignlanguage studied at school.

Compared with other OECD countries,Spain’s population is relatively young:approximately 21% is under 19 years old, 62%

II. The country, its people and its institutions

Table 1

The biggest cities in Spain*

Population

Madrid 3,016,788Barcelona 1,527,190Valencia 761,871Seville 704,114Saragossa 620,419Malaga 535,686Murcia 377,888The Palms of Great Canary 370,649Majorca 358,462Bilbao 353,950

* Figures refer only to the municipal district of each city.Source: Revised registered population in Spanish cities

as of January 1, 2002. Instituto Nacional de Estadística (National Statistics Institute).

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11

is between 19 and 65 years old, and only 17%is over 65 according to year 2002 figures.

Spain has a labor force of around 18.9 millionpeople, representing 55.31% of the country’spopulation over 16 years old. The workingpopulation is generally middle-aged.Additionally, as seen in Table 2 below, Spainis also experiencing in recent years a relevantinflow of immigrants which is beginning tooffset the consequences of an agingpopulation.

The structure of the labor force byeconomic sector has also changedsignificantly in recent years, with a notableincrease in the number of those employed inthe services sector and a decrease in thenumber of farmworkers (see Table 3 andChart 1).

Table 2

Foreigners resident in Spain by continent of origin

1999 2000 2001 2002 2003*

Europe 353,556 361,437 414,555 473,514 506,745America 166,709 199,964 298,798 380,305 432,428Asia 66,340 71,015 89,519 101,621 110,968Africa 213,012 261,385 304,149 366,518 397,516Oceania 1,013 902 944 1,024 1,014Unknown 699 1,017 1,095 1,019 0Total 801,329 895,720 1,109,060 1,324,001 1,448,671

*January-June. Figures released by the “Ministerio del Interior” (Home Office).Source: Instituto Nacional de Estadística (National Statistics Institute).

Chart 1

Labor force structure by economicsector in 2003

Source: Instituto Nacional de Estadística (National Statistics Institute).

5%

19%

12%

64%

Agriculture Construction

Industry Services

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12

The labor force is very qualified, productiveand capable of adapting to technologicalchanges, productivity growth being as aconsequence among the highest in Europe.

Lastly, in line with the existing commitmentwithin the European Union to fosteremployment, since the mid-nineties theGovernment implemented wide-rangingreforms of the labor market regulations,introducing a high degree of flexibility in theuse of the labor force by companies. Thesuccess of the reforms undertaken isattested by the fact that from 1996 to 2003,Spain has generated one third of theemployment in the Euro Zone.

3. Political institutionsSpain is a parliamentary monarchy. The Kingis the Head of State; and his primary missionis to arbitrate and moderate the regularfunctioning of the country’s institutions inaccordance with the Constitution. He alsoformally ratifies the appointment ordesignation of the highest holders of publicoffice in the legislative, executive and judicialbranches.

The Constitution of 1978 enshrined thefundamental civil rights and public freedomsand assigned legislative power to the “CortesGenerales” (Parliament), executive power to

the Government of the nation, and judicialpowers to independent judges andmagistrates.

The responsibility for enacting laws isentrusted to the “Cortes Generales”,comprising the “Congreso de los Diputados”(Lower House of Parliament) and the“Senado” (Senate), the members of whichare elected by universal suffrage every fouryears.

The “Cortes Generales” exercise thelegislative power of the nation, approve theannual State budgets, control the actions ofthe Government and ratify internationaltreaties.

The Government is headed by the“Presidente del Gobierno” (President of theGovernment) who is elected by the “CortesGenerales” and is, in turn, in charge ofelecting the members of the “Consejo deMinistros” (Council of Ministers).

The members of the Council of Ministers areappointed and removed by the President ofthe Goverment at his or her discretion.

For administrative purposes, Spain isorganised into 17 Autonomous Communities(Regions) each containing generally one ormore provinces, plus the Autonomous Citiesof Ceuta and Melilla in Northern Africa; thetotal number of provinces is 50.

Table 3

Evolution of labor force structure by economic sector(Percentages)

1985 1990 1995 2000 2001 2002 2003

Agriculture 18.2 11.8 9.3 6.6 6.2 5.5 5.4Industry 24.5 23.8 20.1 19.8 19.7 19.6 18.7Construction 7.3 9.7 10.4 11.1 11.5 11.7 11.8Services 50.0 54.7 60.2 62.5 62.6 63.2 64.1

Source: Instituto Nacional de Estadística (National Statistics Institute), Labor Force Survey, 2003.

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Each Autonomous Community (Region)exercises the powers assigned to it by theConstitution as specified in its “Statute ofAutonomy”. These Statutes also stipulate theinstitutional organization of the Communityconcerned, consisting generally of: alegislative assembly elected by universalsuffrage, which enacts legislation applicable inthe Community; a Government withexecutive and administrative functions,headed by a President elected by theAssembly, who is the Community’s supremerepresentative; and a Superior Court ofJustice, in which judicial power in theCommunity’s territory is vested. A Delegateappointed by the Central Governmentdirects the Administration of the State in theAutonomous Community (Region), and co-ordinates it with the Community’sadministration.

The Autonomous Communities (Regions)are financially autonomous and also receiveallocations from the general State budgets.

As a result of the structure above describedSpain has become one of the mostdecentralized countries in Europe.

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Spain became a full member of the EuropeanEconomic Community in 1986. Therefore, EUlegislation is fully applicable in Spain. In thisconnection and according to figures publishedby the European Commission, Spain fullycomplies with the objectives established bythe European Council and has implemented2,364 Directives into national law.

A major impact of European Unionmembership for Spain, and for the otherMember States, came in the mid-nineties withthe advent of the European Single Market andthe European Economic Area, which createda genuine barrier-free trading space. Sincethen, the EU has advanced significantly in theprocess of unification by strengthening thepolitical and social ties among its citizens.Spain, throughout all this process, has alwaysstood out as one of the leaders in theimplementation of liberalization measures.

Spain has a strong responsibility in the EU,evidenced by the fact that it is the fifth countryin terms of voting power in the Council ofMinisters. During 2002, it held its thirdPresidency of the Council of the EuropeanUnion with the overall intention of culminatingthe integration process and the historicalchanges which began over a decade ago.

This process has reached one of its mostimportant milestones, as the draft Treatyestablishing a Constitution for Europe is beingdiscussed within the European Commission.The Constitution will incorporate the mainreforms to improve the decision-makingprocess within the Union, to strengthen itsmeans of action and to provide its citizenswith a Charter of Fundamental Rights.

The introduction of the euro (January 1st,2002) in twelve countries marked thebeginning of the third Spanish Presidency,representing the culmination of a lengthyprocess and a whole deal of growth

opportunities for the Spanish and Europeanmarkets.

With the euro in the European Union, amonetary zone has been established to formthe world’s number one trading power,triggering the integration of the financialmarkets and economic policies of theMember States adopting it. Such changes havealso fostered the coordination of the taxsystems of the Euro Zone Member States,thus further increasing the stability of the EU.

The euro has yielded clear results at theinternational level, promoting the visibility ofthe Euro Zone both in international andfinancial fora (the G-7 group meetings) andin multilateral organizations. The economicand commercial stability provided by theeuro has further bolstered Spain’s currenteconomic growth along with additionalinternational political presence.

The European Union approved the joining of10 new countries for May 1, 2004 (Cyprus,the Czech Republic, Estonia, Hungary, Latvia,Lithuania, Malta, Poland, the Slovak Republicand Slovenia). Such enlargement of the EUposes a unique challenge since it is withoutprecedent in terms of scope and diversity: anextension of land area of 23% and apopulation increase of 75 million people.

Spain is the EU Member State that in the lastyears has received the most EU structuraland cohesion funds —used to financeinfrastructure and development projects. Infact, Spain is expected to receive in totalaround 45 billion euros in various EUstructural funds in the 2000-2006 period andover 11 billion euros in cohesion funds (62%of the total budget agreed by the EuropeanCouncil of Berlin). With these funds, theGovernment has undertaken actions in thisarea, with the cooperation of privateinitiatives financing infrastructures.

III. Spain and the European Union

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15

Over the last decade Spain has undergone aprocess of modernization that has includedan extensive renewal of its infrastructure.

The Government plans to continue investingheavily in the future. This is reflected in theOverall Infrastructure Plan for 2000-2010,which provided for investment totalling over102 billion euros. Intercity transport is themain item in the Infrastructure Plan, followedby urban transport. There will also beaccompanying measures in hydraulic worksand environmental infrastructure.

The motorway network, totalling nearly11,000 km, has more than tripled in lengthsince 1982 and has undergone continuousrenovation to enhance efficiency andconvenience. The Government investmentplan will result in over 13,000 km ofmotorway network by year 2010, with totalinvestment expected to surpass 25 billioneuros between 2000 and 2006, thusbecoming one of the most modern networksin the world.

As far as rail transport is concerned, Spainhas a network of over 15,000 km of track,and in 1992 introduced a 471-km high-speedtrain line from Madrid to Seville. High-speedtrain lines have become a priority for theGovernment infrastructure plans (theforeseen network of high-speed trains willtotal 7,200 km), and as a consequence ofthem, by December 2004, Madrid will beconnected by high-speed train to the Frenchborder via Zaragoza (Aragón) and Barcelona(Catalonia) and additionally via Vitoria andIrún (Basque Country). In fact, the sectionMadrid-Guadalajara-Zaragoza-Lérida openedin October 2003. Furthermore, Madrid willbe soon connected to the Mediterraneancoast via Malaga and, by 2005, via Valencia. Inconnection with the Northern route(Madrid-Valladolid-La Coruña), completion of

works for the Madrid-Segovia-Valladolidsection is expected for 2007. Additionally, anagreement has been entered into betweenSpain and Portugal; Madrid and Lisbon will beconnected in less than 3 hours by 2010. Theinvestment forecast for railroads totalsalmost 40.9 billion euros between 2000 and2007.

There are air transport services between themain cities. The approximately 250 airlineswith scheduled flights operating out of thecountry’s 33 international airports ensurecomplete service abroad. Spain is animportant intermediate stop in the linesbetween Latin America and Europe and liesin a crucial position in the network toAmerica and Africa from Europe. Spain alsohas excellent sea communications, with 53international ports on the Atlantic andMediterranean coasts.

Spain is also well equipped with industrialland and technological and industrialinfrastructure. In the last few years,technology parks have proliferated in themain industrial areas and near universitiesand R&D centers. There are currently 41technology parks (12 fully operational, 29 ina development stage). In these technologyparks there are 1,080 companies, 108 R&Dcenters and 12 incubators operating. R&Dexpenditure has risen significantly in recentyears. The new national R&D Plan (2004-2007) forecasts to achieve the objective of aR&D expenditure amounting to 1.4% of GDPby 2007.

Lastly, Spain has a good telecommunicationsnetwork. In addition to the extensive fiberoptic network which covers almost all theterritory, Spain manages one of the largestinternational undersea cable networks andhas satellite connections with the fivecontinents. In this respect, it is worthwhile

IV. Infrastructure

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mentioning the strong liberalization processundertaken in most industries, including thetelecommunications sector, well within theEuropean schedule. Among other benefits,this implies a more competitive and costeffective offering of this type of services,essential for an appropriate economicdevelopment.

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17

Spain’s GDP increased by 2.0% in 2002totalling around US$ 583 billions making itthe eighth largest in the OECD. Growth ofthe GDP for 2003 is estimated to reach2.3%.

The structure of the Spanish economy is thatof an industrialized country, with the servicessector being the main contributor to GDP,followed by industry. These two sectorsrepresent almost 90% of Spain’s GDP withagriculture’s share today representing less

than 4% of GDP, and declining sharply as aresult of the country’s intense economicgrowth (see Table 4).

Spain is a fairly dynamic country, and hasconsistently achieved high economic growthrates, clearly above the average for otherindustrialized countries. The growth in Spaincontinues to be much greater than theaggregate growth of the EU (see Chart 2).

V. Economic overview

4.5

4

3.5

3

2.5

2

1.5

1

0.5

01999 2000 2001 2002 2003*

* January-June.Source: Banco de España (Bank of Spain).

Table 4

Structure of GDP(% of total, in 1995 constant pesetas)

Sector 1998 1999 2000 2001 2002 2003*

Agriculture and fishery 4.7 4.3 4.5 4.3 4.05 3.79Industry 30.2 29.6 24.1 23.1 22.93 23.71Construction 7.0 7.1 8.1 8.5 8.71 8.16Services 58.1 59.0 63.3 64.1 64.31 64.34

* January-March.Source: Instituto Nacional de Estadística (National Statistics Institute).

Chart 2

GDP growth(% growth rate)

Spain

EU

4.2

2.8

4.2

3.42.7

1.5

2.0

1.0

2.3

1.2

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18

The prospects, taking into account that theworld economic situation is beginning torecover, are that Spain will have growth ratesof 3% in 2004, once again exceeding theaverage for the EU (see Table 5). In fact, theSpanish economy is accomplishing theprojections given last year by the OECD,which it already foresaw a recovery for 2003and achievement of real GDP growth ratesover 3% in 2004.

Inflation in Spain has fallen steadily since thelate 1980’s. The average inflation rate for 1987through 1992 was 5.8%. The rate of inflationwas kept under 5% for the first time in 1993,and has been further reduced in subsequentyears. Year 2003 will end with an annual rate

of inflation of 2.6%, clearly improving lastyear’s figure, which amounted to 4%.

Also, in 1999 Spain engaged in an earnesteffort to reduce the budget deficit, includinga successful program of major privatizationsand of contention of public expenditure. Theactions taken by the Government have onceagain proved the flexibility of the Spanisheconomy and according to OECDprojections, a deficit of close to 0.5% of GDPis likely to be recorded in 2003, implying aneutral fiscal stance.

Very noteworthy is the impressive reductionin the official interest rates in Spain from10% in 1993 to the current 2.0%.

Table 5

Growth and inflation forecasts for OECD countries(Percentages)

Real GDP Growth Inflation

2003 2004 2003 2004

EU countriesAustria 1.1 2.0 1.4 1.1Belgium 1.3 2.3 1.7 1.2Denmark 1.6 2.6 2.3 2.3Finland 2.2 3.4 2.3 1.5France 1.2 2.6 1.4 1.4Germany 0.3 1.7 0.8 0.4Greece 3.6 3.9 3.3 3.4Ireland 3.2 4.2 4.2 3.2Italy 1.0 2.4 2.4 1.9Luxembourg 0.3 2.7 2.2 1.4Netherlands 0.7 1.9 2.3 1.3Portugal 0.3 2.3 3.1 2.2Spain 2.1 3.1 2.9 2.4Sweden 1.5 2.8 2.3 1.7United Kingdom 2.1 2.6 0.9 1.0Other countriesUnited States 2.5 4.0 2.0 1.2Japan 1.0 1.1 -1.6 -1.6Total EU 1.2 2.4 1.6 1.4Total Euro Zone 1.0 2.4 1.7 1.4Total OECD 1.9 3.0 2.0 1.3

Source: OECD Economic Outlook (projections). June 2003.

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The growth of the Spanish economy inrecent years has been driven by a strongdemand and a substantial expansion ofproduction in the context of an increasinglyopen economy.

Today Spain has a domestic market of almost42 million people with a per capita income ofmore than 20,000 US$1 and an additionalinjection of demand coming from the 51.7million tourists who visit the country everyyear. The close links (economic, cultural,political) with Latin America and NorthAfrica and the obvious advantages of usingSpain as a gateway to those countries areworthy of mention.

Table 6 reflects the evolution of basicproduction and demand components since1999. Recent indicators show a sustainedrecovery of industrial production. The

general recovery trend shown by allcomponents is also worthy of mention. Ingeneral, the potential for growth is still veryhigh in many industrial sectors due to therelatively lower level of per capitaconsumption as compared to otherEuropean countries. This is the case, forinstance, in the telecommunications and,among others, environmental equipmentindustries.

VI. Domestic market

Table 6

Growth of production and demand components(Percentages)

1999 2000 2001 2002 2003*

Production components

Agriculture and fishery -3.1 1.5 -3.1 1.0 -0.2Industry 3.0 4.0 1.2 0.7 1.9Energy ** ** 2.8 0.3 2.1Construction 8.7 6.3 5.4 4.8 3.8Services 4.0 3.9 3.2 2.2 2.0

Demand components

Private consumption 4.7 4.0 2.5 2.6 3.1Public consumption 2.9 4.0 3.1 4.4 3.8Gross fixed capital formation 8.9 5.7 3.2 1.0 3.2Domestic demand 5.5 4.3 2.8 2.6 3.4Exports of goods and services 6.6 9.6 3.4 0 5.0Imports of goods and services 11.9 9.8 3.5 -0.6 8.2

* January-September. ** For these years, Industry and Energy were added under the Industry heading.Source: Instituto Nacional de Estadística (National Statistics Institute).

1 Figure based on current purchasing power parities.

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20

In recent years, Spain’s exports and importshave grown rapidly, as has incoming foreigninvestment. As can be seen in Table 7, thebasic features of the country’s balance ofpayments today include a trade deficit whichis being completely financed by the surplus inthe services account (driven by tourism) and

in the capital and financial accounts.However, it should be noted that despite thestrong volume of foreign direct investmentthat Spain receives, Spanish direct investmentabroad is since 1997 larger than foreigndirect investment in Spain.

VII. Foreign trade and investment

Table 7

Spain’s balance of payments(Millions of euros)

2000 2001 2002 2003*

I. Current account -18,959 -18,346 -16,627 -9,600

Trade Balance -35,643 -36,396 -34,712 -16,292Services Balance 24,216 27,131 26,128 11,680Income -9,055 -10,878 -10,466 -6,192Net Current Transfers 1,523 1,798 2,424 1,205

II. Capital Account 5,217 5,556 7,498 4,035

III. Financial Account 21,509 20,072 16,179 8,604

Total (excluding Bank of Spain) 27,652 2,597 12,618 12,910Direct investment 18,561 -5,686 2,909 6,333Portfolio investment -2,919 -19,813 6,510 -17,004Other investment 46,961 28,498 7,912 26,380Financial derivatives 2,172 -401 -4,712 -2,800Bank of Spain -6,143 17,475 3,561 -4,305Reserves 3,302 1,581 -3,630 4,552Claims with the Eurosystem -9,250 16,122 6,506 -4,116Other net assets -195 -228 685 -4,742

IV. Net errors & omissions -7,768 -7,293 -7,050 -3,039

*January-June.N.B.: A positive sign in the current and capital accounts means a surplus (receipts greater than payments) and represents a net loan from Spain tothe rest of the world (increase in assets or decrease in liabilities), whereas in the financial account a positive sign means a net inflow of capital andrepresents a net loan from the rest of the world to Spain. A negative sign in reserves means an increase.Source: Banco de España (Bank of Spain).

The main products traded by Spain in 2003are shown in Table 8. The sophistication ofthe main products exported clearly showsthe degree of technology and capability ofSpanish economy.

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21

Spain’s main trading partners are EUcountries, with 72% of total exports and 64%of total imports. Latin American countriesrepresent 6% of Spanish exports and 5% ofimports, the U.S. accounts for 5% of exportsand 5% of imports and Japan accounts for 1%of exports and 3% of imports.

Perhaps the most striking feature of theSpanish balance of payments is the net inflowof foreign investment, consistently receivedby Spain since 1996, with the exception of2001 and 2002, due to the internationalcrisis (see Chart 3).

Table 8

Distribution of exports and imports 2003*(Percentages)

Exports Imports

Transport vehicles 23.8 Transport vehicles 16.5Boilers, machinery and equipment 8.3 Nuclear reactors, boilers 11.9Electronic machinery 6.7 Fuels and mineral oils 10.5Plastics and plastic products 3.4 Electronic machinery 8.3Fuels and mineral oils 3.1 Cast iron and steel 3.5Fresh fruits 3.0 Plastics and plastic products 3.3Pharmaceutical products 2.5 Pharmaceutical products 3.3Fresh vegetables 2.3 Organic chemical products 3.0Cast iron and steel 2.3 Optical machinery 2.4Organic chemical products 2.1 Fishery products 2.2Cast iron and steel products 1.9 Wood and cardboard products 1.8Wood and cardboard products 1.7 Clothing products 1.7

* January-October.Source: Ministry of Economy.

Chart 3

Foreign investment in Spain (1999-2003)(Billions of euros)

120

100

80

60

40

20

01999 2000 2001 2002 2003*

■ Direct ■ Portfolio ■ Total* January-August.Source: Banco de España (Bank of Spain).

14.79

42.69

57.48

40.73

63.64

104.37

31.3030.47

61.77

22.52

37.04

59.56

11.2714.21

25.48

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22

According to the Annual World InvestmentReport released by the United NationsConference on Trade and Development,global foreign direct investment declinedsharply in 2001 (59% in developedcountries). Spain did not escape thisinternational trend, but it is one of the EUcountries with lowest decreases.

Foreign direct investment is mainly routed toservices (77.5% between 1997 and 2000) andindustry (22.5%). The industrial sectors thatreceived most investment were, amongothers, the chemicals, pharmaceutical,automobile, food and beverage andelectronic subsectors.

However, other sectors such as electronics,aeronautics, environment, healthcare andleisure offer attractive investmentopportunities for foreign investors.

Lastly, Table 9 shows Spain’s integration inthe world’s global economy and theopenness of its structures, reflecting therelevancy of the direct investment abroadperformed in the last years by Spanishcompanies and entrepreneurs.

Table 9

Net direct Spanish investment abroad(Millions of euros)

1999 2000 2001 2002 2003*

EU 11,340 17,812 26,855 16,435 7,133USA -127 7,165 1,574 1,077 1,094Latin America 27,629 21,369 6,143 4,297 -1,182

* January - June.Source: Dirección General de Comercio e Inversiones (General Directorate of Commerce and Investments, Ministry of Economy).

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T h e S p a n i s h f i n a n c i a l s y s t e m

25

financialSpanish

system

The

I. Introduction 27II. Financial institutions 28

1. Credit institutions 282. Collective investment

entities 303. Credit market 324. Stock market 32

a) Equity market 34b) Options and futures

market 37c) Fixed-income market 37d) New Market 39

5. Money market 406. Credit finance

establishments 427. Venture capital

institutions 428. Asset securitization 439. Mutual guarantee

societies 4310. Pension plans and

insurance companies 44

III. Law 44/2002 on financialsystem reform measures 46

IV. Taxation of financial products 48

The Spanish financial system

2

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27

From the institutional standpoint, a financialsystem can be defined as the group ofentities which generates, gathers, administersand manages saving and investment in apolitical and economic system.

Spain has a diversified modern financialsystem, which is fully integrated withinternational financial markets.

The system comprises credit, stock andmoney markets, and specific markets forderivatives (options and futures based ondifferent assets, e.g. a share index called Ibex 35).

I. Introduction

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The operators in the Spanish financial systemcan be classified as follows:

• The central bank: Bank of Spain

• Credit institutions:

– Spanish and foreign banks

– Savings banks

– Credit cooperatives - Rural savings banks

• Other credit entities:

– Credit Financial Establishments(introduced by Law 3/94, implementingthe Second EC Directive on bankingcoordination). These are credit entitiesspecialized in certain asset products –e.g., leasing, financing, mortgage loans,etc.– which cannot take public deposits.

– Instituto de Crédito Oficial, ICO (acts asthe State’s finance agency and investmentbank).

• Investment institutions:

– Collective investment entities:

- Investment companies dealing in:

Marketable securities

Property assets

- Investment funds:

Marketable securities

Property assets

- Money market assets:

Mortgage securities

Pension plans and funds

Other

– Venture capital funds and companies

– Other investment entities

• Brokers:

– Stock market:

- Stockbroker companies and agencies

– General:

- Banks

- Security management and depositcompanies

• Insurance and reinsurance companiesand insurance brokers

1. Credit institutionsBanks and savings banks are of particularimportance in the financial sector in Spain,because of the volume of their business andbecause they are active in all segments of theeconomy.

In Spain, since the European System ofCentral Banks (ESCB) and the EuropeanCentral Bank were set up, the functions ofthe Bank of Spain have been redefined. Theynow consist of participating in the followingbasic functions attributed to the ESCB:

– Defining and implementing the Euro Zone’smonetary policy, with the aim ofmaintaining price stability within it.

– Conducting currency exchange operationsand holding and managing the SpanishState’s official foreign exchange reserves.

– Promoting the sound working of paymentsystems in the Euro Zone.

– Issuing legal tender banknotes.

Also, pursuant to its Law of Autonomy, theBank of Spain will have the followingfunctions:

– Supervising the solvency and behavior ofcredit institutions and financial markets.

II. Financial institutions

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29

– Promoting the sound working and stabilityof the financial system and of Spain’spayment systems.

– Preparing and publishing statistics relatingto its functions.

– Providing treasury services and acting as afinancial agent for government debt.

– Advising the Government and preparingthe appropriate reports and studies.

The banks operating in Spain are financialinstitutions authorized as such which engagein intermediation transactions using fundsobtained from customers and provide otherservices of a financial nature.

At November 21, 2003 there were 80officially registered Spanish banks, manysubsidiaries, branches, representative officesand correspondents abroad.1 Some 58foreign banks also have offices in Spain. Of these foreign banks, 49 have theirheadquarters in another EU Member State.

Savings banks are credit institutions with thesame freedoms as and full operationalequality with the other members of theSpanish financial system. They have the legalform of private foundations and acommunity-welfare purpose and operate inthe open market, although they reinvest aconsiderable portion of the earningsobtained by them in community welfarework.

These long-standing institutions with deeproots in Spain attract a substantial portion ofprivate savings and their lending businesscharacteristically focuses on the privatesector (through mortgage loans, etc.). Theyare also very active in financing major publicworks and private-sector projects by

subscribing and purchasing fixed-incomesecurities.

The Spanish savings banks are members ofthe Spanish Confederation of Savings Banks(Confederación Española de Cajas deAhorro-CECA), a credit institution formedin 1928 to act as the national association andfinancial institution of the Spanish savingsbanks and which today groups together 47confederated savings banks.

In recent years, savings banks and certainother banks have been involved in a majorprocess aimed at optimizing their positionvis-à-vis the EU single market for bankingservices. As part of this, a process ofintegration took place involving the largestSpanish banks and the creation of twobanking groups (SCH and BBVA) on aEuropean scale and with a major presence inLatin America.

The network of branches in the bankingindustry enjoyed very moderate andconstant growth until 1999. However, sincethen banks have begun to reduce the numberof branches and increase the number ofpersonnel per branch in order to offer amore personalized service and a wider rangeof high value-added financial services,meaning the redeployment of personnel fromheadquarters to the commercial network.Savings banks, on the other hand, opened507 more branches in 2002, representing agrowth of 2.6%.

A noteworthy development in the regulatoryarea is Law 26/2003 amending the SecuritiesMarket Law and the Corporations Law witha view to reinforcing the transparency oflisted corporations.

1 Bank of Spain.

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Under this Law, savings banks that issuesecurities admitted to trading on officialsecurities markets must annually publish acorporate governance report, which must befiled with the Spanish National SecuritiesMarket Commission (CNMV) and mustaddress, among other aspects:

– The entity’s management structure withexhaustive information on thecompensation of the managing bodies.

– Transactions with members of the boardand oversight committee of the savingsbank and with political groups.

– Compensation received by directors andexecutives for services to the savings bank.

– Structure of the business and of therelationships within its economic group.

– Risk control systems.

2. Collective investmententitiesProspective investors planning investments atany term on the Spanish money or stockmarkets can call on the expert services ofnumerous investment and brokerage entitiesthat ensure ease and flexibility in makingtheir investments, offering risk profilessuitable for each investor’s requirements.

The regulations governing investment entitieslay down complete and stringentrequirements for financial reporting in thisfield, and also introduce a favourable taxregime permitting the elimination ofadditional tax costs that may occur oninvesting through these institutions.

In general, Spanish collective investmentinstitutions are of two types:

– Financial: Their main activity is the investmentin or management of marketable securities.

They include securities investmentcompanies and securities mutual funds,money market mutual funds and otherinstitutions whose purpose is to invest inor manage financial assets.

– Nonfinancial: Their main activity is theexploitation of real estate assets.

They include real estate investmentcompanies and trusts.

These tax relief measures have led to anotable increase in the number of theseinstitutions and in the volume of theirinvestments (see Table 1). The soundnessof the markets in Spain and of theparticipating entities is evidenced by the8.309.839 shareholders and investmentinstitution participants in Spain at October31, 20032.

Table 1

Growth of investment institutions

Investment Volume Institutions(million euros)

1990 9,030 5501991 25,510 6621992 39,831 7321993 64,365 8221994 69,996 9291995 75,791 1,0241996 115,642 1,2581997 167,267 1,8401998 211,903 2,4771999 219,453 3,2612000 201,507 4,1372001 204,458 4,8732002 199,272 5,1052003* 226,229 5,719

* October.Sources: Inverco and CNMV.

2 Spanish National Securities Market Commission (CNMV).

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31

However, it is notable that although the netassets of mutual funds declined in 2002, thistrend was gradually reversed by constantgrowth throughout 2003.

Charts 1 and 2 below show the variations inthe aforementioned figures.

7,000

6,000

5,000

4,000

3,000

2,000

1,000

01994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Source: Spanish Stock Market.

Chart 1

Number of Investment Institutions

250,000

200,000

150,000

100,000

50,000

01994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Source: Spanish Stock Market.

Chart 2

Negotiation volume

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On November 5, 2003, the new CollectiveInvestment Institutions Law (Law 35/2003)was published. The purpose of this Law is toregulate business in the collective investmentindustry through the adoption of three basicprinciples:

a) The deregulation of investment policy.

b)The protection of investors through newinstruments.

c) The perfection of the administrativecontrol system.

Among the new developments, it is worthhighlighting that the types of collectiveinvestment institutions have been narroweddown to two (companies and mutual funds),the management and marketing powers ofthe managers of collective investmentinstitutions have been expanded, andregulations have been introduced for theEuropean passport. Likewise, the legalregulation of the procedure enables unit-holders to transfer their investments fromone collective investment institution toanother at no tax cost.

3. Credit marketAs noted earlier, the Spanish credit market isstructured around banks, which attract mostsavings and use their funds to providefinancing for the private sector.

The banks also operate as investors andunderwriters in the stock market, and adjusttheir liquidity by interbank and moneymarket transactions.

The parallel growth in deposits from andlending to the private sector indicates thelack of any serious problems in obtainingbusiness financing.

The liberalization of capital movements inthe EU has also made it easier for Spanishcompanies to obtain financing from abroad.

The regulation of non-mortgagesecuritization procedures should also bementioned. These will contribute tofurthering the generation of additionalresources by credit institutions, enablingthem to grant new credit facilities.

4. Stock marketThe Spanish stock market consists of thefixed-income and equity markets and theregulated options and futures market.

The issuers are mainly Spanish privatecompanies and banks. However, the sharesof some foreign companies are also listed onthe Spanish stock exchanges. Certain non-resident entities may also issue bondsdenominated in euros in the Spanish market(“matador” bonds), subject to certainconditions.

Market regulation has established a marketbased on the British/US model, aimed atprotecting small investors and the marketitself. A single computerized and centralizedcontinuous stock market (“mercadocontinuo”) exists, on which “insider trading”is penalized. The obligatory involvement ofpublic authenticating officers in stock markettransactions was abolished, and a publicagency (the “Comisión Nacional del Mercadode Valores” –CNMV– National SecuritiesMarket Commission) regulates the systemand supervises its satisfactory operation.

The CNMV is the agency entrusted withsupervising and inspecting the Spanish stockmarkets and the activities of all entitiesoperating in them.

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The CNMV’s objectives include:

– Overseeing the transparency of the Spanishstock markets and proper price formation.

– Overseeing investor protection.

The CNMV’s action impinges on thecompanies which issue securities for publicofferings, the secondary securities marketsand the companies which provide investmentservices.

Crossed trading on the market is cleared inthree days, trading on credit is permitted andnew hedging instruments (i.e. index andwarrant options) are available. The modernregulations for takeover bids and publicofferings should be noted.

On April 12, 2003, Royal Decree 432/2003amending the current regulations on tenderoffers was published. This Royal Decreeoffers broader protection to small investorsby introducing the changes detailed below:

The reform adds new situations in which atender offer must be made, namely:

– A tender offer must be made for 10% ofthe capital of the target company, wherethe intention is to reach a percentagelower than 25% of its capital, provided thatit permits the acquiror, and the acquirorintends, to appoint a number of boardmembers (together with any the acquirorhas already appointed) representing morethan one third and less than one half plusone of the members of the board ofdirectors of the target company.

– A tender offer must be made for 100% ofthe capital of the target company, wherethe intention is to reach a percentagelower than 50% of its capital, provided thatit permits the acquiror, and the acquirorintends, to appoint a number of board

members (together with any the acquirorhas already appointed) representing morethan half of the members of the board ofdirectors of the target company.

The reform now expressly permits thepossibility of making conditional tenderoffers effective subject to conditions thefulfillment of which must be approved by thecorporate bodies of the target company.

Lastly, the reform improves the rules oncompeting tender offers:

– It eliminates the requirement that theprices in competing offers must bebettered by at least 5%.

– Once the period for accepting the last ofthe authorized competing tender offers hascommenced, an auction period starts.Accordingly, the tender offerors maymodify the terms of their offers bybettering the price or widening the scopeof their offers to a greater number ofsecurities. The bettered price must besubmitted in a sealed envelope to theCNMV within five days of thecommencement of the period for acceptingthe last of the authorized competingtender offers.

2002 saw the formation of Bolsas yMercados Españoles, Sociedad Holding deMercados y Sistemas Financieros, S.A., whichgroups together the following companies:

– FC & M, Sociedad Rectora del Mercado deFuturos y Opciones sobre Cítricos, S.A.

– MEFF-AIAF-SENAF Holding de MercadosFinancieros, S.A.

– Iberclear (Servicio de Compensación yLiquidación de Valores, S.A.).

– The Madrid, Barcelona, Valencia and BilbaoStock Exchange Governing Companies.

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The purpose of this holding company is toact as the integrating force behind thevarious Spanish stock markets and as thekey instrument of their internationalprojection.

Also noteworthy within the statutoryframework is the approval of Law 19/2003regulating the legal regime for movements ofcapital and economic transactions withforeign countries and concerning certainmoney laundering prevention measures, asthe Law overhauls the previous legal regimeof exchange control.

One of the highlights of the new Law is thetreatment afforded to preferredparticipations, which must satisfy thefollowing requirements:

– They must be issued by a credit institutionresident in Spain or in another EU MemberState, the voting rights of which mustwholly correspond, directly or indirectly, tothe parent credit institution of aconsolidable group or subgroup of creditinstitutions and the sole business of whichis to issue preferred participations.

– The issuer must furnish the tax authoritieswith information on the businesses andidentities of the holders of theparticipations issued.

– They must be listed on organizedsecondary markets.

– They must not grant preemptivesubscription rights with respect to futureissues.

– They must be perpetual in nature, althoughearly redemption may be agreed on asfrom the fifth year following the date ofdisbursement, with the prior authorizationof the Bank of Spain.

– In cases of dissolution or liquidation,preferred participations must guaranteeonly the reimbursement of the par valuetogether with the remuneration accruedand outstanding.

– For the purposes of issuing preferredparticipations, the outstanding par valuemay not exceed 30% of the core capital ofthe consolidable group or subgroup,including the amount of the issue itself.

All these advances have made the securitiesmarket in Spain more transparent and safer.

a) Equity market

The activity of the Spanish stock marketcan be gauged by the trading volume of the Madrid Stock Exchange, which was g 100,670 million in October, 2003, withthe number of transactions amounting to2.33 million.

The total market capitalization of equitiesin 2002 was g 419,450 million, down 20%from 2001.

Foreign investment also made a significantcontribution to growth in the Spanishstock market. As of December 2002,foreign investment amounted to g 218,726million of listed shares, representing anincrease of 49.8% of the total market.

Chart 3 shows the high volume of foreigninvestment in the Spanish stock market.

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Stock exchange markets had very difficultmoments during year 2002. Despite the2002 losses and from a historicalperspective, Spanish Stock ExchangeMarket has supported a high profitabilityduring the last ten years. The accumulativeannual profitability in the last ten years hasbeen 15,2%; meanwhile the US StockExchange rose a 9.4% and the LondonStock Exchange rose a 6.4%.

The importance of foreign investment inlisted shares, market capitalization andshare index variations in the majorEuropean stock exchanges is shown inTables 2 and 3, and Chart 4.

Chart 3

Madrid Stock Exchange tradingvolume by type of investor(December 2002)

Source: Madrid Stock Exchange.

Foreign Retail operators

Proprietary Proprietary (banks)(brokers)

Collective investment and other

62.91%

5.43%5.88%

9.13%

16.65%

Table 2

Foreign investment in shares of listed companies (transactions on the secondary market)(Millions of euros)

Year Purchases Sales Net Investment

1987 8,941.42 6,415.29 2,526.131988 6,546.35 5,219.17 1,327.181989 10,194.97 6,011.55 4,183.431990 10,023.94 6,640.99 3,382.951991 9,922.43 8,059.56 1,862.871992 11,026.16 8,877.07 2,149.091993 18,211.90 12,647.96 5,563.951994 20,784.85 20,051.53 733.321995 20,766.93 18,037.82 2,729.111996 30,789.29 31,059.69 -270.401997 61,571.63 62,027.41 -455.781998 115,765.75 110,594.74 5,171.011999 136,165.00 131,825.00 4,340.002000 260,721.60 275,505.66 -14,784.052001 227,730.00 251,070.00 -23,340.002002 218,726.00 239,734.00 -21,008.002003* 151,110.00 161,640.00 -10,530.00

* Data at July, 2003.Source: Madrid Stock Exchange.

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Stock market activity is measured by the so-called performance indexes based on shareprices as the best indicator of the marketprice level. Thus the index representschanges and price fluctuations and themarket trend at different points in time.

The Ibex-35 is the Spanish continuousmarket index. It is prepared in real time and

shows the capitalization of the 35 bestcompanies on the electronic stock market. Itis an extremely efficient instrument providinginformation to brokers, as it is an indicatorof the shares with greatest liquidity and isnot subject to manipulations of any kind.The securities that it should include arereviewed twice a year.

Table 3

Comparative stock exchange index variation in 2002

Market Index Variation(percentages)

Italy -26.00Germany -44.90Spain -28.10Euronext* -32.50United Kingdom -24.50US -16.80Japan -18.60

* Corresponds to the Market Stock Exchanges included in Euronext(Paris, Brussels and certain Portuguese Stock Exchanges).Source: Infobolsa, 2003.

Chart 4

Capitalization of shares in the Spanish Stock Exchange (annual evolution)(Billions of actual euros)

600

500

400

300

200

100

01999 2000 2001 2002 2003*

* Data at October, 2003.Source: Madrid Stock Market.

506.66

419.45

525.84537.05

430.70

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12,820

11,576

10,333

9,090

7,846

6,603

5,360Jan. Apr. Jul. Oct. Jan. Apr. Jul. Oct. Jan. Apr. Jul. Oct. Jan. Apr. Jul. Oct. Jan. Apr. Jul. Oct.

1999 2000 2001 2002 2003

Source: Spanish Stock Exchange.


37

To be included in the index, certainguidelines must be observed such as:

– Trading on the continuous market for atleast six months.

– Companies with stock exchangecapitalization of less than 0.3% of theaverage capitalization of the Ibex-35 maynot be included.

– Rules on the weighing of companiesaccording to their free float must beobserved.

Chart 5 shows the performance of thisindex in the last few years.

b) Options and futures market

The regulated Spanish options and futuresmarket is the MEFF (“Mercado Español deFuturos Financieros”). MEFF is an officialmarket and therefore entirely regulated,controlled and supervised by the financialauthorities (CNMV and the Ministry ofEconomy) performing the functions fortrading and those of clearance and

settlement, fully integrated in theelectronic market developed for thepurpose.

There are options and futures marketsrelated to citrus fruits and olive oil.

c) Fixed-income market

The fixed-income markets in Spain arecharacterized by:

– The establishment of a predeterminedsecurity redemption plan at the maturitydate.

– The yield provided to investors in theform of interest or the differencebetween the redemption price and thesubscription price.

The Spanish market for the trading offixed-income securities and assets ofprivate companies and private institutionsis the AIAF, “Asociación de Intermediariosde Activos Financieros”, which forms apart of the official organized financialmarket in this country.

Chart 5

Average value of Ibex-35, 1999-2003

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The AIAF market has developed swiftly inrecent years because of the expansion offixed-income securities in Spain. It wascreated in 1987 through an initiative of theBank of Spain, which wished to put newmechanisms in place to encourage businessinnovations with funds procured throughfixed-income assets.

Subsequently, taking the AIAF as a base,the regulatory and supervisory authoritiesprovided it with the attributes necessary tocompete in its surroundings until equatingit in legal terms with the financial markets.

Therefore AIAF “Mercado de Renta Fija”can be described as an organized marketwith ninety-four members, including theleading banks, savings banks andstockbroker companies and agencies in theSpanish financial system.

At October 2001, AIAF held a 60.1%interest in SENAF, (“Sistema Electrónico de Negociación de Activos Financieros”),an electronic financial assets trading system created in 1999 by Infomedas (a stockbroker agency acting as a tradingplatform for the blind market). SENAF wasorganized as the electronic platform fortrading Spanish government notes andbonds, and it acts neutrally towards thebond market, since its legal statuteprevents it from taking positions. It issubject to supervision by the CNMV andby the Bank of Spain.

The SENAF develops and operates a blindelectronic system for bond trading, inwhich the traders do not know thecounter party in their transactions. Thispromotes the efficiency of the market andgenerates great liquidity.

On February 23, 2001, the Governmentauthorized the creation of SENAF as anorganized trading system. This means thatall the members of any official fixed-incomesecond market may join the system,including the members of fixed-incomemarkets in other countries, provided thatthey meet certain conditions.

The aim of this interest held by AIAF inSENAF was to begin to support theintegration of fixed-income trading systemsin Spain. This has now materialized withthe creation of the MEFF-AIAF-SENAFHolding de Mercados Financieros, S.A. onOctober 4, 2001.

With the creation of this holding company,the first group of financial markets by totaltrading volume has been set up. It is alsothe first initiative for the interconnectionof all Spanish financial markets, with a jointprojection of domestic and internationalscope. It also means the provision of anintegrated service and the offer of newproducts and services, under unbeatableconditions of quality and cost.

Also, the incorporation of this companyaims to strengthen the three entities’competitive position, signifies the provisionof an integrated service, enables newproducts and services to be offered andoffers the possibility of sharing technicalsolutions and harnessing economies ofscale, which will result in lower operatingcosts for market members.

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d) New Market

As a noteworthy new feature of thesecurities market, the “New Market” wascreated in 2000 by CNMV Circular 1/2000,implementing the Ministerial Order ofDecember 22, 1999, as a special tradingsegment in the Spanish stock exchanges.The New Market is used to tradesecurities of companies in state-of-the-artsectors as regards their final products,their production processes or theirperformance of business with high growthpotential.

The New Market (“Nuevo Mercado”) wascreated essentially because of the presenceon the Spanish stock market of companiesassociated with the new communicationstechnologies and particularly with theInternet, and it was thus based onexperiences of a similar kind in themarkets of other countries.

Among the special features of the NewMarket, note the exception made, at theregulatory level, with regard to theperiod for obtaining profits and theprovision of reports on businessprospects and potential futuredevelopment. This is considered of greatimportance for new-economy companies,since many of them, organized recentlyon the base on future expectations, donot have a positive profit and lossaccount at the present time.

To protect investors, the “Sociedad deBolsas” has laid down specific rules fortrading, considering the higher volatilityand risk of the securities. Thus, for thespecific case of New Market securities, themaximum percentage of price variationsfor each session has been increased to 25%(it is 15% for traditional securities), and

this percentage may be further increased ifthe circumstances of the market or of thesecurity make this advisable.

However, the investor’s safety in connectionwith these securities is based on reportingobligations additional to the traditional ones(relevant events, quarterly, six-monthly andyearly information), since at least once ayear these companies must publishexplanatory information on the evolutionand prospects of their businesses at theshort term or in the next financial year.

The New Market started up on April 10,2000 with ten companies being listed,although there are currently eleven,following the delisting of Puleva BIOTECHand Serv. POINT.SOL during 2003. To helpmonitor the New Market, the IBEX NMindex was created. Its value of 1,754 onNovember 21, 2003 shows a increase of27.35% in relation to its levels in late 2002.

The market capitalization of the companieslisted in the New Market on December 31,2002 is shown in Table 4:

Table 4

Capitalization of New Marketcompanies at Dec. 31, 2002

New Market Euro capitalizationIBEX Securities (euros)

Terra 2,438,722,638.59Amadeus 1,739,025,000.00TPI 1,115,750,022.93Zeltia 1,082,449,283.80Indra 958,398,765.12Abengoa 303,978,124.80Jazztel 274,110,999.98Tecnocom 54,648,345.10Amper 50,236,498.80Avanzit 20,824,754.50Natraceutical 18,443,934.18

Source: Invertia.

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5. Money marketThe money market in Spain is basedfundamentally on the issuance of short-termsecurities by the Bank of Spain, which aretaken up by banks, finance companies andmoney market operators that subsequentlyplace a portion of them with individuals andbusinesses.

In a broader sense, the money market isdeemed to encompass also interbankdeposits (the interest rates for which areused as benchmarks for other transactions)and trading in short-term corporatesecurities.

The money market has become increasinglyimportant as a result of the liberalization andgreater flexibility of the Spanish financialsystem as a whole in past years. This isevident from the fact that interest rates areordinarily higher than the rate of inflationand from the substantial volume of trading inmoney market securities.

The government debt market is of specialimportance in Spain and is very often usedby both resident and foreign investors. Thefavorable tax arrangements for investmentsby nonresidents in these securities is makingthis market particularly attractive.Noteworthy developments were thestructuring of money market operationsthrough a book-entry system and thecreation of the options and futures markets,both linked to the book-entry system oftrading in government debt securities.

Following the merger of the Bank of SpainBook-Entry Center and the SecuritiesClearing and Settlement Service, Iberclear isnow in charge of recording, clearing andsettling transactions in the Book-EntryGovernment Debt Securities Market.

The globalization of the securities markets isalso being demonstrated, since 1999, bymergers and alliances among depositories ofthe Euro Zone, such as the trans-bordermergers of Euroclear with the CentralDepositories of France, Belgium and Holland,or that of Cedel with the Deutsche BörseClearing (DBC).

The combination of these factors has had animportant effect on the fixed-incomemarkets, demonstrated by:

– Increased interaction between theefficiency of the channels for issues andtrading and the appraisal of fixed-incomeassets.

– Increased interchangeability betweenproducts issued by the public treasures inthe Euro Zone. The enhanced transparencyof markets facilitates comparison of thevarious assets and therefore increasescompetition among issuers.

– Liquidity and spread in lending, togetherwith the expectations of agents concerningthe future evaluation of variables, havebecome decisive factors for the price ofthe assets and their relative valuecompared with other fixed-income issues.

In 2002, trading in the Spanish governmentdebt market, including bond and debenturesmarket trading and considering single anddouble transactions, increased up to g 18.9trillion, 16.4% higher than 2001 levels.

Thus the level of bond and debenture markettrading was higher in 2002 than in 2001. Thisrise was due to the increase in operationsbetween accountholders (up 21% year-on-year) and in double transactions, according tothe up of 25% year-on-year increase in thetrading with third parties and single-transaction trades.

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Overall, the total volume of bonds anddebentures traded in 2002 was g 16.7trillion, up 23.2% on the g 15.4 trilliontraded in 2001.

Also noteworthy was the sharp increase inthe debt securities held by nonresidents,since the introduction of the euro. Their debtportfolio consisted mainly of governmentbonds and debentures and included scantlysignificant Treasury bill holdings.

Analysis of this market showed most notablythat until 1999 the unstripped bonds anddebentures held by nonresidents represented24% of the outstanding total, although in

2002 there was a surge in this segment,which now accounts for 41.4% of the totalamount of these products.

The reasons for this sharp rise in the growthof government debt securities held bynonresidents are as follows:

– Spain’s accession to Economic andMonetary Union (EMU) eliminatedexchange risk, which made Spanishgovernment debt more attractive.

– The strong performance of the Spanisheconomy in 2002 and its healthy growthled to a higher rating of Spanish debt.

Chart 6

Public Debt Negotiation Volume(Millions of euros)

40,000

35,000

30,000

25,000

20,000

15,000

10,000

5,000

0Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

■ 2002 ■ 2003

Source: AIAF 2003.

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42

– The significant contribution by nonresidentmarket makers who entered the Spanishgovernment debt market in 1999 and havemoved significant volumes of debt, therebymaking for an active market.

6. Credit financeestablishmentsThese institutions are regulated by RoyalDecree 692/1996, which characterizes themas subject to the legal regime of creditinstitutions, although with certain changesregarding their financing possibilities andoperating capacity.

They may engage in the following activities:

– Lending and credit, including consumercredit, mortgage loans and the financing ofcommercial transactions.

– Factoring, with and without recourse, andother supplementary transactions.

– Financial leasing.

– Provision of guarantees.

These institutions include most notablyfinancial lease and factoring companies.

Financial lease companies engage in leasingand renting.

Leasing is a transaction of a financial naturegoverned by commercial law whereby acustomer acquires an asset previouslychosen by him and its use is assigned to himin exchange for certain periodic (normallymonthly) payments; on completion of thecontract term, the customer can opt toexercise a purchase option on the asset andpay its residual value.

Renting is a manner of medium- and long-term leasing of assets. Under this contractthe customer undertakes to pay a fixed

amount, generally monthly, for a certain timeand the credit institution undertakes tofurnish the use of the asset for thecontractual period, assure that the asset ismaintained in good condition and arrangecomprehensive insurance on the asset. Onexpiration of the contract the customer canopt to replace the assets with others orrenew the contract for a certain period.

Factoring is a transaction whereby acompany assigns the trade accountsreceivable from its customers to aspecialized financial institution in exchangefor a consideration. This enables companiesto transfer their cash management tasks toanother party.

There are two types of factoring:

– With recourse: The factor does notassume liability for any factored receivableswhich cannot be collected. Accordingly, ifthe debtor fails to pay, the factor can claimpayment from its customer, which assumesliability for nonpayment.

– Without recourse: The factor accepts thecredit risk arising from the receivablesfactored by the customer.

7. Venture capitalinstitutionsVenture capital is defined as a financialactivity which consists of routing investmentsto unlisted nonfinancial companies andassuming the risk arising from their activitythrough the acquisition of a temporaryholding in their capital stock.

Venture capital institutions can take the legalform of a corporation or a fund and, inaddition to their main corporate purpose,can grant participating loans and providecounseling services to the investees.

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8. Asset securitizationSecuritization consists basically of thetransformation of securities acquired fromcredit institutions into standardized fixed-income securities for subsequent trading inorganized markets, where they can bepurchased by investors.

Two types of securitization can bedistinguished:

– Mortgage-backed securitization: This isperformed through mortgagesecuritization funds, which are separateasset pools lacking legal personality whoseassets are the mortgage loans pooled bythem and whose liabilities are thesecurities issued, such that their net assetvalue is zero.

– Asset-backed securitization: Assetsecuritization funds are separate assetpools lacking legal personality whose assetsare their financial assets and othercollection rights, including assignments ofpresent and future receivables, and whoseliabilities are the fixed-income securitiesissued, loans from credit institutions andany contributions from institutionalinvestors.

9. Mutual guaranteesocietiesThese companies were first introduced in1978 and since then have operated in thearea of medium- and long-term financing ofsmall and medium-sized enterprises, towhich they provide guarantees.

Accordingly, their corporate purpose is asfollows:

– To provide their members with access tocredit and to credit-related services.

– To improve the financial conditions of theirmembers.

– To provide personal guarantees in anylawful form.

– To provide assistance and financial adviceto their members.

– To take holdings in companies andassociations whose sole purpose is toengage in activities for small and medium-sized companies. To this end, they musthave the required reserves and obligatoryprovisions.

The following members of mutual guaranteesocieties should be distinguished:

– Participating members: Also known asmutual members. They are the individualsor legal entities eligible to obtainguarantees from the society. Therefore,they are required to belong to the industryspecified in their bylaws.

– Protector members: These cannot requestguarantees from the society and thereforeare not subject to limitations on theindustry to which they belong. Theprotector members are usually publicauthorities, public-law entities and thecompanies majority-owned by them.

Working together with these societies are“sociedades de reafianzamiento” (supporting-guarantee companies), whose purpose is toprovide sufficient coverage and assurance forthe risk assumed by the mutual guaranteesocieties and, in addition, furnish the cost ofthe guarantee for the members.

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44

10. Pension plans andinsurance companiesIn 1987 the Pension Plans and Funds Lawintroduced a form of saving in Spain that hascreated a sound instrument for long-termfinancing. This legislation envisages theexistence of pension plans promoted byemployers, certain associations and financialentities.

Pension plans are collective investmentproducts which invest a principal sum with aview to obtaining periodic income or capitalgains in the future in order to provide forretirement, death or disability.

Pension funds are asset pools set up for thesole purpose of implementing pension plans.A pension fund may include one or morepension plans.

Inherent features of pension plans are theirfavorable tax treatment and restrictions onuse of the accumulated savings until theoccurrence of the event for which they wereintended.

Also, the Law provides for the possibility ofwithdrawing the savings accumulated inpension plan in the event of long-termunemployment or serious illness.

The Private Insurance Law (Law 30/1995)required all Spanish companies (exceptfinancial institutions) to instrument beforeNovember 15, 2002, their pensioncommitments to employees through anexternal arrangement (pension plan orinsurance policy), which rose significantly thefunds managed by these entities.

Pension funds performed very well in 2002,and this was reflected by an increase in thenumber of plan participants, up 12.55% from2001. This is due especially to theexternalization process by various employersthat has taken place in the employmentsystem.

The volume managed by occupationalpension funds rose to g 22,728 million at theend of September, 2003, up 22.94% from thesame period in 2002. See Table 5.

The personal pension system, with assets ofg 28,169 million, grew more moderately inthe same period (by 20.44%).

In contrast, the performance of theassociation system has not been so strong,with more than g 772 million of assets and87,854 participants.

Table 5

Variation of assets of pension funds (Millions of euros)

Personal System Occupational System Association System

1999 18,989 11,834 8402000 21,494 15,553 8122001 24,214 18,837 7772002 26,284 21,278 760Sep. 30, 2003 28,169 22,728 772

Source: Inverco.

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The Spanish life insurance market has grownsubstantially in recent years, mainly becauseof the similarity between survivorship lifeinsurance policies and traditional savingsinstruments and because of the morefavorable tax treatment than in the past.Although the economic crisis due to theSeptember 11 atacks slowed insuranceindustry growth in 2001, in 2002 the processof employers externalizing their pensioncommitments fueled insurance growth wellabove general growth levels.

In this connection, it is noteworthy that,effective 2002, the tax treatment of savingsplaced in pension funds has again beenimproved.

The Spanish insurance industry will facemajor challenges in the next few years, whichmay be beneficial for it insofar as thetheoretically foreseeable growth in the sizeof companies will bring its ratios closer tothose in countries with similar economies.

Also noteworthy is the trend towardsconsolidation in the Spanish insurancemarket, with mergers, spin-offs, andassignments of books of business leading tothe disappearance of 7 companies in 2002.

In 2002, the Spanish insurance industry sawthe volume of its premiums increase by14.53%.

The revenue collected by the insuranceindustry in 2002 was approximately g 50,000million, of which 55.5% were in life and45.5% in nonlife.

Chart 7 shows the importance of investmentin pension funds and life insurance productscompared with other forms of investments,such as mutual funds.

In 2002, technical results for the nonlifeinsurance business as a whole increased byalmost 450%, yielding the first technicalincome in many years. For the life insurancebusiness, technical income amounted to g 644 million, representing growth of only4.38% due to the decline in value ofinvestments, offset largely by the realizationof capital gains. Growth in the other classesof insurance was 157%, which accounts for6.2% of gross premiums earned, almostdouble the figure in 2001.


45

Chart 7

Savings distribution(Millions of euros)

200,000

180,000

160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000

01999 2000 2001 2002

■ Investment Funds■ Life Insurance■ Pension Funds

Source: General Directorate of Insurance and Pension Funds.

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46

Law 44/2002, (“the Financial Law”), approvedby the Lower House of Parliament onNovember 22, 2002, includes major changesto the Spanish financial system.

First of all, a securities Registration, Clearingand Settlement System ManagementCompany (“Systems Company”) has been setup through the merger of the SecuritiesSettlement and Clearing Service (SCLV) andthe Spanish Government Debt Book-EntryTrading Central Office (CADE).

This company has included other systemsalready existing in Spain, such as those forfinancial derivatives or those managed by theValencia, Bilbao or Barcelona stockexchanges, and will enable the managementof interconnections and alliances with othercountries’ stock markets.

One or more Central Counterparty Entitieswill foreseeably be set up and interposedbetween the purchaser and the seller toeliminate counterparty risk in transactionsand ensure that they are duly completed.

The Settlement and Clearing Systems will bedemutualized and a portion of their capitalwill be placed in the hands of shareholdersthat do not trade in the market.

Also, changes have been made to the systemset up to control the cross-holdingsbetween the companies administeringsecondary markets and their counterpartsoutside Spain. This will permit a moreflexible system conducive to the integrationof crossborder markets while simultaneouslyensuring a certain control over theappropriateness of shareholders in theSpanish markets.

As regards insurance, securities andcollective investment institutions, theexchange of information has been mademore fluid by facilitating these procedures

between the EU supervisors and those inother countries, while ensuring dueconfidentiality.

Extensive regulation of the organized tradingsystems has been introduced in matters suchas the authorization system, the obligation toform governing companies with the legalform of corporations (Spanish “S.A.”companies) and the supervision and penaltysystem.

In the credit market, a more flexibleinvestment regime for credit cooperativeshas been introduced to make it more similarto that of banks and savings banks. Thepurpose of this change is to:

– Enable these entities to achieve a largersize, thereby paving the way for increasesin their industrial portfolios.

– Facilitate management of their liabilitiesand equity by means of recourse tosubordinated debt financing.

As regards the equity of credit institutions,the regulation of the participation certificatesof savings banks, which are treated asmarketable securities representing monetarycontributions for an indefinite term, standsout. Participation certificates cannot beissued for a value below their par value andwill be listed on organized secondarymarkets.

Law 44/2002 permits the Spanish StateTreasury to be managed through fixed-income security purchases under resaleagreement, so that the Treasury can obtain ahigher yield on its balance at the Bank ofSpain.

A notable event in the insurance industry isthat the Insurance Entity SettlementCommission (CLEA) was terminated and itsfunctions taken over by the ClearingConsortium.

III. Law 44/2002 on Financial System Reform Measures

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47

The Risk Information Center will be given amore important role, which will befundamental in the risk control of creditinstitutions and in the supervision exercisedby the Bank of Spain.

The following reforms have been introducedto boost the competitiveness of the Spanishfinancial services industry:

– “Territorial” bonds have been introduced:These are fixed-income securities issued bycredit institutions to local or AutonomousCommunity governments.

– The scope of operations of collectiveinvestment institutions has beenbroadened: They can perform transactionsinvolving the lending of securities fromtheir own portfolios, organized-markettransactions and Over-the-Counter (OTC)transactions.

To improve the terms of SME financing, theuse of factoring has been regulated so as topermit large-scale factoring of their accountsreceivable from governments.

The following measures have beenestablished to protect the customers offinancial institutions:

– Introduction of bodies entrusted withdefending the customers of financialservices: agencies reporting to the Bank ofSpain, the Spanish National SecuritiesMarket Commission (CNMV) and theDirectorate-General of Insurance andPension Funds for the express purpose ofprotecting the rights of users of financialservices.

– Obligation of credit institutions, investmentservices companies and insurancecompanies to attend to and resolvecomplaints and claims from customersrelating to their interests and rights.

For this purpose, credit institutions musthave a customer service departmentformed by an independent entity or expertwhose decisions are binding.

As a new feature for 2004, the Law on Tax,Administrative, Labor and Social SecurityMeasures introduces “synthetic”securitization for loans and other collectionrights, characterized by the assumption ofthe resultant credit risk through thearrangement of credit derivatives with oneor more third parties.

The counterparty to the credit derivativemust be a credit institution, an investmentservices company or a nonresident entityauthorized to pursue the activities reservedby Spanish Law for such entities.

All other matters concerning suchtransactions will be governed by theprovisions of Royal Decree 926/1998regulating Asset Securitization Funds andSecuritization Managers.

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48

This section addresses the taxation of themain financial products in the Spanishmarket, with special reference to thosediscussed in this Chapter.

To these effects, the income taxation derivedfrom these products, and the gains or lossesgenerated on their transfer orreimbursement is here considered.

IV. Taxation of financial products

Nonresidents without Permanent Establishment Resident individuals Corporate entities

Bank deposits

Explicit-yield financial assets

Implicit-yield financial assets (except Treasury bills)

Treasury bills

Interest:- Income from movable capital- General component of taxableincome

- Tax rate:• EU: Exempt• Tax treaty: Reduced rate orexempt (per tax treaty in question)

• Other countries: 15%• Nonresident Bank accounts:exempt

Interest:- Income from movable capital- Rates:• EU: Exempt• Tax treaty: Reduced rate orexempt (per tax treaty inquestion)

• Other countries: 15%• Public Debt is exempt except for tax havens

Income obtained from transfer:- Income from movable capital- Rates:• EU: exempt• Tax treaty: reduced rate orexempt

• Other countries: 15%• Public Debt is exempt except fortax havens

Income obtained from transfer orredemption:- Income from movable capital• EU: Exempt• Tax treaty: Reduced rate orexempt (per tax treaty inquestion)

• Other countries: 15%• Public Debt is exempt except for tax havens

Income from movable capital:- Not subject to taxation except for tax haven

Interest:- Income from movable capital- 40% reduction if generated overmore than 2 years

- Withholding: 15%- General component of taxableincome

- Tax rate: As per tax rate table(maximum 45%)

Interest:- Income from movable capital- 40% reduction if generated overmore than 2 years

- Withholding: 15%- General component or taxableincome


Income obtained from transfer:- Income from movable capital- 40% reduction if generated overmore than 2 years

- Withholding:• Privileged issues: not subject• Other issues: 15%

Income obtained from transfer orredemption:- Income from movable capital- 40% reduction if generated overmore than 2 years

- Withholding: 15%- General component of taxableincome


Income from movable capital:- Not subject to withholding- General component of taxableincome

- Tax rate: as per tax rate table(maximum 45%)

Interest:- Yield- Withholding: 15%- Tax rate: 35% (standard)

Interest:- Yield- Privileged issues: not subjectto withholding

- Withholding: 15%- Tax rate: 35%

Income obtained from transfer orredemption:- Yield- Withholding:• Privileged issues subsequentto 1/1/99*: not subject towithholding

• Other issues: 15%• Tax rate: 35% (standard)

Income obtained from transfer or redemption:- Yield- Withholding:• Privileged issues subsequentto 1/1/99*: not subject towithholding

• Other issues: 15%- Tax rate: 35% (standard)

Yield:- Not subject to withholding- Tax rate: 35% (standard)

* Registered in the book-entry office and listed in secondary markets.

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49

Nonresidents without Permanent Establishment Resident individuals Corporate entities

Spanish shares

Shares and units of collective investment institutions

Dividends:- Income from movable capital• EU: 15% save application ofparent-subsidiary Directive

• Tax treaty: Reduced rate orexempt (per tax treaty inquestion)

• Other countries: 15%

Capital gain/loss on transfer:- Capital gain or loss• Listed companies- EU: Exempt except for significantand real estate participations

- Tax treaty: Generally exempt- Tax haven: 35%- Other countries: 35%

• Unlisted companies- EU: Exempt except for significantand real estate participations

- Tax treaty: Generally exempt(per tax treaty in question)

- Tax havens: 35%- Other countries: 35%

Dividends:- Income from movable capital• EU: 15% save application of parent-subsidiary Directive

• Tax treaty: Reduced rate orexempt (per tax treaty inquestion)


Capital gain/loss on transfer:- Capital gain or loss• EU: Exempt• Tax treaty: Generally exempt (pertax treaty in question)


Dividends:- Income from movable capital- Included in taxable income: Totalyield (140%, 125% or 100%)

- Tax credit: Total yield (40%, 25% or 0%)

- Withholding: 15%- General component of taxable income- Tax rate: As per tax rate table(maximum 45%)

Capital gain/loss on transfer:- Capital gain or loss• Acquisitions prior to 12/31/94- Application of reductioncoefficients: (25% for listed shares,14.28% for non-listed shares)

• Acquisitions subsequent to 12/31/94- Non-application of coefficients

• General component of taxableincome if generated over less than1 year

• Special component of taxable incomeif generated over more than 1 year

- Tax rate:• As per tax rate table (maximum45%): if generated over less than 1year

• 15%: if generated over more than 1year

Dividends:- Income from movable capital- Included in taxable income: Totalyield (100%)

- No tax credit- Withholding: 15%- General component of taxableincome


Capital gain/loss on transfer:- Capital gain or loss• Acquisitions prior to 12/31/94- Aplication of reductioncoefficients: (14.28%)

• Acquisitions subsequent to 12/31/94- Non-application of coefficients

• General component of taxableincome if generated over less than1 year

• Special component of taxable incomeif generated over more than 1 year

• Withholding: 15%- Tax rate:• As per tax rate table (maximum45%): if generated over less than 1year

• 15%: if generated over more than 1year

Dividends:- Yield- Tax credit:• Standard: 50%• In certain cases: 100%

- Tax rate: 35% (standard)

Capital gain/loss on transfer:- Income:• Possibility of tax credit(reserves)

• No withholding• Tax rate: 35% (standard)

Dividends:- Yield- No tax credit- Tax rate: 35% (standard)

Capital gain/loss on transfer:- Income:- Tax rate: 35% (standard)

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C o m p a n y a n d c o m m e r c i a l l a w

51

lawCompany

commercialandCompany law

I. Applicable legislation 53

II. Forms of business enterprise 54

III. Liability of shareholders and partners 55

IV. Basic legislation governing an S.A. 561. Minimum capital 562. Shareholders 563. Formalities of

incorporation 564. Contracts made in the

corporation’s name prior to registration 57

5. Acquisitions performedafter registration 57

V. Basic characteristics of an S.A. 581. Bylaws 582. Capital stock

requirements 593. Shares 59

a) Registered vs. bearer shares 59

b) Common vs. preferred stock 59

c) Shares issued with a premium 60

d) Non-voting stock 60e) Redeemable shares 61

f) Shares with ancillary obligations 61

g) Basic shareholder rights 61h) Share certificates 61

VI. Governing bodies of an S.A. 621. Shareholders’ meeting 62

a) Ordinary shareholders’meeting 62

b) Extraordinary shareholders’ meeting 62

c) Venue and method of calling a meeting 62

d) Universal shareholders’ meetings 62

e) Quorum and voting rules 62

f) Proxies 63

2. Directors 63a) Powers of the Board

of Directors 64b) Adoption of resolutions

by the Board 64c) Majority for adoption

of resolutions 64d) Liability of directors 64e) Powers of attorney 64

VII. Incorporation of limited liability companies 65

VIII. Sole shareholder companies 66

IX. Branches 67

Company and commercial law

3

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52

lawCompany

commercialandIntellectual property law

I. Introduction 68

II. Trade marks 691. National trade marks 692. International system 703. Community trade mark 71

III. Protection of inventions in Spain 731. Patents 732. PCT-Patent

Cooperation Treaty 743. Utility models 74

IV. Plant varieties 75

V. Industrial designs and models 761. National system 762. Community system 773. International system.

The Hague Agreement 77

VI. Topographies of semiconductor products 78

VII. Computer programs 79

VIII. Unfair competition 80

IX. Action against infringement of intellectual property rights 811. Civil actions 812. Criminal action 81

Exhibit Intellectual property conventions 82

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53

Spanish corporate law was substantiallymodified by Law 19/1989. One of the statedpurposes of this law was to adapt Spanishcorporate law to the relevant EU Directivesfollowing Spain’s accession to the EuropeanCommunity. However, Law 19/1989 is morethan a mere adaptation, since it includesmany new provisions which are not requiredby EU law.

Due to the very substantial modificationsintroduced by Law 19/1989, an amendedversion of the Corporations Law includingsuch modifications was approved byLegislative Royal Decree 1564/1989 onDecember 22, 1989. This legislation isreferred to henceforth as the “CorporationsLaw”.

Following the promulgation of Law 19/1989,which dealt essentially with corporations, anew law regulating limited liability companieswas enacted in 1995 (Law 2/1995), and RoyalDecree 1784/1996 was also enacted,establishing new Mercantile RegisterRegulations.

The Commercial Code, the CorporationsLaw, the Limited Liability Companies Lawand the Mercantile Register Regulations arethe basic sources of law in this field.

Lastly, the EU’s Council of Ministers onOctober 8, 2001, adopted CouncilRegulation (EC) 2157/2001, which passes theStatute for a European Company (SE),together with Council Directive 2001/86CE,which completes the Statute for theEuropean Company with regard to theinvolvement of employees.

Said regulation will come into force onOctober 8, 2004, this being the time limitgranted to Member States to adopt the legal,regulatory and administrative measuresnecessary to comply with the provisions ofthis Directive.

The Regulation of the European Companyaffords to companies operating in variousMember States the option of beingestablished as a single company under EULaw and being capable to operatethroughout the EU with an unique regulationand unified management and reportingsystem. For companies acting in different EUMember States, the European Companyoffers the possibility of reducing theiradministrative costs with a legal structureadapted to the EU regulations. This newregulation may result in the restructuring oflarge companies currently operating invarious Member States and significant capitalmovements in Europe.

Company law I. Applicable legislation

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54

Spanish law envisages various different kindsof mercantile entities, all of which can beused by foreign investors.

The most significant are:

– Corporation (“Sociedad Anónima”,abbreviated as “S.A.”)

– Limited Liability Company (“Sociedad deResponsabilidad Limitada”, abbreviated as“S.L.” or “S.R.L.”)

– New Limited Liability Company (“SociedadLimitada Nueva Empresa” abbreviated as“S.L.N.E.”).

– General Partnership (“Sociedad RegularColectiva”, abbreviated as “S.R.C.” or“S.C.”)

– Limited Partnership (“Sociedad enComandita”, abbreviated as “S. en Com.”or “S. Com.”) or Limited Partnership byShares (“Sociedad en Comandita porAcciones”, abbreviated as “S. Com. p. A.”)

The above forms of business enterprise arelisted in order from the most common tothe least frequently used. Traditionally, thecorporation (“S.A.”) has been by far themost commonly used form, whereas thelimited partnership has been rarely used.

However, the limited liability company(“S.L.”) has gained popularity as a result,among other reasons, of its comprehensiveregulation under Law 2/1995 and a lowerminimum capital requirement than that forS.A.’s.

The new limited liability company (“S.L.N.E.”)is a recently created type of limited liabilitycompany, the partners of which mustnecessarily be natural persons and who mayonly be sole partners in one S.L.N.E.

Some of the salient features of each of theabove corporate forms are summarizedbelow. It should be noted that in manyinstances the Law provides only minimumstandards or general rules. The founders of acompany have a great deal of flexibility intailoring the structure of the company totheir specific needs through inclusion ofcertain clauses in the bylaws, for whichpurpose they should seek proper legaladvice.

II. Forms of business enterprise

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Both the S.A. and the S.L. are companieswith capital in which the liability of theshareholders is generally limited to theamount of capital contributed by each.

Technically, the capital of an S.A. is dividedinto shares, whereas the capital of an S.L. isdivided into participation units.

The general rule is clearly one of limitedliability; however, under very exceptionalcircumstances, the corporate veil can bepierced to protect the interest of thirdparties.

In these exceptional cases, the courts havefollowed the criteria of the “piercing of thecorporate veil” as a reaction against theabusive taking advantage of the company’slegal status by the shareholders or partnersfor fraudulent purposes; the courts mayobviate it and differentiate the equity of eachof the partners to establish liabilities.

Liability is not limited in a generalpartnership (S.R.C.). General partners arepersonally jointly and severally liable with thewhole of their net worth for the debts ofthe partnership.

A limited partnership (S. Com.) is apartnership in which there is at least onegeneral partner and one or more limitedpartners. General partners are personallyjointly and severally liable with the whole oftheir net worth for the debts of thepartnership. Limited partners are only liablefor the amount of capital they contribute orpromise to contribute to the partnership.The capital of limited partnerships may bedivided into participation units or shares.

III. Liability of shareholders and partners

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56

This section and the two following onessummarize some of the most significantsubstantive aspects that commonly interestforeign investors with respect to the mostwidely used form of business entity in Spain,the S.A.

For the most part, the issues discussedbelow are applicable to the S.L. as well,although some of the most significant rulesand exceptions applicable to the S.L. aredealt with in Section VII below.

1. Minimum capitalThe minimum amount of capital stockrequired for an S.A. pursuant to theCorporations Law is g 60,101. The capitalmust be fully subscribed and at least 25% ofthe par value of the shares must be paid in.

When the capital stock is not fully paid up,the bylaws must state the manner and timeperiod for the payment of the remainingportion of subscribed capital. No maximumtime period for payment of calls on capital bycontributions in cash is stated in the Law butfive years is the maximum term for fullpayment of contributions in kind.

2. ShareholdersNo minimum number of shareholders isrequired by Spanish law to incorporate anS.A., although sole shareholder companiesare subject to a special system of publicitydiscussed in further detail in section VIIIbelow. Shareholders can be individuals orcompanies of any nationality and residence.

3. Formalities ofincorporationThe shareholders or their representativesmust appear before a notary public in orderto execute the public deed of incorporation.Subsequently, the public deed ofincorporation has to be registered in theMercantile Register. Upon registration, thecompany acquires legal status and capacity.

There is an alternative procedure forincorporation called “successive formation”.Essentially, this procedure involves anoffering to the public at large by thepromoters to subscribe shares before theexecution of the public deed ofincorporation. To this end, means may beused such as publicity or financial brokers.This system is rarely used in practice andmuch less so in the case of foreign investors.

IV. Basic legislation governing an S.A.

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4. Contracts made in the corporation’s nameprior to registration The formation of a S.A. is a two-step processinvolving, as noted, execution of the publicdeed before a notary public and registrationin the Mercantile Register. It is only uponregistration of the public deed ofincorporation that the corporation acquireslegal capacity and becomes a legal entity.

Persons who enter into contracts on behalfof the corporation prior to its registrationare jointly and severally liable for theirperformance, unless such performance wasmade conditional on the corporation’sregistration and, if applicable, its laterassumption of liability.

Contracts made in the corporation’s nameand on its behalf prior to its registration inthe Mercantile Register may generally beaccepted by the corporation within threemonths from registration.

However, a corporation in the process offormation and its shareholders, up to thelimit of the amount they have undertaken tocontribute (but not directors orrepresentatives), are liable for the followingtypes of contract prior to registration:

– Contracts that are indispensable forregistration.

– Contracts entered into by the directorswithin the scope of the powers granted tothem for the pre-registration stage.

– Contracts entered into by virtue of aspecific mandate granted by all theshareholders.

Upon registration, the corporation becomesbound by the foregoing acts and contracts.

In these cases, and if the corporation acceptsacts performed prior to its registrationwithin three months from the date ofregistration, the joint and several liability ofshareholders, directors or representativeslapses.

5. Acquisitions performedafter registrationDuring the two years followingincorporation, the corporation’sshareholders’ meeting must grant its priorapproval for acquisitions of assets for aconsideration involving amounts in excess of10% of the capital stock, unless suchacquisitions are within the ordinary scope ofbusiness of the corporation or the purchaseis made on a stock exchange or by publicauction. In the cases in which priorshareholders’ meeting approval is required,the requirements are basically as follows:

– Issuance of a report prepared by thedirectors.

– An independent valuation by the expertappointed by the Mercantile Register.

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1. BylawsAn S.A. is basically governed by theCorporations Law and by its bylaws. Thebylaws of an S.A. should therefore be draftedin accordance with Corporations Lawrequirements and must at least includereference to:

– Name of the company.

– Business purpose. This should be stated ina concrete and precise manner, since:

- It serves to establish the generalframework for the activities of thecompany.

- The completion of the stated businesspurpose automatically leads todissolution of the company, unless thebylaws provide for an indefinite duration.

- If the business purpose is modified insuch a way as to be replaced, thedissenting shareholders and non-votingshareholders, if any, can withdraw fromthe company and are entitled to bereimbursed for their shares.

– Duration of the company. The bylaws willordinarily stipulate that the duration isindefinite in order to avoid triggeringautomatic dissolution.

– The date on which activities commence,which normally cannot be earlier than thedate of execution of the public deed ofincorporation.

– The location of the company’s registeredoffice, which must be in Spain, and thebody competent to establish, transfer orclose branches.

– Capital stock and shares.

– Managing body. The bylaws must determinewhether the administration is entrusted toa Board of Directors or to some otherbody or person. In the case of collectivemanagement bodies, the manner of debateand of adopting resolutions must bespecified, as also the system for directors’remuneration.

– Restrictions, if any, on the freetransferability of shares.

– Ancillary obligations, if any. If ancillaryobligations are created, the bylaws muststate the content of such obligations,whether or not they are remunerated, andthe penalties, if any, for breach thereof.Ancillary obligations are explained infurther detail below.

– The accounting year-end. If not statedexpressly, the company will be deemed toend its accounting year on December 31.The business year cannot exceed twelvemonths.

– Special rights reserved to founders orpromoters, if any.

Additionally, the public deed ofincorporation, which includes the bylaws,may contain whatever agreements andcovenants the founders deem fit, providedthat they do not contravene any law or thefundamental principles that govern S.A.’s.

V. Basic characteristics of an S.A.

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59

2. Capital stockrequirementsThe minimum subscribed capital for an S.A.is g 60,101; at least 25% of the par value ofall the shares must be paid in uponincorporation.

For comparison purposes, the minimumcapital requirements for other types ofbusiness enterprises are as follows:

– Limited Liability Company: g 3,005, whichmust be fully paid in.

– Limited Partnership by Shares: g 60,101.

– General Partnership: no minimum capitalrequirement.

In addition, specific regulations may providethat the capital stock of corporationsengaged in certain fields of business (e.g. banking, insurance, etc.) must, at thetime of incorporation, exceed the minimumamount required by the Corporations Law.

There are currently no mandatory minimumdebt-equity ratios under Spanish mercantilelaw for any type of business enterprise(however, there is a debt-equity ratio for taxpurposes: see Chapter 4).

Lastly, it should be noted that there arespecial rules which could require an increaseand/or reduction in capital stock. These rulesprovide that there must be a certain balancebetween the capital stock and the net worthof a corporation, whereby if losses areincurred reducing such net worth to less thanone-half of capital stock, the corporation willbe under a mandatory cause for dissolution,unless capital stock is sufficiently increased(or reduced) and, after September 1, 2004,provided that it is not necessary to file forinsolvency pursuant to Law 22/2003, of July 9,Insolvency Law. On the other hand, it will be

obligatory to reduce the capital when losseshave reduced the net worth of the companyto less than two thirds of its capital stock andone fiscal year has elapsed without its networth having recovered.

3. SharesThe following categories may bedifferentiated:

a) Registered vs. bearer shares

The shares of an S.A. can be registered orbearer shares. However, the shares mustbe registered in the following cases:

– If they are not fully paid in.

– If their transferability is subject torestrictions.

– If they are subject to ancillary obligations(see f) below).

– When so required by special regulations(e.g. shares of banks and insurancecompanies).

b) Common vs. preferred stock

Preferred stock may be created as aseparate class or classes pursuant to thesame procedural formalities applicable toamendment of the bylaws (i.e. quorum andvoting requirements and method of callingthe shareholders’ meeting), and may includeshares entitled to a preferential dividend.

In any case, issues of shares will not bevalid in the following cases:

– Shares remunerated in the form ofinterest.

– Shares which directly or indirectly alterthe proportionality between their parvalue and voting rights or the existingshareholders’ preferential right tosubscribe new shares in capital increases.

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With regard to the particular regulationson the issuance of preferred stock, thereexist differences resulting from whetherthe company is listed or non-listed on thestock exchange.

In the case of listed companies, thefollowing obligations are established:

– It is provided that where the privilegeconsists of the right to obtain apreferential dividend, when distributableprofits exist the company is obliged todistribute such preferential dividend.

– The corporate bylaws should establishthe consequences of failure to pay part orall of the preferential dividend, whetherthis is or is not accumulative as regardsthe unpaid dividend, and the possiblerights of holders of privileged shares inconnection with dividend to which theordinary shares may be entitled.

– Higher ranking is provided for theshareholder owning privileged shares,since collection of dividend by ordinaryshares against the profits of one fiscalyear is imperatively prohibited until thepreferential dividend for the same fiscalyear has been paid.

In the case of non-listed companies, a moreflexible system is maintained, since thereare no rules of imperative law makingspecific regulations in the bylaws obligatory.Nevertheless, the company is obliged todeclare a dividend wherever distributableprofits exist, unless otherwise provided inits corporate bylaws.

c) Shares issued with a premium

Shares may be issued with a premiumpayable to the company above their parvalue. In such cases the premium must befully paid in upon subscription of the shares.

d) Non-voting stock

Non-voting stock may be issued for a totalpar value that does not exceed one-half ofthe total paid-in capital.

The special rights attached to non-votingstock are as follows:

– Minimum annual dividend

The minimum annual dividend shall beset by the bylaws in any percentage inrelation to the amount of paid-in capitalcorresponding to each non-voting share.The minimum annual dividend andordinary dividends are cumulative for aperiod of five years in the case of non-listed companies. In the case of listedcompanies this period will be indefinite.In other words, non-voting shares alsoparticipate proportionately with commonshares if a dividend is distributed on thecommon shares.

– Preferential rights in liquidation

In the event of liquidation of thecompany, non-voting shareholders rankabove common shareholders withrespect to their right to obtainreimbursement of the paid-in portion oftheir shares.

– Capital reduction

If capital is reduced to offset losses, thereduction must first be applied against allother classes of stock before it can affectnon-voting stock.

– Shareholder rights

Non-voting stock has the same basicrights as common stock except for theright to vote at shareholders’ meetings(see g) Basic shareholder rights below).

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However, under certain exceptionalcircumstances, holders of non-votingshares may acquire a transitory right tovote at shareholders’ meetings. Twoexamples follow:

- Non-voting shareholders acquire theright to vote if the minimum annualdividend is not distributed.

- If, due to a capital reduction, allcommon shares are amortized, thennon-voting stock becomes voting stockuntil such time as equilibrium isrestored between voting and non-voting stock (i.e. new common sharesare issued in sufficient number so thatthe total par value of non-voting stockdoes not exceed one-half of total paid-in capital). If equilibrium is not restoredwithin two years, the company issubject to mandatory dissolution.

e) Redeemable shares

Redeemable shares as a form of privilegedshares have been very recently introducedin Spanish corporate legislation. However,the possibility of issuing this type of sharesis only open to listed companies, subject tocertain conditions.

Redeemable shares are those whoseredemption of full or partial purchase bythe issuer or by third parties is fixed intime or released at the choice of theshareholder, according to the conditions ofthe issue; or those whose redemption orfull or partial purchase by the issuer or bythird parties is undertaken in any othermanner, excluding that contemplatedabove.

f) Shares with ancillary obligations

An ancillary obligation is an obligation toperform certain acts or to refrain fromperforming certain acts. Ancillaryobligations do not form part of the capitalstock of the company.

The shares of an S.A. can only be paid forwith money or property, not with labor orservices. The ancillary obligation is a devicewhereby the labor or services or otherobligations of particular shareholders canbe tied to the corporation.

g) Basic shareholder rights

The basic rights of shareholders are asfollows:

– Right to share in corporate earnings andin the assets upon liquidation.

– Preferential right to subscribe new sharesor convertible bond issues.

– Right to attend and vote at shareholders’meetings (except non-voting stock) andto challenge corporate resolutions.

– Right to obtain information about thecompany’s affairs.

h) Share certificates

In general, shares may be either issuedphysically as certificates or recorded by abook-entry system. The conditions forrecording shares under a book-entrysystem and the regulations of this systemare contained in the Securities Market Law(Law 24/1988), as amended by Law37/1998 and by Law 26/2003.

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The governing bodies of an S.A. are theshareholders’ meeting and the directors(who may or may not be organized as aBoard of Directors, as explained below).

1. Shareholders’ meetingThe shareholders’ meeting is the S.A.’ssupreme governing body. The lawdistinguishes two types of meeting: ordinaryand extraordinary. Additionally, bothordinary and extraordinary meetings may beheld as universal meetings, as discussedbelow.

a) Ordinary shareholders’ meeting

An ordinary shareholders’ meeting may beheld as and when stipulated by the bylaws,but an ordinary meeting must be heldwithin the first six months of the financialyear to review management’s conduct ofthe business and to approve, if appropriate,the financial statements of the prior yearand the proposed distribution of the prioryear’s earnings. If the ordinaryshareholders’ meeting is not held withinthe legal term, it may be called by a court,upon petition by the shareholders andsubject to prior hearing of the directors.

b) Extraordinary shareholders’ meeting

Any meeting of the shareholders otherthan as described above is anextraordinary shareholders’ meeting. An extraordinary shareholders’ meetingcan be called:

– By the company’s directors if and whenthey consider it in the company’sinterests to do so.

– By the company’s directors whenrequested to do so by shareholdersrepresenting at least 5% of capital stock.In this case, the directors must call the

meeting so requested to be held withinthirty days following the date of thenotarial notification to them to call it.

– By a court if the directors disregard thenotification referred to above.

c) Venue and method of calling a meeting

Both ordinary and extraordinaryshareholders’ meetings must be held in themunicipality where the company has itsregistered offices. A Spanish S.A. must bedomiciled in Spain. Nevertheless, auniversal shareholders’ meeting (see d)below) may be held anywhere.

The formal requirements for calling ameeting, which relate to publicity andadvance notice, are the same for ordinaryand extraordinary meetings. Meetings mustgenerally be called by a notice published inthe Official Gazette of the MercantileRegister at least 15 days in advance of themeeting and in a high-circulationnewspaper of the province in which thecompany has its registered offices.

d) Universal shareholders’ meetings

Regardless of the type of shareholders’meeting (ordinary or extraordinary), theformal call requirements need not befollowed if shareholders representing onehundred percent of the capital stock arepresent and agree unanimously to hold ashareholders’ meeting. Such meetings arecalled “universal” shareholders’ meetings.

e) Quorum and voting rules

Shareholders’ meetings may generallyadopt resolutions by simple majorityprovided the quorum requirementsdescribed below are met.

In general, the quorum for a shareholders’meeting, at the first call, exists when theshareholders present or represented at the

VI. Governing bodies of an S.A.

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meeting own at least twenty-five percent(25%) of the voting capital stock. If asecond call has to be made (because therewas no quorum at the first call), themeeting is deemed to be legally convenedregardless of the percentage of capital stockpresent or represented at the meeting. Acompany’s bylaws may set special call andquorum requirements for shareholders’meetings; however, the special quorumrequirements cannot be lower than thelegal requirements outlined above.

Special quorums are required by law for theadoption of resolutions on certain matters,e.g. debenture issuance, capital increase orreduction, any transformation, merger orspin-off of the company and, in general, forthe adoption of resolutions amending thebylaws. In such cases, the quorum requiredat the first call exists when theshareholders present or represented at themeeting own at least fifty percent (50%) ofthe subscribed voting capital stock. At thesecond call, a quorum will exist if at leasttwenty-five percent (25%) of the votingcapital stock is present or represented atthe meeting.

However, if a meeting subject to a specialquorum requirement is held on second callwith less than fifty percent (50%) of thevoting capital stock present orrepresented, then a special voting rulestipulates that resolutions may only bevalidly adopted by the ‘aye’ votes ofshareholders owning at least two-thirds ofthe capital stock present or represented atthe meeting.

f) Proxies

A shareholder may be represented at ashareholders’ meeting by any person, whoneed not be a shareholder unless thebylaws provide otherwise. The proxy must

be in writing or using certain means oflong distance communication, and specificfor each meeting.

A shareholder may cast his vote by mail, e-mail or using any other means of longdistance communication as provided for inthe bylaws, and will then be considered tobe present for the purpose of establishingthe quorum for the meeting.

Special rules regulate the public solicitationof proxies. Proxies are deemed to havebeen solicited publicly if one personrepresents more than three shareholders.

2. DirectorsAn S.A.’s executive governing body is itsdirector or directors, who need not beSpanish citizens. The actual form ofadministration, i.e. Board of Directors, soledirector, joint and severally liable directorsor joint directors, must be stipulated in thebylaws, but can be changed at any time bythe shareholders’ meeting.

If a Board of Directors is created, it musthave a minimum of three members.Furthermore, no maximum legal limit exists.

A director is normally not required to be ashareholder unless the bylaws provideotherwise.

The Board of Directors may validly adoptresolutions in writing without holding ameeting, provided certain requirements aremet.

An S.A.’s directors are appointed by theshareholders’ meeting. Minority shareholdersthat meet certain thresholds of ownershipare entitled to proportional representationon the Board.

Appointment as a director becomes legallyeffective when accepted by the appointee,

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and must be registered in the MercantileRegister within a stipulated period of time.

The term of office of directors is set by thebylaws and cannot exceed five years.Directors may be reelected for one orseveral further five-year periods.

The shareholders’ meeting can freely dismissthe directors at any time.

The following paragraphs refer to somespecial features of a Board of Directors:

a) Powers of the Board of Directors

– The Board of Directors is themanagement body of the corporation.

– With respect to third parties, the Boardof Directors represents the company in allacts within the scope of its corporatepurpose. The company is bound even withrespect to acts outside the scope of itscorporate purpose as registered in theMercantile Register if a third party actedin good faith and without gross negligence.

Any limitation on the representativepowers of the Board, even if registeredin the Mercantile Register, is not bindingon third parties.

– An S.A.’s Board may delegate its functionsto one or more managing directors or toan executive committee of Boardmembers (however, the Board cannotdelegate its accountability, or itsobligation to submit annual financialstatements to the shareholders’ meeting,or the powers delegated to it by theshareholders’ meeting without specificauthorization from the latter to do so).

b) Adoption of resolutions by the Board

The quorum for a Board meeting is thepresence, either personally or by proxy, ofone-half plus one of the Board members.

c) Majority for adoption of resolutions

Board resolutions are adopted:

– Generally, by an absolute majority of thedirectors attending (in person or byproxy).

– Exceptionally, for permanent delegationof Board powers, by the affirmative voteof two-thirds of the Board’s members;such delegation is not legally valid until ithas been registered in the MercantileRegister.

d) Liability of directors

Directors are held to a standard of faithfuldefense of the corporate interests, loyaltyand secrecy.

Directors are liable to the company, itsshareholders and its creditors for damagescaused by acts that are illegal, contrary tothe bylaws or done in breach of the dutiespertaining to their office.

In such cases all the directors are jointlyand severally liable. A director can only beexonerated from liability if he proves thathe did not participate in the adoption orexecution of the resolution and that hewas unaware of the existence of theharmful act or, if he was aware of it, dideverything reasonably possible to mitigateit or at least expressly opposed theresolution giving rise to the harm.

e) Powers of attorney

In addition to the powers vested in theBoard of Directors, general powers ofattorney may be conferred upon anyperson, whether or not a director, inwhich case they must be documented in apublic deed of power of attorneyregistered in the Mercantile Register.

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Law 2/1995 on “Sociedades deResponsabilidad Limitada” (Limited LiabilityCompanies) which came into force on June 1,1995, made certain important changes to thelegal framework governing the limited liabilitycompany (S.L.) which can sometimes be usedas an alternative form of business entityinstead of the S.A.

Flexibility is one of the main objectives ofLaw 2/1995, which allows the participationunit holders (members) a wide margin insetting up, in the bylaws, the rulesconcerning the internal governance of an S.L.An S.L. is intended to be a more closely heldentity as evidenced by the fact that:

– Participation units are generally not freelytransferable unless acquired by otherparticipation unit holders, ascendants,descendants or companies within the samegroup. In fact, unless otherwise provided inthe bylaws, the Law establishes apreemptive acquisition right in favor of theother partners or the company itself in theevent of transfer of the participation unitsto persons different than thoseaforementioned.

– Debenture issues cannot be used as ameans of raising funds because an S.L. isunable to issue debentures since Law2/1995 came into force.

– The scope for representation at theGeneral Meeting is limited.

Some salient features of the above-mentioned Law are described below.

– An S.L. cannot have a capital stock of lessthan g 3,005, which must be fully paid upat its organization. Capital stock must bedivided into participation units, but theseneed not all be the same (and,consequently, they may carry differentvoting weight).

– Non-voting participation units may becreated, up to the limit of half the capitalof the company.

– The genuineness of monetarycontributions made at the time ofincorporation or in connection with anycapital increases must be attested tobefore a notary public.

– No independent appraiser’s report on non-monetary contributions is required,although the founders and shareholdersare jointly and severally liable for thegenuineness of the non-monetarycontributions made. Similarly, in capitalincreases the directors of the company areliable for the difference between the valueof the non-monetary contributions statedin their report and the real value of thecontributions.

VII. Incorporation of limited liability companies

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Under the Law, which applies in this respectto both S.A.’s and S.L.’s, either form ofbusiness entity can be set up as, or cansubsequently become, a company having asole shareholder (S.A.) or sole participationunit holder (S.L.), i.e. a wholly-ownedsubsidiary.

Such companies are subject to a specificregime involving special reportingrequirements and registration requirements.For example, the fact that a company has asingle owner has to be acknowledged on allcompany correspondence and commercialdocumentation. Likewise, contracts betweenthe company and its sole owner need to berecorded in a special company register.

On the whole, such requirements can bedeemed mere administrative and reportingrequirements, but adherence to the specificrules is of paramount importance, becauseotherwise, under certain circumstances, thecompany can loose its limited liability status.

VIII. Sole shareholder companies

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In addition to the forms of businessenterprise created under Spanish law, thatconstitute separate legal entities, a foreigninvestor may operate in Spain through abranch.

The formation of a branch requires theexecution of a public deed that must beregistered at the Mercantile Register. Fromthe foreign investment legislation viewpoint,the branch must have an assigned capital,which is not subject to any minimum amountrequirement.

The branch must have a legal representativewho is empowered by the home office toadminister the affairs of the branch. Apartfrom this requirement, there are no formaladministration or management bodies.

Except for the obvious differences in termsof internal structure and organization, abranch operates much like a corporation inits dealings with third parties.

The choice between forming a branch or alegal entity in Spain may be affected bycommercial reasons; for example, a companymay be deemed to provide a more “solid”presence than a branch. There are also otherdifferences which are addressed in differentchapters of this publication.

IX. Branches

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Intellectual property is one of a company’smain assets. It is therefore vital to ensurethat it is properly protected before investingin a new market.

In Spain, with rare exceptions, theregistration principle prevails, which meansthat there can be no right to an invention ora distinctive sign unless it has been previouslyregistered. Spain, unlike the United States forexample, follows the “first-to-file” system.The first person to apply for registration willhave priority rights, i.e. use will give no rightsagainst third parties except in the case ofwell-known marks.

The principle of territoriality also prevails inthe registration system, which means thatprotection is only available in countrieswhere the trade mark or patent isregistered. In other countries, the trademark or patent could theoretically be usedfreely by third parties. Consequently, theregistration of a trade mark or a patent in itscountry of origin does not grant automaticprotection in other countries, for whichreason protection must be assured byregistration in each country.

Intellectual property rights are assets, and,like tangible goods, can be assigned,encumbered or transferred by any meansprovided by the law. Third parties can belicensed by holders of registered rights touse the rights in exchange for payment.

Spain has ratified the main InternationalConventions in this area which, with rareexceptions, allow non-Spanish nationals toprotect their rights in Spain.

Spain’s membership of the European Unionhas also forced the Spanish legislature toimplement the guidelines laid down by theCommunity Directives on IntellectualProperty, and Spain is therefore in line withEurope.

A list of the main conventions is given in theExhibit at the end of this Chapter.

The main Intellectual Property Conventionsratified by Spain include the following:

– TRIP’S - World Trade Organization

– Paris Convention

– Patent Cooperation Treaty (PCT)

– European Patent Convention

– Madrid Agreement

– Madrid Protocol

Intellectual property law I. Introduction

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A trade mark is a distinctive sign the mainfunction of which is to distinguish anddifferentiate in the marketplace the goodsand services of one undertaking from thoseof other undertakings. It also plays animportant role in advertising and goodwillconsolidation.

Rules on distinctive signs, and on trademarks in particular, are effective andnecessary instruments in the fields ofbusiness policy and consumer protection.

When introducing a good or service on theSpanish market, steps must be taken toensure that the trade mark:

1. May be freely used;

2. May be registered; and

3. Has no negative connotations, i.e. it iscommercially suitable.

Before marketing the good or service, asearch should be conducted to determinewhether an identical or similar mark hasbeen registered previously for an identical orsimilar good or service, thereby possiblypreventing the sign from being used in theterritory.

After confirming that no prior third-partyrights are being infringed, consideration canbe given to the various procedures forobtaining registration in order to secureexclusive rights and prevent the mark frombeing used by other companies. Obtainingregistration also involves checking that themark is not generic, deceptive, descriptive orcontrary to public policy or acceptedprinciples of morality.

Since April 1996, the procedures throughwhich a registration having effect in Spain canbe obtained are as follows:

– National system

– International system: Madrid Agreement -Madrid Protocol

– Community Trade Mark

1. National trade marksNational trade marks are registered by theSpanish Patent and Trade Mark Office. Thesemarks may consist of a large number of signscapable of being represented graphically,using words, combinations of names andsurnames, signatures, numbers and numbercombinations, slogans, drawings, colours andthree-dimensional shapes including theirpackaging and wrapping.

Since the Trade Marks Law, Law 17/2001, ofDecember 17, came into force, on July 31,2002, the Spanish Office only examines exofficio whether any absolute grounds forrefusal of registration apply (mainly, that themark is not generic, misleading, descriptiveor contrary to public policy) and no longeraddresses relative grounds for refusal (theexistence of identical or similar marksregistered for identical or similar products,with the likelihood of confusion). Relativegrounds for refusal are only consideredwhere owners of earlier signs oppose theapplication filed for a certain trade mark.

The Spanish Patent and Trade Mark Officewill not refuse trade marks ex officio basedon relative grounds but shall instead performa computer search to notify the holders ofprevious identical or similar signs, forinformative purposes only, of the application,in case they are interested in filing notice ofopposition.

Among the new features of Law 17/2001, we should mention the higher level ofprotection granted to well-known and

II. Trade marks

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renowned trade marks, the disappearance oftitles of establishment, the implementation ofthe multi-class mark and the reinforcementof the obligation to use the mark, all ofwhich are intended for the Spanish system tobecome faster, more effective, moretransparent and more consistent with thepredominant systems in other Europeancountries.

Although the registration of a trade mark isvalid for ten years and can be renewedindefinitely for further ten-year periods, theregistration may lapse if the trade mark isnot renewed, if it is not effectively usedduring an uninterrupted five-year period, orif it becomes generic or deceptive.

2. International systemThe “International System” comprises theMadrid Agreement of 1891 and the Protocolto the Madrid Agreement of 1989administered by the World IntellectualProperty Organization (WIPO) withheadquarters in Geneva.

It is important to point out that althoughknown as the “International System”, it isnot strictly speaking an internationalregistration but rather a system in whichvarious national registrations may beobtained through a unified administrativeprocedure.

The applicant must designate the countrieswhere he wishes to obtain protection. TheWIPO notifies the national offices of thecountries designated and if no opposition toregistration is filed pursuant to the nationallaws of each of the countries concernedwithin one year (pursuant to the Agreement)and 18 months (the Protocol), the trademark will be registered.

This is not an open system because it canonly be used by natural or legal persons whoare domiciled or who have a real andeffective establishment in a country signatoryto one or both of the above conventions andmay, on the basis of a registration orapplication at the Trade Marks Office of suchState, obtain an international registrationeffective in all or some of the countries ofthe Madrid Union.

One of the most recent contracting partiesof the Madrid System is the United States ofAmerica, where the Protocol has becomeeffective on November 2, 2003.

Likewise, the possibility of filing internationaltrade mark applications in the Spanishlanguage as of April 1, 2004 heralds asignificant breakthrough for internationaltrade mark protection.

The adoption of Spanish as the third workinglanguage of the Madrid Protocol (togetherwith English and French), will surely promotecommercial relations due to theinternationalisation of Spanish companiesabroad and to the attraction of internationalentrepreneurial activities to Spanish markets.

Said initiative will also be an added incentivefor hispanophone countries to join theMadrid System for the internationalregistration of trade marks, offering theirnationals the possibility of filing applicationsin their native tongue and an affordable andefficient way of obtaining and maintainingtheir trade marks.

Lastly, we must also mention theextraordinary importance of the EuropeanUnion’s ratification of the Madrid Protocol,which will encourage the development ofeconomic activities and competition and willimprove the degree of integration andoperation of the internal market.

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The European Union’s accession to theMadrid Protocol, which will presumably takeplace within a year, will be the first time thatthe EU, as a regional body, adheres to aWIPO treaty.

3. Community trade markThe main feature of the Community trademark (CTM) is its unitary character. A singleprocedure and a single registration providethe owner of a trade mark with registeredprotection in all 15 Member States of theEuropean Union, which as of May 1st 2004,will include ten new Member States: Estonia,Latvia, Lithuania, Czech Republic, Slovakia,Slovenia, Poland, Hungary, Malta and Cyprus.The Community trade mark will cover amarket of 455 million consumers with asingle registration.

An important point to note is that theCommunity trade mark does not replacetrade mark rights in each Member State. Thenational, international and Community trademark systems coexist and in some casessupplement each other.

The Community trade mark system enablesa single registration granting directprotection in all the Member countries ofthe European Union to be obtained bymaking a single application and following asingle set of procedures. Thus, rather thanfiling applications in each of the MemberStates where they wish to sell goods orprovide services, undertakings in Europe canobtain a Community registration conferringexclusive rights over the trade markthroughout the European Union.

This system is open to virtually all companiesthe world over since any company domiciledor with an establishment in the EuropeanUnion or in a country which is a party to theParis Convention, or domiciled in a memberstate of the World Trade Organization, canobtain a CTM registration.

The Community trade mark is administeredby the Office for Harmonization of theInternal Market (OHIM) which is based inAlicante, Spain.

The application may be submitted in any ofthe 11 official languages of the EuropeanUnion, which, after the enlargement, will bea total of 20, although the applicant isrequired to designate a second language(English, French, Spanish, Italian or German),which could become the language ofproceedings in the event of opposition,revocation or invalidity actions.

The OHIM only examines marks onabsolute grounds (i.e. it will check toensure that the mark is not descriptive,generic, deceptive or contrary to publicpolicy or accepted principles of morality inany of the European Union countries). Itdoes not examine applications on relativegrounds (i.e. it will not refuse registrationex-officio on account of the existence ofany earlier trade mark applications orregistrations in the European Union). It isup to the owners of these registrations tooppose the application, and disputes willbe clarified before the OHIM. There aremore than 3 million trade marks in theEuropean Union, and finding one which canbe freely used and registered as aCommunity trade mark is therefore notalways easy.

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The main legal consequence of theCommunity trade mark system enlargementdue to the adherence of ten new MemberStates is the automatic extension of allCommunity trade marks filed before May 1st2004 (whether they have already beenregistered or not) to the territories of thenew Member States, without anyadministrative intervention nor the paymentof additional fees.

Extended CTMs may not be challengedbased on absolute grounds for refusal (i.e.because the CTM is descriptive inHungarian), however, the owners of earliernational rights in the new Member Statesmay prohibit the use of the extended CTMsin the territory covered by the right,provided that such rights were acquired ingood faith before the date of accession andprovided further that it is possible pursuantto the applicable national legislation.

As we mentioned in section 2., the futureadherence of the European Union to theMadrid Protocol will allow to interweave theCTM application procedure and theinternational trade mark registration system,enabling any citizen based in an EU State toprotect its trade marks as a CommunityTrade Mark and also as an internationalregistration in Member States of the MadridProtocol.

Another important advantage of theCommunity trade mark is that no evidenceof use is required to obtain registration anduse of a mark in any one Member State issufficient to maintain its validity. Onceregistered, a Community trade mark is validfor 10 years. This period can be renewed forfurther 10-year terms subject to thepayment of the relevant fee.

The Community trade mark grants its ownerthe right to prevent third parties throughoutthe entire area of the European Union fromusing without his consent signs identical orsimilar to his mark for identical or similargoods if there is a risk of confusion.Importantly, under actions for infringement,acts carried out in violation of trade markrights in any Member State of the EuropeanUnion can be punished. Community trademark infringement actions are brought inCommunity trade mark courts, which arenational courts designated by each of theMember States.

In this regard, we must mention Law 8/2003of July 9, Bankruptcy Reform Law, (whichmodifies Law 6/1985, of July 1, on theJudiciary), which designates the mercantilecourts and the Alicante Provincial Court asfirst and second instance Community trademark courts in Spain, respectively, makingtheir jurisdiction extensive to these effectsto the entire national territory.

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Inventions are fully protected under Spanishlaw through a number of instruments such aspatents, utility models, industrial designs anddesigns which guarantee the possibility oftheir exclusive use by their inventors or bysuch persons as may be authorized by thelatter.

1. PatentsPatents seek to boost investments in R+Dand to develop a country’s technology. TheState grants exclusive rights to the inventionfor a specific term (generally 20 years) onthe understanding that once this period hasexpired, the invention will pass into thepublic domain and society as a whole canbenefit from it.

The patent owner may exploit the inventionand prevent third parties from exploiting it,marketing it or trading with it without hisconsent. During the term of the patent, thirdparties may only exploit the invention afterbeing licensed to do so by the patent owner.

New inventions which involve an inventivestep and are susceptible of industrialapplication are patentable. Consequently, thethree main requirements to obtain a patentare as follows:

a. Novelty

b. Inventive step

c. Industrial application

Discoveries, scientific theories, mathematicalmethods, literary, scientific, artistic and anyother aesthetic creations, schemes forperforming mental acts, playing games ordoing business are not consideredpatentable. Inventions contrary to public lawand order, plant varieties (which areprotected by special rules), animal varieties,

and essentially biological processes for theproduction of animals or plants cannot beprotected by patent either.

A significant step forward is the amendmentof the Patents Act, to implement in Spanishlaw the European Directive for the legalprotection of bio-technological inventions. Itshould be noted that although it is expresslyadmitted that inventions of this kind arepatentable, clear restrictions are established,particularly emphasizing the defense of ethicsand the public policy by excluding patentswhen their exploitation is contrary to theseprinciples.

Spain allows patents of goods andprocedures. Pharmaceutical products havebeen patentable since 1992.

Patents are granted for a term of 20 yearsfrom the date of filing. A patent is maintainedby paying annual fees which increasegradually each year. Once the 20-year periodhas elapsed, the subject-matter of the patentpasses into the public domain and can beexploited by any third party. TheComplementary Protection Certificate forpharmaceutical and phytosanitary products,which has been in force since 1998, extendsthe patent term by up to a maximum of 5years for the time it took to obtain therelevant administrative authorizationrequired to market the products.

In addition to the national system for thegranting of patents, regional systems mayalso be used, in which an applicant requestsprotection for the invention in one or morecountries and each country decides whetheror not to protect the patent within itsfrontiers.

III. Protection of inventions in Spain

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Lastly, Spain has ratified the 1973 MunichEuropean Patent Convention and Spain cantherefore be designated in a European patentapplication. European patents areadministered by the European Patent Office,which is based in Munich. Various nationalregistrations enforceable in the countriesdesignated can be obtained by following asingle procedure and by applying a singlesystem of law (the European PatentConvention).

2. PCT- PatentCooperation TreatySpain has ratified the PCT, whose mainfeature is that it unifies initial applicationprocedures and search reports, which arenecessary to determine the novelty of theinvention and the inventive step. The maindifference with respect to the Europeanpatent is that registration is granted by eachof the various national offices.

3. Utility modelsThis form of protection is intended for newinventions involving an inventive stepwhereby an object is given a configuration,structure, or constitution that results in anadvantage, appreciable in practice, for its useor manufacture.

A lesser degree of invention is required forutility models than for patents and, unlikepatents, utility models require only nationaland not world novelty. They are granted for10 years and therefore have a shorter termthan patents.

This system of protection is particularlysuitable for protecting tools, objects anddevices of practical use.

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Plant varieties constitute a category ofintellectual property the legal status of whichrelates in many ways to that of patents. Aplant variety may be defined distinct if it isclearly distinguishable from any other varietywhose existence is a matter of commonknowledge on the date of application; uniformif it is sufficiently uniform in the expressionof its characteristics; and stable if it remainsunchanged after repeated propagation.

At present, the protection of plant varietiesis regulated in Spain by Law 3/2000, ofJanuary 7, of the Legal System of PlantVariety Protection and in the EU by (EC)Council Regulation No. 2100/94, of July 27,on Community Plant Variety Rights.

The aforementioned Law 3/2000 has beenrecently modified by Law 3/2002, of March12, in order to recognise the SpanishAutonomous Communities as competentauthorities in plant variety rights registration-related procedures.

IV. Plant varieties

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Unlike patents and utility models, industrialdesigns and models protect the aestheticappearance of goods rather than theirfunctional novelty.

They offer protection for 10 years,renewable for a further 10-year period.

Industrial models are objects that can serveas prototypes for the manufacture of aproduct and that can be described in termsof their structure, configuration,ornamentation or representation.

Industrial designs are two-dimensionalaesthetic creations consisting of anarrangement or a set of lines and colourswhose purpose is to ornament a good, usingany manual, mechanical, chemical orcompound means (e.g. textilesmanufacturing).

At present there are three proceduresthrough which designs may be protected:

– National system

– Community designs

– International system

1. National systemThe recent 20/2003 Industrial Design Law isthe result of the efforts to moderniseintellectual property legislation, particularlywith regard to industrial models, which, untillast July was regulated by a law dating from1929.

Amongst the most relevant features of saidLaw is the so-called “grace period” whichallows the holder or a third authorised partyto disclose the design without destroying itsnovelty. This allows a proprietor theopportunity to determine whether seekingprotection for a design is likely to be worththe money and time registration before theSpanish Patent and Trademark Office requires.

Registration is granted for a period of fiveyears from filing date, which may be renewedfor further five-year periods up to amaximum of 25 years.

It is also important to emphasize that theowner of a design shall have the right to usethe design concerned and to obtain reliefshould any third party use it without consentafter its registration is published.

In short, the new Industrial Design Lawendeavours to put an end to deliberatecopying, counterfeiting and piracy and fostercreativity and innovation.

V. Industrial designs and models

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2. Community systemCommunity designs are protected in theEuropean Union by Council Regulation6/2002, which creates a uniform and unifiedlegal framework within the EU in areas assignificant as the automobile, textile, andshoe industries.

The essential feature of the Communitydesign system is the recognition of bothregistered and unregistered designs providedthese meet the requirements of novelty andindividual character.

A Registered Community Design (RCD) isfiled before the OHIM and gives its ownerexclusive right to use and prevent the use byunauthorised third parties of said design. Ithas a life of five years that can be renewedfor further five-year periods up to amaximum of 25 years.

The Unregistered Community Design (UCD)protects a design for a period of three yearsform the date on which the design was firstmade available to the public within theCommunity and gives the right to preventthe commercial use of the design only if theuse results from copying.

The UCD is particularly advantageous forthose sectors of industry which produceshort-lived designs (e.g. fashion). Since theduration of registration is of lesserimportance, a three-year protection periodis reasonable.

The new design legislation encouragesinnovation and development of newproducts, providing mainly individual andmedium-sized designers with a simple, cost-efficient, unitary system with effect in all theEuropean Union similar to that ofCommunity trade marks.

3. International system.The Hague AgreementUnder The Hague Agreement Concerningthe International Deposit of IndustrialDesigns, a WIPO-administered treaty, aprocedure for an international registration isoffered.

A national of any contracting party mayprotect its designs in any of the MemberStates, filing a single international depositeither with WIPO or the national office of acountry which is party to the treaty. Suchapplication shall be subject to the applicablenational legislation of each of designatedMember States.

In this regard, we must also mention theentry into force in Spain of the Geneva Act,concerning the international registration ofindustrial designs, on December 23, 2003,which simplifies the enlargement ofgeographic protection established by TheHague Agreement.

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Spanish legislation grants a period ofprotection of 10 years for topographies ofsemiconductor products, which areintegrated semiconductor circuits known as“chips”. The subject-matter of protection isnot the integrated circuit itself but the way inwhich it is physically mounted and thephysical arrangement of all its elements.

For a semiconductor product to qualify forprotection from the Spanish Patents andTrade Marks Office, the topography must bethe result of the creator’s own intellectualefforts and must not be commonplaceamong manufacturers of semiconductorproducts. The law requires originality andcreativity.

The governing provisions are to be found inLaw 11/1988, the result of the transpositionto Spanish law of Community Directive87/54/EEC of December 16, 1986.

VI. Topographies of semiconductor products

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VII. Computer programs

Unlike the situation in other countries,computer programs in Spain cannot beregistered as patents since the SpanishPatent Law expressly excludes them fromthe list of patentable inventions.

A special chapter is devoted to computerprograms in the 1996 Spanish IntellectualProperty Law. Computer programs and theiraccompanying documentation are protectedas copyright and, with certain exceptions, aretreated in the same way as literary works.

In Spain, copyright exists from the momentthe related work is created, without anyregistration being required and withautomatic protection therefore beinggranted. However, the option of filing thework with the Intellectual Property Register,as evidence to be used against third partiesin the event of copyright infringement, exists.

Computer programs are protected for 70years from the death of their author if theauthor is a natural person. If the author is alegal person, the period of protection is 70years from January 1 of the year followingthe year in which the program was lawfullypublished or of the year of its creation if itwas not published.

Like any literary or artistic work, computerprograms create various economic and“moral” rights. Moral rights cannot bewaived or assigned. They entitle the authorto decide, amongst other things, whether hiswork is to be published and how, to demandthat he be recognized as the author of thework and that the integrity of the work isobserved, to alter the work and to withdrawit from the marketplace.

In Spain the author of the work is assumedto be the owner of the rights unless thework was created in the course of hisemployment. Unlike the position in otherjurisdictions, when the work is createdunder, for example, a commission, the ownerof the copyright will be the author and notthe principal or commissioning party.

However, it should be noted that theProposal of Community Directive on thePatentability of Inventions Implemented byComputer is currently being prepared. Theseinventions are defined as those that may onlybe implemented using a computer, computernetwork or other programmable apparatus.

After this Directive has been approved, theEU Member States should adopt theprovisions necessary for its compliance,within the term established for the purpose.

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VIII. Unfair competition

Intellectual property rights may be protectedby unfair competition legislation. Spainintroduced unfair competition legislation in1991, which is proving to be highly effectivein practice.

The concept of unfair competition is verywide since any conduct objectively contraryto good faith is deemed to be unfair. The lawincludes amongst such forms of conduct actsof confusion and deception, gifts which lockconsumers into contractual obligations orwhich create confusion as to price, and actsof denigration, comparison, imitation,exploitation of another’s reputation,breaches of confidentiality, incitement tobreach of contract, infringement of laws ondiscrimination and dumping.

The main forms of unfair competition inrelation to trade marks are imitation and theexploitation of the reputation of another.

Unfair competition rules also deal withknow-how by defining as unfair competitionthe disclosure or exploitation of industrial orother business secrets obtained lawfully onthe understanding that they would be keptconfidential, without the consent of theirowner.

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IX. Action against infringement of intellectual property rights

The owner of intellectual property rights canbring civil and criminal actions against anyperson who infringes his rights in Spain.

1. Civil actionsThe procedure to bring actions before theCivil Courts is ruled by the Civil ProcedureLaw, which establishes the ordinary trial asthe procedure path for the trade mark’sowner to defend his rights against thirdparties’ infringements.

The trade mark owner whose right has beeninfringed can claim:

– An order for the cessation of the actsinfringing the intellectual property rights;

– Damages;

– Seizure of the goods produced orimported;

– To be awarded the seized objects or meansof production;

– All necessary steps to prevent thecontinuation of the infringement; and/or:

– Publication of the judgment against theinfringer.

The owner of the rights may also seekinjunctive relief to ensure the effectiveness ofthe actions.

2. Criminal actionSpanish criminal law defines certain types ofinfringements of intellectual property rightsas criminal offences, punishable under theSpanish Criminal Code by terms ofimprisonment that range from six months totwo years and fines from six to twenty-fourmonths.

It should be explained that the days-finesystem consists of imposing an economicpunishment in a daily amount of from aminimum of g 1.20 to a maximum of g 300.51, established according to the natureof the infringement and the economicsituation of the convict.

The Spanish Criminal Code establishes aprison sentence (of two to four years), a fine(from eight to twenty-four months), and aspecial disqualification from practicing in theprofession related to the crime committed(for two to five years).

We must also mention the entry into forceof Law 28/2002, of October 24, for partialreform of the Criminal Procedure Law, alsoknown as the “Fast Lawsuits Law”, and theOrganic Law supplementary thereto. ThisLaw enables criminal offence against theserights to be pursued more effectively andfaster. Failure to bring charges does notimpede the preliminary investigation forprevention and insurance of criminal offenceagainst industrial property.

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Country IP Trade marks Patents Designs Copyright

Paris WTO1 Madrid Madrid Hague BerneConvention (TRIP’S)2 Agreement Protocol CTM3 PCT4 EPC5 Agreement Convention

Albania ✔ ✔ ✔ ✔ * ✔ E ✔Algeria ✔ O ✔ ✔ ✔Andorra OAngola ✔Antigua and Barbuda ✔ ✔ ✔ ✔ ✔Argentina ✔ ✔ ✔Armenia ✔ ✔ * ✔ ✔ ✔ ✔Australia ✔ ✔ ✔ ✔ ✔Austria ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔Azerbaijan ✔ O ✔ ✔ ✔Bahamas ✔ O ✔Bahrain ✔ ✔ ✔Bangladesh ✔ ✔ ✔Barbados ✔ ✔ ✔ ✔Belarus ✔ O ✔ ✔ ✔ ✔Belgium ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔Belize ✔ ✔ ✔ ✔ * ✔Benin ✔ ✔ ✔ ✔ ✔Bhutan ✔ O ✔ ✔Bolivia ✔ ✔ ✔Bosnia and Herzegovina ✔ O ✔ ✔ ✔Botswana ✔ ✔ ✔ * ✔Brazil ✔ ✔ ✔ ✔Brunei ✔Bulgaria ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔Burkina Faso ✔ ✔ ✔ ✔Burundi ✔ ✔Cambodia ✔ OCameroon ✔ ✔ ✔ ✔Canada ✔ ✔ ✔ ✔Cape Verde O ✔Central African Republic ✔ ✔ ✔ ✔Chad ✔ ✔ ✔ ✔Chile ✔ ✔ ✔China ✔ ✔ ✔ ✔ ✔ ✔Colombia ✔ ✔ ✔ ✔Congo ✔ ✔ ✔ ✔Costa Rica ✔ ✔ ✔ ✔Côte d’Ivoire ✔ ✔ ✔ ✔ ✔Croatia ✔ ✔ ✔ ✔ ** ✔ ✔Cuba ✔ ✔ ✔ ✔ ✔ ✔Cyprus ✔ ✔ ✔ * ✔ * A ✔ ✔ ✔Czech Republic ✔ ✔ ✔ ✔ A ✔ ✔ ✔Denmark ✔ ✔ ✔ ✔ ✔ ✔ ✔Djibouti ✔ * ✔ ✔ *Dominica ✔ ✔ ✔ ✔Dominican Republic ✔ ✔ ✔Ecuador ✔ ✔ ✔ ✔Egypt ✔ ✔ ✔ ✔ * ✔ ✔El Salvador ✔ ✔ ✔

ExhibitIntellectual property conventions

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Equatorial Guinea ✔ O ✔ ✔Estonia ✔ ✔ ✔ A ✔ ✔ ✔ ** ✔Ethiopia OEuropean Communities ✔Fiji ✔ ✔Finland ✔ ✔ ✔ ✔ ✔ ✔ ✔France ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔Gabon ✔ ✔ ✔ ✔ * ✔Gambia ✔ ✔ ✔ ✔Georgia ✔ ✔ ✔ ✔ ✔ * ✔Germany ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔Ghana ✔ ✔ ✔ ✔Greece ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔Grenada ✔ ✔ ✔ ✔Guatemala ✔ ✔ ✔Guinea ✔ ✔ ✔ ✔Guinea-Bissau ✔ ✔ ✔ ✔Guyana ✔ ✔ ✔Haiti ✔ ✔ ✔Honduras ✔ ✔ ✔Hong Kong ✔Hungary ✔ ✔ ✔ ✔ A ✔ ✔ * ✔ ✔Iceland ✔ ✔ ✔ ✔ ✔ ** ✔India ✔ ✔ ✔ ✔Indonesia ✔ ✔ ✔ ✔ ✔Iran ✔ ✔ ** ✔ **Iraq ✔Republic of Ireland ✔ ✔ ✔ ✔ ✔ ✔ ✔Israel ✔ ✔ ✔ ✔Italy ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔Jamaica ✔ ✔ ✔Japan ✔ ✔ ✔ ✔ ✔Jordan ✔ ✔ ✔Kazakhstan ✔ O ✔ ✔ ✔Kenya ✔ ✔ ✔ ✔ ✔ ✔Popular Republic of

Korea (North Korea) ✔ ✔ ✔ ✔ ✔ ✔ *Korea (South) ✔ ✔ ✔ * ✔ ✔Kuwait ✔Kyrgyzstan ✔ ✔ ✔ ✔ ✔ * ✔Laos ✔ OLatvia ✔ ✔ ✔ ✔ A ✔ E ✔Lebanon ✔ O ✔Lesotho ✔ ✔ ✔ ✔ ✔ ✔Liberia ✔ ✔ ✔ ✔Libya ✔ ✔Liechtenstein ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔Lithuania ✔ ✔ ✔ A ✔ E ✔Luxembourg ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔Macao ✔

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Republic of Macedonia(The former YugoslavRepublic of Macedonia) ✔ ✔ * ✔ ✔ * ✔ E ✔ ✔

Madagascar ✔ ✔ ✔ ✔Malawi ✔ ✔ ✔ ✔Malaysia ✔ ✔ ✔Maldivas ✔Mali ✔ ✔ ✔ ✔Malta ✔ ✔ A ✔Mauritania ✔ ✔ ✔ ✔Mauritius ✔ ✔ ✔Mexico ✔ ✔ ✔ ✔Myanmar ✔Republic of Moldova ✔ ✔ ✔ ✔ ✔ ✔ ✔Monaco ✔ ✔ ✔ ✔ ✔ ✔ ✔Mongolia ✔ ✔ ✔ ✔ ✔ ✔ ✔Morocco ✔ ✔ ✔ ✔ ✔ ✔ ✔Mozambique ✔ ✔ ✔ ✔ ✔Namibia ✔ ✔ ** ✔Nepal ✔ ONetherlands ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔New Zealand ✔ ✔ ✔ ✔Nicaragua ✔ ✔ ✔ * ✔Niger ✔ ✔ ✔ ✔Nigeria ✔ ✔ ✔Norway ✔ ✔ ✔ ✔ ✔Oman ✔ ✔ ✔ ✔Pakistan ✔ ✔Panama ✔ ✔ ✔Papua New Guinea ✔ ✔ ✔ *Paraguay ✔ ✔ ✔Peru ✔ ✔ ✔Penghu, Kinmen and Matsu

(China Customs Territory other than Taiwan) ✔ *

Philippines ✔ ✔ ✔ ✔Poland ✔ ✔ ✔ ✔ A ✔ ✔Portugal ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔Qatar ✔ ✔ ✔Romania ✔ ✔ ✔ ✔ ✔ ✔ * ✔ ✔Russian Federation ✔ O ✔ ✔ ✔ ✔ ✔Rwanda ✔ ✔ ✔Saint Kitts & Nevis ✔ ✔ ✔St. Lucia ✔ ✔ ✔ ✔Saint Vicent and the Grenadines ✔ ✔ ✔ * ✔SamoaSan Marino ✔ ✔Sao Tome and Principe ✔ OSaudi Arabia OSenegal ✔ ✔ ✔ ✔ ✔

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Seychelles ✔ * O ✔ *Sierra Leone ✔ ✔ ✔ ✔ ✔Singapore ✔ ✔ ✔ ✔ ✔Slovak Republic (Slovakia) ✔ ✔ ✔ ✔ A ✔ ✔ ✔Slovenia ✔ ✔ ✔ ✔ A ✔ ✔ * ✔ ✔Solomon Islands ✔South Africa ✔ ✔ ✔ ✔Spain ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔Sri Lanka ✔ ✔ ✔ ✔Sudan ✔ O ✔ ✔ ✔Suriname ✔ ✔ ✔ ✔Swaziland ✔ ✔ ✔ ✔ ✔ ✔Sweden ✔ ✔ ✔ ✔ ✔ ✔ ✔Switzerland ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔Syria ✔ ✔Tajikistan ✔ O ✔ ✔ ✔Tanzania ✔ ✔ ✔ ✔Thailand ✔ ✔Togo ✔ ✔ ✔ ✔Tonga ✔ O ✔Trinidad & Tobago ✔ ✔ ✔ ✔Tunisia ✔ ✔ ✔ ✔ ✔Turkey ✔ ✔ ✔ ✔ ✔ ✔Turkmenistan ✔ ✔ ✔Uganda ✔ ✔ ✔Ukraine ✔ O ✔ ✔ ✔ ✔ * ✔United Arab Emirates ✔ ✔ ✔United Kingdom ✔ ✔ ✔ ✔ ✔ ✔ ✔United States of America ✔ ✔ ✔ * ✔ ✔Uruguay ✔ ✔ ✔Uzbekistan ✔ O ✔ ✔Vanuatu OVatican ✔ O ✔ ✔Venezuela ✔ ✔ ✔Vietnam ✔ O ✔ ✔Yemen OYugoslavia (Serbia and

Montenegro) ✔ O ✔ ✔ ✔ ✔ ✔Democratic Republic

of the Congo (Zaire) ✔ ✔ ✔Zambia ✔ ✔ ✔ ✔ ✔Zimbabwe ✔ ✔ ✔ ✔

1. WTO: World Trade Organization.2. TRIP’S: Trade Related Intellectual Property Rights.3. CTM: Community Trade Mark.4. PCT: Patent Cooperation Treaty.5. EPC: European Patent Convention.E: Non EU Member States that have completed agreements for extension with the European Patent Organization.O: Governments with the status of observers that should commence negotiations for adhesion in the term of 5 years after the acquisition of said status.A: States that will join the EU (and the CTM System) as of May 1, 2004.*: Recent signatory State.**: Forthcoming signatory State.

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systemTax

I. Introduction to the Spanish tax system 89

II. Central Government taxes 901. Corporate income tax 90

a) Taxable income 90b) Reduction in base for

investments to establish companies abroad 99

c) Tax rates 99d) Tax credits, withholdings

and prepayments 99e) Asset-holding companies 107f) Consolidated taxation

status 108g) Other special taxation

regimes 109h) Foreign-securities holding

entities 110i) Neutral tax regime for

restructuring operations 111j) Tax incentives for small

and medium-sized companies 112

k) Formal requirements 113l) Canary Islands Tax Regime 113

2. Personal income tax 1163. Nonresidents’

income tax 1234. Net worth tax 1325. Inheritance and gift tax 1336. Value added tax (VAT) 136

a) Taxable events 136b) VAT rates and exemptions 136c) Place of supply of taxable

transactions 137d) Permanent establishment 138e) Taxpayer 138f) Deduction of input VAT 139g) Refunds 140

7. Transfer tax and stamp duty 141

8. Excise taxes 1429. Customs duties

on imports 14210. Tax on insurance

premiums 142

III. Local taxes 1441. Periodic taxes 144

a) Tax on real estate 144b) Tax on business activity 144c) Tax on motor vehicles 144

2. Other taxes 145a) Tax on erection and

installation projects and construction work 145

b) Tax on increase in urban land value 145

IV. Infringements and penalties 146

Exhibit I. Calculation of corporate income tax 147

Exhibit II. Nonresident case:Income obtainedwithout a permanentestablishment 149

Exhibit III. VAT example 150

Tax system

4

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The Spanish tax system comprises threekinds of taxes: “impuestos” (true taxes),“tasas” (dues and fees) and “contribucionesespeciales” (special levies). The “tasas” and“contribuciones especiales” are collected inreturn for a public service provided by theauthorities or for any type of benefit as aresult of public works or services.

In Spain taxes are levied:

– By the Central Government

– By the Autonomous Community (regional)governments

– By local authorities

The necessary brevity of this chapter makesit necessary to offer only a short commenton the taxes levied by AutonomousCommunities and local authorities and toconcentrate on the taxes levied by theCentral Government, which may be of moreinterest for the foreign investor, includingthose administered and collected by localauthorities.

The special regimes applicable in the BasqueCountry and Navarra may affect certain ofthe matters explained in this chapter.

I. Introduction to the Spanish tax system

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National taxes in Spain can be classified asfollows:

– Direct taxes:

- On income:

Corporate income tax

Personal income tax

Nonresidents’ income tax

- On assets (affecting only individuals):

Net worth tax

Inheritance and gift tax

– Indirect taxes:

- Value added tax (VAT)

- Transfer tax and stamp duty

- Excise taxes

- Customs duties on imports

- Tax on insurance premiums

1. Corporate income taxCorporate Income Tax Law 43/1995,implemented by Regulation 537/1997,represented a major reform of corporatetaxation in Spain, the main objectives beingthe harmonization of the rules fordetermining the tax base and the accountingrules, and the systematization of existinglegislation.

The key factor in determining the applicationof corporate income tax is “residence”. Acompany is deemed to be resident in Spainfor tax purposes if it meets any of thefollowing conditions:

– That it was incorporated under Spanishlaw.

– That its registered office is located inSpain.

– That its effective managementheadquarters are in Spain.

In the event of a conflict of residence, theprovisions of Spain’s tax treaties with othercountries will, where applicable, prevail.

Resident companies are taxed on theirworldwide income. Taxable income includesall the profits from business activities,income from investments not relating to theregular business purpose, and incomederived from asset transfers.

In this connection, regard should also be hadto the provisions of Spain’s tax treaties withother countries, which, where applicable,may influence the determination of thetaxation in Spain.

Taxation of nonresident entities is regulatedseparately under the Nonresidents’ IncomeTax Law.

a) Taxable income

The Corporate Income Tax Law establishesthree methods for determining taxableincome: the direct assessment method, theindirect assessment method and theobjective assessment method.

Under the direct assessment method(which is generally applicable), taxableincome is defined as the differencebetween period revenues and periodexpenses. Taxable income is based on theincome disclosed in the financialstatements adjusted in accordance with taxprinciples. Business expenses aredeductible if they are properly recordedand supported.

– Revenue and expense allocation criteria

The tax principles for allocating revenuesand expenses to determine taxableincome generally coincide withaccounting principles. Tax law identifies

II. Central Government taxes

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the accrual method as generallyapplicable for revenue and expenserecognition purposes. Additionally, allexpenses must be recorded in order tobe deductible (except in certain cases,such as accelerated depreciation). Fortax purposes, in the event of conflictbetween an accounting standard and atax principle, the latter will prevail.However, expenses recorded in a fiscalyear subsequent to their accrual, orrevenues recorded in a fiscal year priorto their accrual, are allocated for taxpurposes in the year in which they arerecorded, provided that such practicedoes not give rise to lower taxation thanthat which would apply in the event ofthe proper recognition of the expensesand revenues in the taxpayer’s books.

For certain transactions, companies arepermitted to use special allocationmethods other than the accrual method(e.g. deferred price transactions).

If allocation criteria other than thoseexpressly envisaged in the tax regulationsare applied, the rationale for their usemust be duly supported and they mustbe approved by the Government.

– International “fiscal transparency” regime(“Controlled Foreign Corporations”provisions)

This regime becomes applicable when:

- The taxpayer (Spanish company) holds50% or more of the capital stock,equity, voting rights or results of thenonresident company. Notwithstandingthe above, this regime will not beapplicable when the nonresident entityis tax resident of another EU MemberState which is not deemed to be a taxhaven according to Spanish legislation.Ownership interests held by related

entities or individuals (resident ornonresident) are included indetermining such holding.

- The tax (corporate income tax orsimilar) paid by the nonresident on theattributable net income must be lessthan 75% of that which would havebeen payable under Spanish regulations.

- The net income derives from:

a) Ownership of real estate or rights inrem, unless such real estate is usedfor an entrepreneurial activity orlicensed to another nonresidentgroup company (as defined in Article42 of the Commercial Code).

b)Share in equity and transfer to thirdparties of capital (with certainexceptions, such as financial assetsheld in order to meet statutoryrequirements, etc.).

c) Lending, financing, insurance andservice activities (except servicesdirectly related to export activities)with related resident companieswhich incur deductible expenses.The attribution does not take place ifmore than 50% of this type ofincome derives from transactionscarried out with nonrelated entities.

d)Income from transfers of assets orrights included in a) or b) above.

The attribution of net income does nottake place (except for the third caseabove) when the nonresident companyobtains such income from an entity inwhich its direct or indirect holdingamounts to at least 5% of its capitalstock if:

* The former engages in directing andmanaging its investment.

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* At least 85% of the revenues of thelatter entity derive fromentrepreneurial activities.

Additionally, a general exception to theapplicability of the regime for theincome addressed in letters a), b) andd) above is established when theattributable income is below:

* 15% of the total net income obtainedby the nonresident entity or,

* 4% of the total revenues of thenonresident entity.

The above limits may also be computedon a group basis, as legally defined.

In any case, the attributed net incomecannot be higher than the total netincome of the nonresident entity.

The attribution will take place inproportion to the direct or indirectholding in the nonresident entity, andthe amount of net income to beattributed will be determined inaccordance with the principles andcriteria established in the corporateincome tax legislation.

The Spanish entity will not include in itstax base the portion of distributeddividends received which derives fromincome previously attributed.

Specific income can only be included inthe tax base once, regardless of themanner or the entity at which it isdisclosed.

This legislation entitles the Spanishcompany to a tax credit on the amountof corporate income tax (or similar)actually paid by the nonresident entityand its subsidiaries as defined by law (inproportion to the net income attributed)and the tax actually paid as a result of

the distribution of dividends. The limitfor this tax credit is the Spanish tax.

No tax credit is permitted for taxes paidin tax havens.

Where the investee is resident in acountry or territory classed as a taxhaven it will be presumed that:

i) The amount paid by the entity notresident in Spain attributable to any ofthe classes of income previouslyreferred to in letters a) to d), inrelation to a tax identical or similar tocorporate income tax, is lower thanthe 75% that would have beenapplicable in accordance with thecorporate income tax rules.

ii) The income obtained by the investeearises from the mentioned classes ofincome.

iii)The income obtained by the investee is15% of the acquisition cost of theholding.

These assumptions are rebuttable and donot apply if the investee consolidates itsfinancial statements, pursuant to Article42 of the Commercial Code, with one ormore of the entities which are obliged toinclude in their taxable income the incomeobtained from nonresident entities.

– Market price valuation

As a general rule, assets must be valuedat their acquisition or production cost.

However, in certain cases, marketvaluation (i.e. valuation on an arm’s-length basis) must be applied for taxpurposes. This method is applicable to:

- donated assets;

- assets contributed to entities and thesecurities received in exchange;

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- assets transferred to shareholders inthe event of dissolution, the withdrawalof shareholders, capital reductions withrefund of contributions, paid-in surplusand the distribution of income;

- assets transferred as a result ofmergers, absorptions and full or partialspin-offs;

- assets acquired through swaptransactions;

- assets acquired as a result of exchangesor conversions.

It should be noted that currentlegislation provides for a special taxneutrality regime when certain of thetransactions described above are carriedout as part of a corporate reorganization(i.e. mergers, spin-offs, nonmonetarycontributions of lines of business andshare exchanges as well as nonmonetarycontributions of assets if certainrequirements are met).

Under this regime, provided that certainrequirements are met, the gains disclosedon the valuation at market prices of theassets and rights transferred may beexcluded from the transferor’s tax base,thereby not entailing an acquisition costfor tax purposes for the acquiror.

Additionally, transactions between relatedentities may be valued by the taxauthorities at market prices for corporateincome tax purposes when the agreedvaluation would have led either to lowertaxation or to a tax deferral; however,such valuation cannot lead to taxation ofa higher income for the parties involved.Two entities are deemed to be related fortax purposes if one owns indirectly atleast 25% of the capital of the other orexercises functions at the other signifying

the power to influence decisions, or if thesame shareholders own at least 25% ofthe capital stock of both (or if suchshareholders exercise functions withdecision-making power at bothcompanies). In addition, companies whichare members of a group as defined inmercantile law, companies and theirshareholders (those owning at least 5%of the capital stock —1% in the case oflisted companies), and companies andtheir directors are also deemed to berelated for corporate income taxpurposes.

OECD methods are applicable fordetermining market prices betweenrelated parties as follows:

First,

- Comparable uncontrolled pricemethod (market price of the goods orof comparable items)

Secondarily,

- Cost plus method

- Resale price method

If none of the methods listed above areapplicable, the profit split method wouldapply, taking into account the risksassumed, the assets employed and therole of each of the related parties.

Additionally, the possibility of “advancepricing agreements” with the taxauthorities has been introduced incorporate income tax legislation. Thus, ataxpayer may submit to the taxauthorities a proposal for valuing itstransactions with related entities basedon market conditions. If the proposal isapproved by the tax authorities, suchvaluation is valid for tax purposes for aperiod of three tax years.

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Advance pricing arrangements may alsobe reached in connection withcontributions for research, developmentand technological innovation ormanagement expenses and in connectionwith the part of management expensesthat may be allocated to a permanentestablishment in Spain of a nonresidententity.

– Thin capitalization rule

Where the direct or indirect netremunerated indebtedness of an entitytax resident in Spain (other than afinancial institution) to one or morerelated persons or entities notresidents in Spain exceeds the result ofapplying a coefficient of 3 to capital fortax purposes (equity of the entityexcluding income or loss for the year),the interest accrued on the excess willbe treated as a dividend and thus willbe nondeductible for the Spanishcompany.

The rule commented in the precedingparagraph will not be applicable when thenon Spanish resident related entity is taxresident in another EU Member State,unless it is resident of a territoryclassified as tax haven.

The taxpayer may submit a (dulysupported) proposal for applying a higherratio. If the proposal is approved, adifferent ratio may be applied. Thispossibility is not applicable totransactions made with or by persons orentities resident in countries orterritories legally defined as tax havens.

– Lastly, the tax base must in generalinclude the difference between the valueper books and the normal market value ofthe assets which:

- are owned by a resident entity thattransfers its place of residence abroad;

- are allocated to a permanentestablishment located in Spanish taxterritory that ceases operations; or

- having been previously allocated to apermanent establishment located inSpain, are transferred abroad.

Also, the tax authorities can value atmarket price any transactions withpersons or entities resident in territoriesdefined in the relevant regulations as taxhavens if the valuation agreed upon hasled to lower or deferred taxation in Spain.

– Inventory valuation

There are no special tax rules in thisconnection. Accordingly, all inventoryvaluation methods (LIFO, FIFO,acquisition cost or weighted averagecost) applicable for accounting purposesare also acceptable for tax purposes. Thesame rules apply to inventorydepreciation.

– Value adjustments

- Depreciation

Depreciation qualifies as a deductibleexpense only if it is effective and isrecorded in the accounts (with theexception of the accelerateddepreciation applicable to certainactivities, such as research anddevelopment: see below).

* Official depreciation rates

There are official rate tables (updatedby Royal Decree 537/1997) which, ifcomplied with, relieve the companyof the need to prove effectiveness.Examples of the current official ratesare:

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There are special rules for assetsused on a daily basis in more thanone ordinary shift of work and forassets acquired second hand.

In addition, in the case of new assetsacquired between January 1, 2003and December 31, 2004 the annualdepreciation rates established in theofficial tables will be multiplied by1.1, being the new depreciation rateapplicable during the asset’s usefullife.

* Declining-balance depreciation

Under this method, which ispermitted for all assets exceptbuildings and furniture, depreciationcan be shifted to the early years ofthe asset’s useful life, when theeffective depreciation may be greaterby applying a coefficient to thedeclining balance of the asset’s bookvalue.

* Sum-of-the-years’-digits method

This system is also permitted for allassets except buildings and furniture,and the sum of the digits isdetermined on the basis of thedepreciation period established in theofficial tables.

* Other depreciation methods

Companies which, for technicalreasons, wish to depreciate theirassets at different rates than thosefixed by the official tables, and alsowish to obviate the uncertaintiesinvolved in proving the “effective”depreciation, can seek prior approvalfrom the tax authorities for specialdepreciation plans with such annualrates of depreciation.

Finally, companies of certain kindsand in certain industries (e.g. miningcompanies, industries in the processof reorganization, etc.) may beauthorized to depreciate their assetsat their discretion in accordance withthe special laws regulating eachindustry.

* Amortization of intangible assets

Intangible assets are amortized by thesame methods as those applicable totangible fixed assets throughout theireconomic life.

Among other intangible assets whichdo not have a specified finite life,goodwill can be amortized overtwenty years if certain requirementsare met (mainly that they derive froma transaction for a considerationbetween companies not belonging tothe same group —as defined foraccounting purposes). Otherwise,amortization will only be deductible ifit is proved by the taxpayer that suchamortization is irreversible.

The minimum period over whichtrademarks, leasehold assignmentrights and other intangible assets thatdo not have a certain expiry datemay be amortized is ten years.

Annual depreciation rate (%)

Maximum Minimum

Industrial buildings 3 1.47Commercial buildings 2 1Office furniture 10 5Computers 25 12.5Software 33 16.7Vehicles 16 7.14Machinery 12 5.55

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- Financial lease contracts

Under Spanish law, financial leasecontracts (provided by finance entities,as legally defined) for movable assetsmust have a minimum term of twoyears, and those for real estate musthave a minimum term of ten years, andthe annual charge corresponding to thedepreciation of the cost of the assetmust remain the same or increase overthe term of the lease. Lease payments(interest plus the portion of principalrelating to the cost of the asset) aredeductible, except those for land(although in this case the interestportion will be deductible) and forother nondepreciable assets. However,the ceiling on the deductibility of thedepreciation cost of the asset is twicethe maximum depreciation rate per theofficial tables.

- Assets leased with purchase option

In this case, when there is noreasonable doubt that the purchaseoption will be exercised (i.e. when theprice to be paid for the purchase of theasset is lower than the amountresulting from reducing the acquisitioncost of the asset by the maximumdepreciation corresponding to thelease term), the amount relating to thedepreciation rates applicable to theasset is deemed to be a deductibleexpense for the lessee in line with therules applicable to tangible fixed assets.

The difference between the leasepayments payable to the lessor and theacquisition cost of the asset (i.e. thefinancial cost of the contract) is a taxdeductible expense for the lessee overthe tax periods spanned by the leasecontract.

If the asset is transferred by the lesseeto the lessor prior to the leasecontract, the latter must continue todepreciate it by the same method andunder the same terms as those appliedprior to the transfer.

- Diminution in value of assets

* Provision for bad debts

The provision for bad debts coversthe foreseeable losses in the realizablevalue of accounts receivable. Thedeductibility of this provision issubject to certain requirements.Under these requirements, the onlymethod applicable is the individualbalance method, whereby the statusof each receivable is individuallyanalyzed (balances receivable fromdebtors that are bankrupt or intemporary receivership or similarsituations, or balances past due bymore than six months can beprovided for at the full amount, as canbalances in the process of legallyenforced collection).

Provisions cannot be recorded fortax purposes for receivables fromrelated parties unless the relatedparties concerned are insolvent.

Similarly, provisions cannot berecorded for tax purposes for otherreceivables (from public entities orreceivables for which sufficientguarantees have been provided).

Financial institutions, as defined bylaw, are subject to specific rules.

* Provision for depreciation ofmarketable securities

For marketable unlisted securities, aprovision is admissible for the

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difference arising in the reportingyear between the book value at theend of the fiscal year and thepreviously recorded book value(equity method) on the basis ofeither the accounts prepared by thedirectors or the accounts approvedby the shareholders. For listedsecurities, the provision is admissiblefor the difference between the year-end stock market price and the priceat the beginning of the tax year.

Provisions for depreciation of listedfixed-income securities are deductibleup to the limit of the overalldepreciation arising in the year onsuch securities held by the taxpayer.

Provisions for unlisted fixed-incomesecurities with a fixed redemptionvalue are not deductible.

Provisions for holdings in the equityof entities resident in tax havens arein general not deductible.

- Financial goodwill

Where securities representing aholding in the equity of entities notresident in Spain are acquired and theincome or gains obtained by suchentities qualify for exemption underArticle 20. bis of the CorporateIncome Tax Law, the amount of thedifference between the acquisition costand underlying book value of theholding on the acquisition date will beallocated to the assets and rights ofthe entity not resident in Spain, andany portion of the difference that hasnot been allocated will be deductiblefrom taxable income, subject to anannual limit of one twentieth of itsamount.

This deduction is not consistent withthe tax credit for export activities, butis consistent with the provision fordepreciation of marketable securities.

This legislative provision applies toacquisitions of holdings made in fiscalyears commencing after January 1,2002.

The taxpayer, in the tax periods inwhich it is going to benefit from this taxcredit, should file to the tax authoritiesthe following information jointly with itscorporate income tax return:

a) In relation to the direct investee:

1. Identity and percentage holding.

2. Description of its activities.

3. Value and date of acquisition of theholdings, as well as their underlyingbook value, determined on thebasis of standardized financialstatements.

4. Support for the rules onstandardization of valuation andtiming, as well as the attribution tothe assets and rights of the investeeof the difference existing betweenthe acquisition cost and underlyingbook value of its holdings on thedate of their acquisition.

b)Amount of investment made in theacquisition of holdings in entities notresident in Spain and included in thetax credit base for export activities.

- Provisions for contingencies andexpenses

As a general rule, provisions forforeseeable contingencies, possiblelosses, expenses or probable debts arenot deductible for tax purposes.

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However, the following provisions,among others, are tax-deductible:

* Provisions intended to cover definiteeconomic liabilities contracted orincurred by the company, the amountof which has not been definitivelyestablished. Examples include penaltiesfor nonperformance of contracts,execution of guarantees, etc.

* Provisions intended to cover repairand inspection warranties (andancillary expenses for sales returns),up to the limit resulting from applyingto the sales with outstandingwarranties at the end of the taxperiod the average warrantyexpenses as a percentage of totalsales under warranty in the currentand the two preceding tax periods.

– Nondeductible expenses

- Amounts directly or indirectlyremunerating equity.

- Corporate income tax.

- Criminal and administrative fines andpenalties, and surcharges for the latepayment of taxes.

- Gambling losses

- Free gifts. Except gifts to certainentities (foundations, etc.) of assetsregistered in the Register of Assets ofCultural Interest, assets aimed atcontributing to the conservation ofassets of cultural interest or to theperformance of activities of generalinterest, which would give right todeduct a 35% of the tax credit basedetermined in accordance with Law49/2002, up to a limit of 10% of the nettaxable income of the year. Theamounts exceeding said limit could be

applied in the tax periods ending in the10 subsequent and immediate years.

- Expenses for services relating totransactions performed directly orindirectly with individuals or entitiesresident in designated tax havens orpaid through individuals or entitiesresident in tax havens (unless the payorcan prove that the expense arose froma transaction effectively performed).

- Provisions to internal pensionallowances.

- Additionally, some expenses charged byrelated entities (such as managementfees and R&D contributions) mustmeet certain formal requirements inorder to be tax deductible.

– Income derived from asset transfers

By contrast with other countries, Spanishcorporate income tax treats incomederived from the transfer of assets in thesame way as other income items.Accordingly, such income is generallyadded to (deducted from) regularbusiness income to determine thetaxable income (a tax credit forreinvestment being applicable in somecases, as explained below).

Special rules are envisaged fordetermining income derived from realestate transfers to take into account thedeclining value of money. Under theserules, the acquisition cost and the annualdepreciation are corrected by applyingcertain coefficients.

– Loss carryforwards

As a general rule, a resident entity cancarry forward its tax losses for offsetagainst the taxable income of the followingfifteen years. For newly-incorporated

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entities, this fifteen-year periodcommences in the first fiscal year in whichthe entity reports taxable income.

The taxpayer must prove, by producingthe related tax returns or self-assessments,accounting records and the appropriatedocumentary support, the origin andamount of the tax losses to be offset,whenever the tax losses were incurred.

Loss carrybacks are not permitted.

b) Reduction in base for investments to establish companies abroad

This reduction is a tax incentive to supportinvestments made in acquiring holdings incompanies not resident in Spain that enablea majority of the voting rights in suchcompanies to be obtained, provided that:

– The investee company carries onbusiness activities abroad (excluding realestate, financial or insurance activities orthe provision of services to relatedentities resident in Spain).

– The business activities pursued by theinvestee company have not been carriedon previously under other ownership.

– The investee company is not resident inthe European Union or in territoriesclassified as tax havens in the regulations.

This incentive involves deducting from thetax base for corporate income tax purposesthe amount of the investments effectivelymade in the year, up to a maximum annuallimit of g 30,050,605.22, without exceeding25% of the tax base for the tax periodbefore calculating the reduction. Theamounts deducted will be included in thetax base in equal parts in the tax periodsconcluding in the following four years.

The size of the deduction is reduced bythe amount of any decline in the value of

the holding in nonresident companies thathad been tax deductible. Furthermore, thisincentive is incompatible with the taxcredit for export activities.

c) Tax rates

Spain’s current standard corporate incometax rate is 35%. Special rates are applicableto certain entities such as listed collectiveinvestment institutions including real estateinvestment funds (1%), certain cooperatives(20%) or entities engaging in oil and gasresearch and exploitation activities (40%),as well as the so called asset-holdingcompanies (40%), which regime substitutedthe former fiscal transparency one.

d) Tax credits, withholdings andprepayments

The tax credit regulations are normallyrevised annually in the Budget Law. Werefer hereunder to the main creditsapplicable for 2004.

– Tax credit for reinvestment of extraordinaryincome

Provision is made for a tax credit in theform of a 20% deduction from the taxpayable on gains obtained from transfersof assets (the types of asset arementioned below), on condition that thetransfer proceeds are reinvested. The taxcredit will be 10%, 5% or 25% where thetax rates are 25%, 20% or 40%,respectively.

However, a partial tax credit can betaken if the proceeds are partiallyreinvested, by applying the 20% tax creditto the portion of the gain proportionalto the amount reinvested.

The amount of the gain qualifying for thetax credit will not include deductibleprovisions for the assets transferred, or

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amounts charged in respect ofaccelerated depreciation and to beincluded in the tax base as a result of thetransfer of the assets on which it wasclaimed. The portion of the gain that hasgiven the right to claim a double taxationtax credit will not be included in the taxcredit base either.

The tax credit will be taken in the periodin which the reinvestment is made andwill be taken without any limit on the taxpayable. However, where thereinvestment takes place before thetransfer, the tax credit must be taken inthe period in which the transfer is made.

- Types of asset transferred:

The following are the assets thetransfer of which qualifies for theabove-mentioned tax credit:

* Tangible fixed assets or intangibleassets previously held for at least oneyear.

* Securities which represent at least5% of the capital of the investee inquestion and have been previouslyheld for at least one year, excludingsecurities that do not confer aninterest in its capital stock.

For the purposes of calculating thelength of ownership, the FIFO rule willbe applied (those acquired first will bedeemed to have been transferred first).The calculation of the interesttransferred will refer to the tax period.

- Reinvestment requirements:

The following are the assets in whichthe transfer proceeds must bereinvested:

* Tangible fixed assets or intangibleassets used for business activities.

* Securities which represent at least5% of the capital of the investee,excluding those which do not conferan interest in its capital stock andthose which confer an interest in thecapital or equity of entities residentin tax havens.

The assets in which the reinvestment ismade must continue to be held by thetaxpayer for five years, except forjustified loss, or for three years in thecase of movable assets, unless theiruseful life is shorter. If the assets aretransferred before the end of thatperiod, the tax credit will be forfeited(unless the net book value orproceeds, if less, is reinvested asdescribed above). If the tax credit isforfeited in a year subsequent to that inwhich it is used, the relevant taxpayable and late-payment interest mustbe paid over to the tax authorities.

The reinvestment must be made withina period commencing one year beforeand ending three years after the dateon which the asset transferred is madeavailable. However, a specialreinvestment plan may be submittedwhere the reinvestment cannot bemade in the above-mentioned periodsdue to the technical characteristics ofthe reinvestment.

If more than one transfer of securitiesis made in the same period, time in theabove-mentioned period will startrunning from the end of the tax period.

The reinvestment will be deemed tohave been made when the assets inwhich it is made are made available tothe taxpayer, except in the case ofassets under financial lease agreements,where the reinvestment will be deemed

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to have been made on the date ofexecution of the related agreement (for the cash value of the asset). In thelatter case, if the purchase option isnot exercised, the reinvestment will bedeemed not to have been made (the reinvestment being a conditionsubsequent).

– Investment and professional training taxcredits

- A 10% tax credit for investments madein tangible fixed assets used for thefollowing:

* To protect the environment,consisting of installations to avoid airpollution from industrial facilities.

* To prevent the pollution of surface,underground and sea water byreducing, recovering or treatingindustrial waste.

* Purchases of land-based means oftransportation that help reduce airpollution.

In order for investments in these assetsto qualify for this tax credit, they mustbe included in programs, agreementsor contracts with the relevantenvironmental authorities. In suchcases, the authorities will issue therelated certificate accrediting theinvestment.

- A 15% tax credit for investments madein certain assets of cultural interest,provided that they are held for at leastfour years.

Capitalizable expenses incurred in theacquisition, maintenance, upkeep orrepair of such assets also qualify forthis tax credit.

- Investments in satellite vehiclenavigation and location systemsincorporated into industrial orcommercial road transport vehicles willgive the right to a tax credit of 10% ofthe amount of such investments.

- Investments in access platforms forhandicapped people and wheelchairsecuring facilities incorporated intopassenger road public transportvehicles will give the right to a taxcredit of 10% of the amount of suchinvestments.

- A 20% tax credit for investments madein Spanish motion picture oraudiovisual productions. Theproduction cost is reduced, in order toapply the tax credit, by the portionfinanced by the financial co-producer.

A 5% tax credit is envisaged forinvestment in a motion picture financedby the financial co-producer (subject toa ceiling of 5% of the income for theyear derived from such investment).

- A 5% tax credit for investments madein the publication of books.

The portion of these investmentsfinanced with subsidies does not qualifyfor a tax credit.

- A tax credit for 30% of the expensesincurred in the tax period on scientificR&D. If the investment made exceedsaverage expenses incurred in theprevious two years, 50% is applied tothe excess.

In addition, a tax credit will be availablefor 20% of the expenses incurred onpersonnel assigned exclusively to suchactivities, and expenses relating tocertain types of project.

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A tax credit for 10% of the expensesincurred in the tax period ontechnological innovation, and 15% inthe case of expenses relating toprojects, the execution of which isentrusted to universities and otheragencies or centers.

R&D and technological innovationexpenses incurred abroad may qualifyfor this tax credit provided that themain R&D activity takes place in Spainand the expenses incurred abroad donot exceed 25% of the total.

The amount of the base for this taxcredit is reduced by 65% of anysubsidies received to encourage suchactivities.

Apart from the tax credit for R&Dexpenses a tax credit is established forinvestments in tangible fixed assets andintangible assets (excluding investmentin buildings or land) to be usedexclusively for R&D activities, whichwill qualify for a tax credit for R&Dactivities (n.b., not technologicalinnovation) on the following conditions:

* The base of the tax credit will be theamount of the investments in theabove-mentioned assets, net of 65%of the subsidies received.

* The investments are deemed to bemade when the assets are put intooperation.

* The tax credit rate in these cases willbe 10%.

* The assets acquired must remain atthe company until their specificpurpose in the research anddevelopment activities isaccomplished, unless their useful lifeis shorter.

* This tax credit will be inconsistentwith the other tax credits provided forthe same investments in the Chapteron Tax Credits to encourage thepursuit of certain activities, but will beconsistent with the tax credit forreinvestment of extraordinary income.

Lastly, it should be noted that it ispossible to apply to the Ministry ofScience and Technology for a reasonedbinding report on fulfillment of thescientific and technological requirementsfor characterizing activities as R&D oras technological innovation.

- A tax credit may be taken for 25% ofthe investment in:

* The formation of a branch orpermanent establishment abroad, theacquisition of a holding in a foreigncompany or the incorporation of asubsidiary directly connected withthe export of goods or services orthe contracting of tourism services inSpain, provided that the holding is ofat least 25% of the capital stock ofthe subsidiary (except forinvestments in tax havens).

* Advertising and publicity expensescovering more than one year for thelaunch of products, the opening-up ofmarkets, and attendance at trade fairs(including international trade fairs inSpain) also qualify for this tax credit(except when carried out in taxhavens).

The amount of the base for these taxcredits is reduced by 65% of anysubsidies received.

- A tax credit can be taken for 5% of theamount of the employee trainingexpenses.

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If the expenses exceed the averageamount spent in the two precedingyears, this tax credit is increased to10% on the excess amount. Theemployee training expenses arereduced by 65% of any subsidiesreceived treated as period revenues.

The tax credit also applies to expensesincurred by the entity in trainingemployees in the use of newtechnologies. Such expenses includethe cost of Internet access and therelated hardware, even if used byemployees outside the workplace andoutside normal working hours. Theexpenses referred to in this section willbe treated for tax purposes as trainingcosts and will not give rise to salaryincome for the employee.

– Tax credit for employer contributions toemployment pension plans

In general, this tax credit encouragescontributions to employment pensionplans or mutual entities which operate asemployee welfare vehicles sponsored bythe taxpayer for the benefit of workerswhose annual gross compensation is lessthan g 27,000 provided that suchcontributions are imputed. If thecompensation exceeds that amount, thetax credit will be taken on theproportion of the contributions whichrelate to g 27,000.

The tax credit is equal to 10% of thecontributions made.

– Tax credit for hiring handicapped workers

The requirements for qualifying for thistax credit are as follows:

- The contract must be an indefinite-term, full-time contract.

- The amount of the tax credit will be g 6,000 per handicapped person/yearby which the average labor forceincreases, with respect to theimmediately preceding year.

Tax credits are limited to 35% of the grosstax payable, net of domestic andinternational double taxation tax creditsand of tax allowances.

However, any excess can be carriedforward for use in the following ten years(in the case of the tax credit for scientificresearch and technological innovationactivities, the period will be up to fifteenyears).

The period will be counted from the firstsubsequent year in which an entity reportstaxable income in the case of newly-incorporated entities or entities offsettingprior year’s losses by effectivecontributions of new resources.

– Tax credit for domestic double taxation ofdividends and on transfers of shares

This credit completely eliminates doubletaxation when the resident companycollecting the dividend owns at least 5%of the resident company paying thedividend and had its holding during the12-month period prior to the date onwhich the distributed dividend becomesclaimable or, failing that, be maintainedsubsequently for the time required tocomplete that period. If theserequirements are not met, doubletaxation is not avoided altogether, since50% of the dividend received is taxed (or100% should certain antiabuse provisionsbe applicable).

The credit can also be taken on transfersof shares in respect of the amount ofundistributed earnings generated in the

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period of ownership of the holding,provided that the requirements describedabove are met.

Additionally, the credit applies (in respectof the amount of undistributed earnings)in the following cases: liquidation of acompany; acquisition by a company of itsown shares for amortization purposes;withdrawal of shareholders; dissolutionof a company without liquidation(mergers, total spin-offs or globaltransfers of assets and liabilities).

The above-mentioned tax credits aresubject to certain limits (with someexceptions) including most notably:

- When the distribution of the dividendor of the share in profits does notresult in the inclusion of income in thetax base.

- When the distribution of the dividendor of the share in profits causes adecline in the value of the ownershipinterest for tax purposes.

- When the undistributed income relatesto income not included in the tax baseof the investee company because it wasoffset by tax losses.

Any excess tax credit can be carriedforward for use in the following sevenyears.

– Tax credit to avoid international doubletaxation

Traditionally, Spanish legislation hasadopted the credit method and the three-tier-underlying tax credit (for dividends)to avoid international double taxation.

An amendment to the legislation datedJune 2000, introduced a pure exemptionsystem subject to compliance withcertain requirements.

The exemption co-exists with the taxcredit system (the tax payer may opt forone or the other, although theapplication of both is incompatible).

- Tax credit system

Under this method, all the income orcapital gains obtained abroad bycompanies resident in Spain areincluded in the tax base in calculatingthe tax due. The amount of taxeffectively paid abroad will be deductedfrom the tax due, up to the limit of thetax that would have been payable onthe income had it been obtained inSpain. In making the calculation, all theincome obtained in the same countrywill be included, except in the case ofpermanent establishments, where theincome obtained by each of them willbe grouped (“country per countrymechanism”).

When the tax base includes dividendsor shares in profits paid by an entitynot resident in Spain, the tax effectivelypaid by the nonresident entity inrespect of the income from which thedividends or shares in profits were paidwill be deducted. This deduction,together with that mentioned in theprevious paragraph, may not exceedthe gross tax that would have beenpayable in Spain on such income.

The underlying tax is deductible up tothe third level (i.e. subsidiaries ofsubsidiaries). To qualify for the taxcredit, a direct or indirect holding of atleast 5% in the capital of thenonresident entity must be owneduninterruptedly for the one-year periodimmediately prior to the distribution ofthe dividend (or the one-year periodmust be completed after the

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distribution), and the resident entitymust include in its tax base not onlythe income distributed but also thetaxes borne by said foreign entities.

Any amounts not deducted due toinsufficiency of the gross tax payablemay be carried forward for use in thefollowing ten years.

- Exemption system applicable to incomefrom business activities carried onabroad through subsidiaries orpermanent establishments

Under the exemption system, dividendsor profit participations derived fromholding securities representing theequity of entities which are notresident in Spanish territory and theincome (gains) obtained from thetransfer of these securities are taxexempt in Spain provided the followingrequirements are met:

a) The direct or indirect interest in thecapital or equity of the nonresidententity must be at least 5% and thisinterest must have been held by theSpanish entity uninterruptedly duringthe year prior to the date on whichthe profit distributed becomesclaimable (or will be maintained forthe time necessary to complete ayear).

b)That the nonresident entity has beensubject to a tax of an identical oranalogous nature to the Spanishcorporate income tax in the tax yearin which the profit which isdistributed has been obtained. It isconsidered that the nonresidententity is subject to a tax of identicalor analogous nature to the Spanishcorporate income tax if thenonresident entity is resident in a

country with which Spain has atreaty to avoid international doubletaxation and such treaty contains anexchange of information clause. Theexemption does not apply when thenonresident entity resides in a taxhaven as legally defined.

c) The income from which thedividends or profit participationsarise must be derived from thecarrying on of business activitiesabroad as defined by the Law. Thisrequirement will be deemed to bemet when at least 85% of therevenues for the year of thesubsidiary relate to operating (i.e.not subject to Spain’s controlledforeign corporations –CFC– rules)income obtained abroad, as well asto dividends from subholdings arisingfrom qualifying operating subsidiaries.

The exemption applies in the case ofcapital gains when the requirementsprovided for in b) and c) above are metin every year of the holding, and therequirement set in a) on the date onwhich the transfer takes place.

Regarding the computing of the one-year period, account may be taken ofthe period during which the holdingwas owned by companies that meetthe conditions to be considered asforming part of the same group ofcompanies according to Spanishmercantile legislation.

In any case, if the exemption has beenapplied to foreign-source dividends, thedecline in the value of the holding maynot be included in the tax base,regardless of the manner or the taxperiod in which it occurs, up to theamount of those dividends.

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The Law also states that, if thenonresident entity whose holdings arebeing transferred has, in turn, a director indirect holding in entities residentin Spain or possesses assets in Spanishterritory (and the market value of theholdings in the Spanish-residententities or of the assets located inSpain exceeds 15% of the market valueof its total assets), the exemptionwould be limited to the part of theincome that relates to the net increasein undistributed profits generated bythe investee entity during the time theholding was owned. Furthermore, theLaw establishes provisions that limitthe application of the exemption, as incases in which the entity transferringthe holdings has made a tax-deductibleadjustment to the value of the holdingtransferred. In this case, the exemptionis limited to the excess of the incomeobtained on the transfer over theamount of the adjustment deducted.Similarly, if the holding in thenonresident entity had been acquiredfrom another entity that meets theconditions referred to in Article 42 ofthe Commercial Code for forming partof a group of companies, any lossdisclosed on the transfer of theholding will be reduced (in order todetermine the amount of taxexempted) by the amount of theincome obtained on the transfer of thesame holding to which the exemptionhad been applied. Furthermore, anyincome obtained on the transfer willbe taxed up to the amount of the losson previous transfers included in thetax base for corporate income taxpurposes.

Apart from the above provisions, theLaw also stipulates certain cases inwhich the exemption is not applied,such as, for example, when the entityresident in Spain is a Spanish orEuropean Interest Grouping (EIG), or aTemporary Business Association (UTE)(see p. 109), the acquiror resides in atax haven, or the business activityabroad is carried on for the mainpurpose of qualifying for this taxregime unless, in this latter case,evidence is provided of other valideconomic grounds. It will be assumedthat the business activity abroad iscarried on mainly to qualify for the taxregime if it is simply relocated, i.e.when the same activity carried on bythe subsidiary abroad had previouslybeen carried on in Spain by anotherentity, which has ceased to carry onbusiness and has a relationship of thetype referred to in Article 42 of theCommercial Code.

Lastly, in relation to the incomeobtained abroad through a permanentestablishment, it should be noted thatthe losses incurred by the establishmentwill be deductible, although tax must bepaid subsequently on future income upto an amount equivalent to the lossespreviously deducted.

– Withholdings and prepayments

Nonoperating income, such as interest,rent and dividends, is subject towithholding tax at source, as aprepayment against the final tax liability.

In addition, with certain exceptions,lessees of certain types of real estatemust make withholdings of 15% of therent paid to the related lessors.

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Spanish companies are also required tomake three tax prepayments (in April,October and December of each year)based on the taxable income for the firstthree, nine or eleven months of thecalendar year, applying a rate equal to 5/7of the applicable tax rate (for taxpayerstaxable at the standard rate, theprepayment would be 25%). Certainreductions, withholdings, prepayments onaccount and installment payments madefor the tax period shall be deducted fromthe resulting tax payable.

This method is obligatory for taxpayerswhose volume of business exceeds g 6,010,121 in the 12 months prior tothe date on which their tax periodcommences, and optional for anytaxpayer that expressly decides to followthe method.

Taxpayers whose volume of businessdoes not exceed said amount, make theprepayments by applying the rate of 18%to the gross tax payable (net of therelated tax credits) of the last tax yearwhose deadline for filing a return haselapsed.

The withholdings and prepayments canbe taken as tax credits in the annualreturn for the corresponding year. If thesum of such credits exceeds the final taxpayable, the company is entitled to arefund for the excess prepaid.

e) Asset-holding companies

On 2003 was suppressed the fiscaltransparency regime, which was replacedby the “asset-holding companies” regime.

Companies which fulfill the followingrequirements for more than 90 days in thefiscal year are deemed to be asset-holdingcompanies:

– over half their assets consist of securitiesor are not used in economic activities,and

– over 50% of their capital stock isdirectly or indirectly owned by no morethan ten shareholders or by a familygroup.

For these purposes, in the case ofcompanies over half of whose assetsconsist of securities, inter alia, those ownedfor the purpose of complying with legaland statutory obligations or of directingand managing the ownership interest(provided they carry at least 5% of votingrights) are not deemed to be securities.

This regime does not apply to companies atwhich all the shareholders are legal entitieswhich are not asset-holding companies or ifover 50% of the capital is owned by a legalentity governed by public law. In addition, itdoes not apply in the tax periods in whichthe securities representing the ownershipinterest in the company are traded on anofficial secondary market.

Shareholdings and other ownershipinterests in the company must beregistered.

Asset-holding companies will be taxedaccording to the following special rules:

– Taxable income will be divided into twocomponents: the general component,which will be taxed at 40%, and thespecial component which will be taxed at15%. The taxable income will bequantified pursuant to the rules of thePersonal Income Tax Law, excluding thefollowing: personal and family exemptions,and the deferral for capital gains disclosedas a result of the transfer of units orshares in collective investment institutionsin cases in which the amount obtained is

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invested again in units or shares inanother collective investment institution.

– The direct assessment method will beused to determine net income fromeconomic activities.

– In calculating capital gains, the method ofabatement coefficients, whereby the gainis reduced by a certain percentagedepending on the type of asset (14.28%,25% or 11.11%) for each year followingthe second year the asset forms part ofthe taxpayer’s net worth at December31, 1996, will not be used.

– The 40% reduction provided for in thePersonal Income Tax Law for incomegenerated over a period exceeding twoyears or obtained at particularly irregulartime intervals will not apply (in casethere are resident or nonresident entitiesas shareholders).

– Prior years’ tax losses are offset pursuantto the Personal Income Tax Law.

– The gross tax payable can only be reducedby the following: the tax credit foreconomic activities, gifts, income obtainedin Ceuta and Melilla, and investments inassets of cultural interest. In addition,companies can claim the dividend and theinternational double taxation credit(applicable to individuals), and can deductthe prepayments made in the fiscal year.

The rules for distribution of income are asfollows:

– Where the recipient is an individualresident for tax purposes in Spain,dividends and shares in income generatedin tax periods in which the distributingentity was taxed under the regime forasset-holding companies will not beincluded in the recipient’s personalincome tax return for that tax period.

– Where the recipient is a resident companyor a nonresident income taxpayer with apermanent establishment in Spain, theincome received will be included in thetaxable income but the 50% tax credit fordouble taxation of dividends will be applied.

– Where the recipient is a nonresidentincome taxpayer without a permanentestablishment, the income received willbe afforded the treatment provided inthe Nonresidents’ Income Tax Law.

Income obtained from transfers ofownership interests in companies which ownreserves recorded out of income to whichthis regime applied will be treated as follows:

– If the transferor is an individual residentfor tax purposes in Spain, the rules ofthe Personal Income Tax Law will apply.

– If the transferor is a resident company ora nonresident with a permanentestablishment, it cannot take the taxcredit for double taxation of capital gains,and the transfer value cannot be lowerthan the underlying value resulting fromthe latest balance sheet.

– If the transferor is nonresident and doesnot have a permanent establishment, theincome will be treated as provided for inthe Nonresidents’ Income Tax Law.

f) Consolidated taxation status

Spanish tax law envisages the possibility ofcertain corporate groups being taxed on aconsolidated basis.

The filing of a consolidated return hassignificant advantages, most notably the factthat the losses of some group companiescan be offset against the profits of others.Also, since intercompany profits areeliminated in calculating consolidatedincome, the arm’s-length test being applied

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in the valuation of intercompanytransactions is normally irrelevant (see p. 93 for earlier comments on this point).

For tax purposes, a consolidated groupconsists of the resident controllingcompany, which must be subject to (andnot exempt from) corporate income tax,or by a permanent establishment of anonresident company, and those of itsSpanish subsidiaries in which they haveeffective direct or indirect ownershipinterests of at least 75%. In order torequest the application of the consolidatedtax regime, the controlling company orpermanent establishment must have adirect or indirect holding of at least 75% inthe capital stock of another company onthe first day of the tax period in which thistax regime applies and said holding must bemaintained throughout the tax period.

Resolutions for group companies to be taxedon a consolidated basis must be adopted bythe shareholders’ meeting (or equivalentbody if they are not formed under theCommercial Code), and the tax authoritiesmust be notified at any time during the taxperiod immediately prior to that in which theconsolidated tax regime is applied. Theregime will be applicable indefinitely so longas its application is not waived.

g) Other special taxation regimes

Corporate income tax legislation containsprovisions governing special taxationregimes, established mainly as a result ofthe nature of the taxpayer or of theactivities carried on by entities in a specificeconomic sector:

– Spanish and European Economic InterestGroupings (EIGs). These entities and theirshareholders are subject to the generalcorporate income tax rules, with some

exceptions, among others: they do notpay corporate income tax on the portionof their taxable income attributable toshareholders resident in Spain.

The nonresident shareholders of a SpanishEIGs are taxable pursuant to theNonresidents’ Income Tax Law andpursuant to the rules contained in the taxtreaties.

The nonresident shareholders of anEuropean EIG, are only taxable in Spain,for the EIGs’ income allocated to them, ifthey are considered to have a permanentestablishment in Spain.

– Temporary Business Associations(“Uniones Temporales de Empresas” orUTEs). These entities are taxed in thesame way as EIGs; however, the foreign-source income (derived from activitiescarried out abroad) of UTEs is tax-exempt (subject to application to the taxauthorities).

The losses obtained by a UTE abroad areimputed to the tax bases of its members.If, in future years, the UTE obtainsincome it must be included in the taxbase of its members up to the limit ofthe losses previously included.

– Other special tax systems apply to venturecapital companies and funds, industrial andregional development companies andcollective investment institutions.

Special regimes for economic sectorsapply to both mining companies (withspecial provisions relating mainly toaccelerated depreciation of certain assetsand reductions in the tax base due to theapplicability, subject to certainrequirements, of the depletion factor),companies engaging in oil and gas researchand exploitation activities (which,

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although subject to tax at a higher rate –40%–, may reduce, with certainlimitations, their tax base by applying thedepletion factor and are subject to specialdepreciation and loss carryforwardprovisions, etc.) and to shipping entitieson the basis of tonnage.

h) Foreign-securities holding entities

Current legislation of the regime governingforeign-securities holding entities (in Spanish,ETVE) underlines the same as one of themost competitive in the European Union.

The main features of this special regimeare summarized below:

– Corporate purpose and application of theregime

Regarding the corporate purpose of theETVE, it is sufficient for the corporatepurpose to include the management andadministration of securities representingthe equity of entities not resident inSpanish territory, by means of theappropriate organization of material andpersonal resources. Moreover, an ETVEmay be a member of a consolidated taxgroup, if it meets the relevantrequirements, although the ETVE regimeis not applicable to asset-holdingcompanies, Spanish or European InterestGroupings and Temporary BusinessAssociations.

It is sufficient to notify the decision toapply the regime to the Ministry ofFinance (no permission has to be grantedby the authorities).

– Treatment of the income obtained by theETVE from holdings in nonresident entities

Firstly, the dividends or shares in theprofits of entities not resident in Spain,and income deriving from the transfer of

the holding, are exempt subject to therequirements and conditions providedfor under the exemption method toavoid international double taxation(described above, see p. 104).

Secondly, a minimum holding of at least5% must be owned in the nonresidententity to apply the aforementionedmethod. For the purpose of applying theexemption provided for in the ETVEregime, the minimum holdingrequirement is deemed to be met (i.e.the holding may be less than 5%) if theacquisition value of the holding is over g 6 million. Holdings of less than 5% maybe held in second and subsequent levelsubsidiaries (when the g 6 millionrequisite is maintained), if thesesubsidiaries meet the conditions referredto in Article 42 of the Commercial Codefor forming part of the same group ofcompanies as the first-level foreign entityand file consolidated financial statements.

The above notwithstanding, when theholding in the nonresident entity hadbeen valued in accordance with the rulespertaining to the neutral tax regime, andthe application of these rules, even in aprevious transfer, had resulted in thenon-inclusion of income in the tax basefor corporate income tax, personalincome tax or nonresident income tax,deriving from the transfer of the holdingin an entity resident in Spain, theexemption will apply only to the incomerelating to the positive differencebetween the transfer value and thenormal market value of the holding in thenonresident entity at the time ofacquisition by the transferring entity. Therest of the income obtained on thetransfer will be included in the tax basefor the period.

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– Treatment of income distributed by the ETVE

If the recipient of the income is an entitysubject to Spanish corporate income tax,the income received will entitle therecipient to the tax credit for domesticdouble taxation (see p. 103).

In case the recipient is an individualsubject to Spanish personal income tax,he may apply the tax credit for taxes paidabroad on the terms provided for in thepersonal income tax legislation.

Finally, when the recipient is an individualor entity not resident in Spain, the profitsdistributed will not be deemed to havebeen obtained in Spain and, in this respect,the first distribution of profits will bedeemed to derive from exempt income. Inthis sense, the distribution of additionalpaid-in capital is to be treated in the sameway as the distribution of income.

– Treatment of the capital gains obtained onthe transfer of the holdings in the ETVE

When the shareholder is an entitysubject to Spanish corporate income tax,it may apply the new exemption to avoiddouble international taxation describedabove in respect of the part of theincome relating to holdings innonresident entities that meet therelevant requirements, and the tax creditfor domestic double taxation of capitalgains in respect of the correspondingportion of the income obtained, on theterms provided for in the legislationgoverning the tax credit for domesticdouble taxation (p. 103).

When the shareholder is a person orentity not resident in Spain, the incomerelating to the reserves allocated with acharge to the exempt income or to thevalue differences imputable to the holdings

in nonresident entities will not be deemedto have been obtained in Spain.

No special rules have been introducedfor individual resident shareholders, whowill continue to be subject to thepersonal income tax legislation.

i) Neutral tax regime for restructuringoperations

In order to facilitate corporatereorganizations (mergers, spin-offs,contributions of assets, and exchanges ofsecurities), the Spanish tax system providesfor a well-established special regime basedon the principles of non-intervention bythe tax authorities and tax neutrality,which guarantees –when certainrequirements are met1– the deferral of orexemption from taxation, as appropriate, inrespect of both direct and indirecttaxation, for taxpayers carrying out suchoperations, along the same lines as the restof the EU Member States.

According to such regime, in the case ofmergers, the absorbing company candeduct for tax purposes up to a limit of a5% annually, under certain circumstances,the amount of the difference between theacquisition cost of a holding above the 5%and its underlying book value that cannotbe allocated to the assets and rightsacquired, in conformity with the rules forpreparing consolidated financial statements.

In this respect, the taxpayer, in the taxperiods in which it is going to benefit fromthis tax measure, should file to the taxauthorities the following information jointlywith its corporate income tax return:

1 Among these requisites, it should be noted that thereorganization must be made for “valid economic reasons” aslegally defined (i.e. business and economic reasons, and not mereand purely tax motivations).

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a) Identifying details of the transferor andof the percentage holding owned in it.

b)Value and date of acquisition of theholdings in the transferor, as well as theirunderlying book value, determined onthe basis of standardized financialstatements.

c) Support for the following:

- Explanation of the rules onstandardization of valuation and timingas well as for the attribution to theassets and rights of the transferor ofthe difference existing between theacquisition cost and underlying bookvalue of its holdings on the date ofdissolution of that entity;

- That the holding has not been acquiredfrom persons or entities not residentin Spain or from individuals resident inSpain, or from a related entity if therelated entity, in turn, acquired theholding from those persons or entities.It shall be deemed that thisrequirement has been satisfied wherethe amount of the difference betweenthe acquisition cost of a holding abovethe 5% and its underlying book valuethat cannot be allocated to the assetsand rights acquired, has been taxedeither in Spain or another EU MemberState, under any transfer of the holding;

- That the transferee is not, in relationto the transferor, in any of thesituations provided for in Article 42 ofthe Spanish Commercial Code.

j) Tax incentives for small and medium-sized companies

Companies whose net sales (calculatedfor the group, if applicable) in theimmediately preceding tax period (or inthe current period in the case of newly-

incorporated companies) amount to lessthan g 6 million qualify for certain taxincentives. If the entity belongs to a groupof companies within the meaning ofArticle 42 of the Commercial Code, thenet sales figure will be calculated for thegroup as a whole. The incentives cansummarized as follows:

– Accelerated depreciation of their tangiblefixed assets up to certain limits, providedthat certain job creation requirementsare met.

– Accelerated depreciation of new fixedassets whose unit value does not exceedg 601.01 (up to an aggregate limit of g 12,020.24), without having recorded itfor accounting purposes.

This possibility is inconsistent with thetax credit for reinvestment ofextraordinary income.

– Entitlement to increase by a coefficient of1.5 the maximum depreciation ratespermitted per the official depreciationtables (without having recorded it foraccounting purposes) for tangible fixedassets and intangible assets (includinggoodwill, trademarks, leaseholdassignment rights, etc.).

– Ability to record provisions for bad debtsbased on 1% of the balance of theiraccounts receivable at the end of the taxperiod.

– The tax rate for these companies is 30%,applicable to the first g 90,151.81 oftaxable income. Any taxable incomeabove that amount is taxed at 35%. Inthe case of tax periods of less than oneyear, the taxable income subject to the30% rate is determined in proportion tothe length of the period with respect tothe calendar year.

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– Deduction of 10% of the volume ofperiod investments and expenses aimedat improving access through the Internetand at improving internal processesthrough the use of information andcommunications technologies has beenintroduced.

– 10% tax credit for environment-relatedinvestments, subject to the fulfillment ofcertain requirements.

k) Formal requirements

The tax period is the company’s businessyear, and its financial statements andaccounting records are the basicdocumentation to support its annual taxreturn.

The returns must be filed and the tax paidwithin 25 days following the six monthsafter the end of the business year.

l) Canary Islands Tax Regime

The Canary Archipelago enjoys a numberof tax benefits intended to compensate forthe disadvantages brought about byinsularity and distance from the Spanishmainland and, principally, attract investmentto the Canary Islands.

The main features of the regime are:

– Direct taxation

- Reduction in a 50% of the portion ofgross tax payable that relates toincome from the sale of tangible goodsspecific to agricultural, livestockfarming, industrial or fishing activities,provided that they have been producedby the taxpayer itself in the archipelago.

- Reduction in the tax base (up to 90%of undistributed income per books forthe year) by such amounts as areallocated by companies, in relation to

their permanent establishments on theCanary Islands, from their income to aCanary Islands Investment Reserve(“Reserva para Inversiones enCanarias” or RIC). According to thestance adopted by the tax authorites,taxpayers have a maximum of five yearsin which to invest the RIC: the year inwhich the income is obtained, the yearin which the reserve is recorded foraccounting purposes and the followingthree years. Since January 1, 2003future provisions to the RIC can beinvested early provided that they arerecorded out of income obtainedthrough December 31, 2005. Theamounts must be invested acquiring newor used fixed assets located or receivedin the archipelago, and/or by subscribingshares or ownership interests in thecapital of companies that carry on theirbusiness in the archipelago and makethe above-mentioned investments. SinceJanuary 1, 2004 it is no longer possibleto invest the RIC by subscribingsecurities or book-entry debt issued bythe Canary Islands AutonomousCommunity government, or by CanaryIslands local corporations orAutonomous Community governmentagencies. However, a TransitionalProvision is introduced wherebytaxpayers can continue to honorcommitments relating to allocations tothe Canary Islands Investment Reserveout of income obtained throughDecember 31, 2003, by investing up to50% of such allocations in governmentdebt securities.

- A company that has acquired fixedassets to invest its RIC must continueto own, and actually use, those assetsfor at least five years or for their useful

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life, if shorter, and cannot transfer,lease, or license them to third parties,unless they are used, through aneconomic activity, for lease ofassignment to third parties for use bythem, provided there is no direct orindirect link with the lessees orassignees of such assets and providedthe transactions in question are notfinancial lease transactions.

- It will also apply to personal incometaxpayers who determine their incomeby the direct assessment method, witha tax credit, subject to the limit of 80%of the portion of the gross tax payablethat relates to the net income fromeconomic operations in the CanaryIslands.

- This tax relief is incompatible, inrelation to the same assets, with thetax credit for investment and with thetax credit for the reinvestment ofextraordinary income.

- The tax credit for investment in fixedassets consisting of 25% of theinvestment up to a limit of 50% of taxpayable net of tax reductions anddouble taxation credits remains inforce in the Canary Islands despitebeing repealed elsewhere.

- Increased tax credits for investmentsmade on the Canary Islands, withrespect to those applicable toinvestments in the Spanish mainland.

– Indirect taxation

- Application of the Canary IslandsIndirect General Tax, which is similarto VAT, at the standard rate of 5%.

- Application of the Tax on Imports andDeliveries of Goods in the CanaryIslands (AIEM) on the production and

import in the Canary Islands of certaintangible property.

- Newly-formed companies residing inthe Canary Islands, or existingcompanies, increasing their capital, orexpanding, modernizing or relocatingtheir facilities can claim an exemptionfrom transfer tax when theyincorporate, increase their capital oracquire capital goods located on theCanary Islands for three years from theexecution of the public deed ofincorporation or capital increase.Under the transfer tax “corporatetransactions” heading, incorporationsand capital increases will only beexempt to the extent that they areallocated to the investments mentionedabove. Transactions subject to the“stamp tax” heading will not beexempt.

Supplies and imports of goods to thecompanies referred to in the precedingsection that are classed as capital goodsfor such companies are also exemptfrom Canary Islands Indirect GeneralTax. The execution of projects havingthe status of supplies of servicesresulting in capital goods will also beexempt.

- Vessels and shipping companiesregistered in a Special Register canclaim any exemption from stamp tax onacts and contracts subject to that tax.

Furthermore, in the case of the crewsof such vessels, a 90% reduction inemployer social security contributionsis established, and 50% of the salaryincome earned by resident ornonresident taxpayers when sailing onthose vessels is treated as exemptincome for personal income tax

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purposes. A 90% reduction can also beclaimed on the portion of thecorporate income tax charge (net ofany tax credits for double taxation),which relates to the portion of the taxbase resulting from the operation ofthe vessels.

Canary Islands legislation also establishesthe special tax regime of the CanaryIslands Special Zone (“Zona EspecialCanaria” or “ZEC”), which was authorizedby the European Commission in January2000, since the Commission took the viewthat its application was consistent with thelegislation governing the Single Market.

The ZEC will remain in force until 2008,and any extension in time will beconditional on prior authorization from theEU authorities.

The regime applies to newly-formedentities domiciled in the Canary Islands andregistered in the ZEC Official Register ofEntities. Registered entities must meet thefollowing requirements:

– Their registered office and effective placeof management must be located on theCanary Islands.

– At least one of their directors mustreside in the Canary Islands.

– Their corporate purpose must be toengage in the activities expresslyprovided in the Law. Financial activitiesare excluded in all cases.

– They must create at least five jobs withinthe first six months after authorization,and maintain an annual average laborforce headcount of at least the samenumber while under the regime.

– In the first two years after authorization,they must make investments of at least

g 100,000 in the acquisition of tangiblefixed assets or intangible assets locatedor received within the geographical areaof the ZEC, and such assets must beused and required for the pursuit of theactivities carried on within the ZEC.

– They must file with the authorities aregistration application and a reportdescribing the activities to be carriedon. The purpose of the report, thecontents of which will be binding on theentity, is to provide assurance of itssolvency, viability, internationalcompetitiveness, and contribution to theeconomic and social development of thearchipelago.

As for the tax regime, operating incomeobtained by ZEC entities is subject tocorporate income tax at a special rate(between 1% and 5%), to be determined byreference to the following criteria: yearclaimed, year authorized, and net job creation.

Shareholders (whether individuals or legalentities) of a ZEC entity who are residentin Spain cannot claim a tax credit fordouble taxation of dividends from ZECentities to the extent that those ZECentities have been taxed at reduced rates.

Interest, capital gains, and dividends obtainedby nonresidents from ZEC entities areexempt for nonresidents’ income taxpurposes in Spain on the same terms asthose applicable to EU residents where suchincome or gains are paid by a ZEC entity andoriginate from transactions performedphysically and effectively in the geographicalarea of the ZEC. The only case in whichthese exemptions do not apply is if theincome or gains are obtained throughcountries or territories classed by regulationsas tax havens, or if the parent company hasits tax residence in such territories.

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ZEC entities are exempt from transfer andstamp tax on acquisitions of assets andrights used by the taxpayer in the courseof its business, provided that such assetsand rights are located, may be exercised,or must be complied with in thegeographical area of the ZEC. Similarly,corporate transactions by ZEC entities areexempt, except for the dissolution of, andlegal instruments related to transactions by,those entities in the geographical area ofthe ZEC (subject to certain exceptions).

Additionally, supplies of goods and servicesbetween ZEC entities and imports ofgoods by ZEC entities are exempt fromCanary Islands Indirect General Tax.

2. Personal income taxThis tax, which is one of the pillar’s of Spain’stax system, was radically reformed in 1998under the Personal Income Tax Law (Law 40/1998) and, indirectly, by theNonresidents’ Income Tax Law (Law41/1998). Royal Decree 214/1999 approvedthe Personal Income Tax Regulations.

As discussed below, the taxation ofnonresident individuals is regulatedseparately under a new piece of legislation(see p. 123 and ff.).

– Persons subject to the tax

The following persons are subject topersonal income tax:

- Individuals habitually resident in Spanishterritory.

- Individuals of Spanish nationality who arehabitually resident abroad and fulfill anyof the conditions laid down in the Law(e.g. diplomatic and consular services,etc.). Moreover, any Spanish national whoestablishes his residence for tax purposes

in a tax haven will remain subject topersonal income tax (this rule will applyin the year in which residence is changedand for the following four years).

A taxpayer is deemed to be habituallyresident in Spanish territory if any one ofthe following conditions is met:

- The taxpayer is physically present inSpanish territory for more than 183 daysin the calendar year.

Sporadic absences are included indetermining the length of time a taxpayeris present in Spanish territory, unless taxresidence in another country is proved.In the case of territories designated inthe regulations as tax havens, theauthorities may require the taxpayer toprove that he was present in theterritory in question for 183 days in thecalendar year (excluding absences due tocultural or humanitarian cooperationwith the Spanish authorities).

- The main center or base of thetaxpayer’s business or professionalactivities or economic interests is inSpain, either directly or indirectly.

In the absence of proof to the contrary, anindividual is presumed to be resident inSpain if his/her spouse/husband (fromwhom he/she is not legally separated) anddependent under-age children are habituallyresident in Spain.

Individuals who are payers of nonresidents’income tax and are residents in a MemberState of the European Union may elect to betaxed under Spanish personal income tax ifthey demonstrate that their habitualdomicile or residence is in another EUMember State and that at least 75% of theirtotal income during the year was obtained assalary income or business income in Spain.

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Finally, a new regime has entered into forcefor the year 2004, by virtue of whichnonresident individuals who are secondedto Spain due to labour reasons, andbecome tax resident in Spain, can elect tobe taxed in Spain as nonresidents, whencertain requirements are met.

– Taxable event

Taxpayers subject to personal income taxare taxed on their entire worldwideincome, including the income of foreignentities in certain circumstances(international fiscal transparency system,unless the nonresident entity is resident ofa EU Member State) in a manner similar tothat described above for corporate incometax, and capital gains (and losses) in thecalendar year, net of the necessaryexpenses (as defined in the Law) incurredto obtain such income.

– Taxation system - taxpayer

The possibility of being taxed individuallyor jointly (as a family unit) is regulated,although there are no separate tariffs(there is only one tariff but divided in twoparts: the general one and theAutonomous Community one).

– General structure of the tax

The Law distinguishes a generalcomponent and a special component inthe tax base.

The general component comprises thepositive balance from adding:

- Salary income (discussed briefly below).

- Income from real estate.

- Income from movable capital.

- Income from business activities.

- Imputation of income from real estate.

- Imputation of income from entities underthe international fiscal transparencysystem.

- Imputation of income from assignment ofrights of publicity.

- Changes in the value of units in collectiveinvestment undertakings established intax havens.

- The positive balance resulting fromoffsetting capital gains and losses obtainedover a period of less than one year.

The special component of the tax basecomprises the positive balance of offsettingcapital gains and losses obtained over aperiod exceeding one year (the taxation ofcapital gains is discussed briefly on p. 119).

– Exempt income

Noteworthy among the exemptions is thatrelating to salary income for workperformed abroad. In this connection,salary income will be exempt up to g 60,101.21 per year if certainrequirements are met:

- Salary income has to be paid in respectof work effectively performed abroad.Namely, the taxpayer must be renderingservices physically abroad.

- The recipient of the services must beeither a non Spanish resident entity or apermanent establishment situated abroadof a Spanish resident company.

- A tax identical or similar to the Spanishpersonal income tax must exist in theother country, and such country must notbe a territory classified as a tax haven.

This exemption is inconsistent with theregime on “excess income” excluded fromtaxation envisaged for taxpayers workingabroad.

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– Salary income

The main permitted deductions from salaryincome are social security contributions.

- The main features relating tocompensation-in-kind are as follows:

* The use of vehicles is valued at 20% ofthe annual cost of acquisition for thepayer (if it is not owned by the payer, the20% is applied to the market value thatwould correspond in the case the vehiclewere new). In the case of provision ofthe vehicle to the employee by the payer,the compensation-in-kind is valued asthe acquisition cost for the payer.

* Compensation-in-kind relating to theuse of housing owned or leased by theemployer is limited to 10% of thecadastral value (5% if the cadastralvalue has been updated), subject to aceiling of 10% of the other salaryincome. Where there is no cadastralvalue or the value has not beennotified, the value of the compensationwill be 5% of 50% of the value for networth tax (wealth tax) purposes.

* The portion of shares or otherownership interests not exceeding g 12,000 awarded annually to allemployees free of charge or at lower-than-market value, will not beconsidered to be compensation-in-kind,provided that certain requirements aremet.

Certain reporting requirements areestablished (notification to the CNMVwhere the shares are traded on a stockexchange) in the case of shares orstock options awarded to executivesand directors. In addition, in caseswhere a company acquires treasurystock for this purpose, the resolution

of the shareholders’ meeting mustinclude authorization for theacquisition as well as other particulars.

- Regarding salary income paid bynonresident related entities, entitiesresident in Spanish territory mustwithhold tax from salary income paid totheir employees, regardless of whetherthe payer of the income is the entityitself or another related resident ornonresident entity.

In cases where the right to receive suchcompensation arises over a period oflonger than two years, the provisions on“irregular” income will apply.

- Imputation of salary income

When the salary income has beengenerated over a period exceeding twoyears and, at the same time, therequirement that it has not been obtainedon a periodic or recurring basis is met, orwhen the income is classified byregulations as irregular, only 60% of thisincome will be imputed. The reduction isextended in certain circumstances forcertain types of income.

If the income arises from the exercise byemployees of stock options, the amountof the income to which the 40%reduction applies cannot exceed theresult of multiplying the annual averagesalary of the aggregate of personalincome taxpayers (g 17,900) by thenumber of years during which theincome is generated. For these purposes,in the case of income obtained atparticularly irregular time intervals, theapplicable time period will be five years.

The limit mentioned in the previousparagraph will be multiplied by two incertain circumstances.

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– Rental income

In cases of leases of residential properties,a 50% reduction will apply to the netincome (i.e. gross income less depreciationand amortization, non-State taxes andsurcharges, etc.).

In addition, if the income was generatedover a period exceeding two years, or if itwas obtained at irregular time intervals, a40% reduction will apply.

– Capital gains and losses

- Valuation

A capital gain or loss on a transfer,whether for valuable consideration or forno consideration, is valued as thedifference between the acquisition andtransfer values (as legally defined) of theitems transferred.

- Adjustment coefficients and tax rate

The Law does not envisage the use ofadjustment coefficients except for realestate.

The adjustment coefficients are aimed atcorrecting for inflation and were appliedto the acquisition cost of the transferredreal estate and to the related depreciation.

Acquired rights are preserved as regardsthe application of the reductioncoefficients to assets acquired beforeDecember 31, 1994. In such cases, thecapital gain is reduced by a givenpercentage depending on the type ofasset (14.28%, 25% or 11.11% for eachyear over two during which the assetwas held by the taxpayer prior toDecember 31, 1996). The reductioncoefficients do not apply to capital losses.

The tax rate is 15% for capital gainsobtained over a period exceeding one year.

- Other issues concerning capital gains

Capital gains on the transfer for noconsideration of a family business are taxexempt provided that the assets used bythe taxpayer in the business activity afterits acquisition had been so deployed for atleast five years prior to the transfer date.

Lastly, capital gains obtained on thetransfer of units or shares in collectiveinvestment institutions (investment funds)will not be included provided that theamount obtained is reinvested in assets ofa similar nature. In case of capital gainsobtained on the transfer of units orshares in collective investment institutions(SICAVs), said capital gains will not beincluded if, in the year prior to thetransfer, the transferor’s ownershipinterest in the collective investmentinstitution has at no time exceeded 5%,and if the number of the entity’sshareholders exceeds 500. In both cases,the new shares or units subscribed willmaintain the value and the acquisitiondate of the shares or units transferred.

– Reductions in the tax base

There are certain reductions which will beused first to reduce the generalcomponent of the taxable income withoutmaking it negative, while any remainder willbe used to reduce the special component.The main applicable reductions are:

- Personal reductions: a general reductionof g 3,400.

- Family reductions: for each unmarrieddescendant aged under 25, or disableddescendant regardless of age, or personunder a guardianship or foster carearrangement living with the taxpayer andnot obtaining annual income above g 8,000, the taxpayer will be entitled to a

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reduction of g 1,400 for the first, g 1,500 for the second, g 2,200 for thethird and g 2,300 for the fourth andsubsequent of these.

The family reductions will not apply if thetaxpayers generating entitlement to theseamounts file personal income tax returnsor an application for a refund.

– Determination of net taxable income

The general component of the taxableincome is reduced by certain amounts,including most notably contributions topension plans. These reductions aresubject to certain limits:

- Firstly, certain reductions, ranging from g 2,400 to g 3,500, are established fornet salary income. In addition, employeeswho continue working over the age of 65and those who accept an employmentpost requiring them to change their usualresidence to a new municipality inaccordance with certain requirementsare entitled to twice the reductioncorresponding to them in thisconnection.

- Taxable income can be reduced by g 1,200 annually under the “care ofoffspring” heading for each descendantaged under three, or for adopted orfoster children regardless of age forwhom the taxpayer can claim theminimum family exemption fordescendants.

- Taxpayers aged over 65 are entitled toreduce their taxable income by g 800annually. In addition, taxpayers living withascendant relatives aged over 65 or withdisabled persons regardless of their agewhose annual income does not exceed g 8,000 can reduce their taxable incomeby g 800 annually.

- In addition, total maximum contributionsto mutual funds and pension plans by theparticipants which are used to reducetaxable income must not exceed g 8,000.

This amount will be increased by g 1,250annually for each year of age of theparticipant that exceeds 52, up to amaximum of g 24,250 for participantsaged 65 and over.

Additionally, regardless of thecontributions made by mutual entitymembers and pension plan participants,employer contributions can be made onbehalf of the taxpayer by sponsors ofoccupational pension plans, up to theannual limits indicated above.

On top, the annual reduction ceiling forcontributions to pension plans or mutualfunds in which the taxpayer’s spouse is aparticipant is g 2,000.

– Determination of the gross tax payable: taxrates

A general tax scale and an AutonomousCommunity tax scale are established. Themarginal rate is 45%.

Law 21/2001, on the tax and administrativemeasures under the financing system ofcommon regime Autonomous Communitiesand cities with a statute of autonomy,includes, among the taxes transferred, thepersonal income tax, and grants theAutonomous Communities regulatorypowers over the taxes transferred.

The taxpayer’s place of habitual residencedetermines the Autonomous Communityin which income is deemed to be obtainedfor personal income tax purposes. TheLaw also lays down specific rules toprevent tax-motivated changes ofresidence. Where an Autonomous

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The rate applicable to the specialcomponent of the tax base (positivebalance of capital gains and lossesgenerated over one year, less the tax-freeallowances) is 15%:

– Allowances and tax credits

We set forth below a detail of the maintax credits and tax relief (in general, 67%of the amount thereof is applied to thegeneral tax liability and 33% to theAutonomous Community tax liabilityunless the Autonomous Communityestablishes its own tax credits):

- Housing tax credits

A credit of 15% of the amount investedin acquiring or refurbishing the taxpayer’shabitual abode is granted; the percentageis applied to the investment made, thepurchase expenses and the interest andexpenses paid on debt, and the amountsdeposited in home-purchase savingaccounts and used for the acquisition ofthe habitual abode.

In the case of borrowing, a 25% credit isallowed on the first g 4,507.59 and 15%on the remainder in the first two years.In subsequent years, these percentagesare 20% and 15%, respectively. Somerequirements are envisaged in theregulations to be able to benefit fromthese increased percentages.

The maximum base for the tax creditunder this heading is g 9,015.18.

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Community has not approved tax tables orwhere tax powers have not been devolvedto it, the Autonomous Community taxtable below will apply (the general tax tablewill also apply in all cases).

As stated above, the tax scales do not varyon the basis of the type of return (joint orseparate) chosen by the taxpayer.Consequently, the only tax scales are thosebelow (for year 2004):

General Table Autonomous Community Table

Remainder RemainderTax base Gross tax of tax base Tax base Gross tax of tax base

up to payable up to Applicable up to payable up to Applicable(Euros) (Euros) (Euros) rate (%) (Euros) (Euros) (Euros) rate (%)

0.0 0.0 4,000 9,06 0.0 0.00 4,000 5.944,000 362.40 9,800 15,84 4,000 237.60 9,800 8.16

13,800 1,914.72 12,000 18,68 13,800 1,037.28 12,000 9.3225,800 4,156.32 19,200 24,71 25,800 2,155.68 19,200 12.2945,000 8,900.64 and above 29,16 45,000 4,515.36 and above 15.84

Tax rate applicable to the special component of the tax base

State rate Autonomous Community Total rate(%) rate (%) (%)

9.06 5.94 15.00

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Amounts deposited in home-purchasesaving accounts only qualify for the taxcredit if they are used to purchase thehabitual abode.

A specific system for disabled taxpayersis established.

Additionally, a transitional regime isestablished for taxpayers who acquiredtheir habitual dwelling before May 4, 1998,and who were entitled to the tax credit.

- Tax credit for income obtained in Ceutaand Melilla.

- Tax credits for economic activities.

- Tax credit amounting to 25% ofdonations to certain entities.

- Tax credit amounting to 15% of theinvestment in and expenditure on assetsof cultural interest.

The base of these two last tax credits maynot exceed 10% of the taxpayer’s taxableincome.

– Withholding

Payments of income from movable capital,gains on shares or units in collectiveinvestment undertakings, salary income,etc. are subject to withholding at sourcewhich is treated as a prepayment onaccount of the final tax.

Moreover, employers are obliged to makepersonal income tax prepayments inrespect of compensation-in-kind paid totheir employees.

The base and rate of withholding andprepayment for the main types of incomeare detailed in the table hereunder:

Income Base Rate

Salary income

Income frommovable capitalProfessionalactivities

Capital gains

Other income

GeneralContracts lasting less than one year

Special dependent employmentrelationshipsBoard of Directors membersCourses, talks, assignment ofliterary, artistic or scientific worksGeneral

GeneralCommencement of activity andsubsequent two years (pending theimplementing regulations)Transfers or reimbursements ofshares and participations in collectiveinvestment schemesCash prizesLease/sublease of urban property

Intellectual and industrial propertylease/sublease of movable propertyand businessesLicensing of rights of publicity

Total amount of compensation paid

Full consideration claimable or paid

Amount of revenues or considerationobtained

Amount to be included in the taxbase, calculated according to thePersonal Income Tax RegulationsAmount of the prizeAmount of rent and other items paidto the lessor or sublessor - VAT

Full amounts paid

Full amounts paid

See belowSee below(Minimum 2%)Minimum 15%

35%15%

15%

15%7%

15%

15%15%

15%

20%

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To calculate the withholding tax applicableto salary income, the deductible expensesand reductions and the personal and familyallowances are deducted from the totalamount of such income to obtain thetaxable income. The tax scale (aggregate ofState and Autonomous Community rates)is applied to this amount to obtain theamount of withholding. The applicablewithholding tax rate is obtained by dividingthe amount withheld by total income.

– Self-assessment

Taxpayers who are required to file apersonal income tax return must, whenfiling their returns, calculate the related taxpayable and pay it over in the place andmanner and by the deadlines determinedby the Ministry of Finance. The deadline isusually June 30.

Taxpayers who are married and not legallyseparated, and who are obliged to file apersonal income tax return under whichtax is payable, may request the suspensionof their tax debt in an amount equal to orless than the refund to which their spouseis entitled for the same tax and in the sametax period.

3. Nonresidents’ income taxLaw 41/1998, on Nonresidents’ Income Tax,established the tax regime applicable tononresident individuals or entities that obtainSpanish-source income.

This Law consolidated the various rules ontaxation of nonresidents which were to befound in personal income tax and corporateincome tax legislation. Thus, taxation ofnonresidents is dealt with separately fromtaxation of resident individuals and entities.

As was mentioned before, this Law envisagesthat nonresident individuals who prove thatthey are habitually resident in another EUcountry and that they have obtained in Spainsalary income and income from businessactivities which amounts to at least 75% oftheir worldwide income, may opt to betaxed as resident individuals.

The key factor in determining the tax regimefor nonresidents is whether or not they havea permanent establishment in Spain. Thisfactor determines the following two ways inwhich nonresidents may be subject totaxation:

– Income obtained through a permanentestablishment

Nonresident individuals or entities thatobtain income through a permanentestablishment located in Spain will be taxedon the total income attributable to saidestablishment, regardless of the placewhere it was obtained or produced.

The concept of permanent establishmentin Spanish law is in line with the OECDModel Tax Convention. In the case of aforeign entity or individual resident in acountry with which Spain has a tax treaty,the treaty provisions and, specifically, theexceptions to the definition of permanentestablishment, will govern the existence ofa permanent establishment in Spain.

In general terms, permanent establishmentsin Spain are taxed on their net income atthe same rate (in general, 35%) as Spanishcompanies. Nonresident entities orindividuals operating through a permanentestablishment in Spain are required towithhold taxes or make tax prepaymentson the same terms as resident individualsor entities (i.e. on salary income paid,income from movable capital satisfied, etc.).

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There is a 15% tax (branch profit tax) on theremitted profits of nonresidents doingbusiness through a permanent establishmentin Spain. In this respect, the law providesprotection to the other EU Member Statesand also exempts from taxation incomeobtained in Spain through permanentestablishments by entities resident for taxpurposes in a State that has signed a taxtreaty with Spain which does not expresslyprovide otherwise, provided that there isreciprocal treatment. This tax wouldtherefore be additional to that already borneby the permanent establishment on itsincome (35% on revenues net of expenses).

Nonresidents who operate in Spainthrough a permanent establishment aregenerally required to keep accountingrecords here, in accordance with the rulesand procedures established for Spanishcompanies.

The taxation of the income of permanentestablishments envisages three differentsituations, as follows:

- As a general rule, taxable income isdetermined in accordance with the sameregulations as are applicable to Spanish-resident companies and, accordingly, thetax rate of 35% (40% in the case of oiland gas research and exploitationactivities) would be applicable to netincome. Allocated parent companygeneral and administrative overheadexpenses are deductible under certainconditions. The permanentestablishment’s tax year will be thecalendar year unless stated otherwise.

The tax period is also deemed to haveended in the event of the discontinuationof a permanent establishment’s businessactivities, withdrawal of the investmentinitially made in the permanent

establishment, or the change of residenceof the head office.

The permanent establishment may alsotake the tax credits and relief that mightbe applicable, in general, for Spanishresident companies.

- For permanent establishments engagingin installation or erection projects with aduration of over 6 months, for thosewith seasonal or sporadic activity, or forthose engaged in the exploration ofnatural resources, the tax base isdetermined in accordance with the rulesapplicable to nonresidents obtainingincome in Spain not through a permanentestablishment. Such rules also apply indetermining the tax return filing and taxaccrual obligations of the permanentestablishment, which is not obliged tokeep books of account (but onlydocumentary support of its transactions).

However, these nonresidents who operatethrough a permanent establishment inSpain may also choose to be taxed underthe general rules, but such option mayonly be taken if separate accounts are keptin Spain. This choice must be made at thedate of registration in the entities’ index.

- If the permanent establishment does notcomplete a business cycle in Spain whichleads to income in Spain, and the businesscycle is completed by the parent company(or the nonresident individual whooperates in Spain through a permanentestablishment) or by other permanentestablishments, the tax liability isdetermined by applying the generaltaxation rules, whereby revenues andexpenses are valued at market prices.

However, the tax base will secondarily bedetermined by applying the percentageestablished by the Ministry of Finance for

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this purpose to the total expensesincurred, and by adding any “passive”(unearned) income not obtained in thenormal course of business (interest,royalties, etc.) and any other capital gainsarising from the assets assigned to thepermanent establishment. Thispercentage has been set at 15%.

The gross tax payable in this case isdetermined by applying the standard taxrate, but the tax credits and tax reliefprovided by the standard corporateincome tax system may not be taken.

The tax period and tax return filingdeadlines are those envisaged in thestandard tax rules.

– Income obtained not through a permanentestablishment

Nonresident entities or individuals thatobtain income in Spain not through apermanent establishment will be taxedseparately on each total or partial accrualof Spanish-source income.

Spanish-source income obtained notthrough a permanent establishment, asdefined by the Nonresidents’ Law, consistsmainly of the following items:

- Earnings derived from economic activitiespursued in Spain.

- Earnings derived from the rendering ofservices where such services (i.e. studies,projects, technical assistance ormanagement support services) are usedin Spanish territory.

- Salary income, which is directly orindirectly derived from work performedin Spain.

- Interest, royalties and other income frommovable capital which remunerate capitalused in Spanish territory.

- Income from marketable securities issuedby companies resident in Spain.

- Income from real estate located in Spainor from certain rights arising therefrom.Law 41/1998 treats as income obtainedin Spain income attributed tononresident individuals derived fromurban real estate located in Spain and notconnected to business activities.

- Capital gains on the sale of assets locatedin Spain and on the sale of securitiesissued by residents.

However, certain types of incomeoriginating in Spain are not taxable in Spain,most notably the following:

- Income paid for international sales ofgoods.

- Income paid to nonresident persons orentities relating to permanentestablishments located abroad, with acharge to these establishments, if theconsideration paid is related to theactivity of the permanent establishmentabroad.

Interest and earnings derived from thetransfer of equity to a third party, as wellas capital gains on movable assets ownedby residents of other EU Member States(except tax havens) obtained not through apermanent establishment are deemed tobe tax-exempt in Spain. However, capitalgains on holdings in entities whose assetsconsist principally of real estate in Spain, orin which the seller has had, directly orindirectly, at least a 25% interest at sometime during the twelve months precedingthe sale, are taxable.

In addition, gains on transfers of securitiesor redemptions of participation units inmutual funds on official secondarysecurities markets in Spain obtained by

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nonresident individuals or entities withouta permanent establishment in Spain thatare resident in a State with which Spain hassigned a tax treaty and such treaty containsan exchange of information clause are alsotax exempt. The exemption does not applywhen the nonresident entity resides in acountry or territory classed as a tax haven.

Similarly, yields derived from SpanishGovernment debt securities accruing tononresident entities obtained not througha permanent establishment are not taxablein Spain, unless they are routed throughtax havens.

Income derived from “nonresidentaccounts” paid by banks or other financialinstitutions to nonresident entities orindividuals (unless payment is made to apermanent establishment in Spain of suchentities) as well as that obtained notthrough a permanent establishment locatedin Spain and derived from the rental orassignment of containers or ship and aircraftbare-boat charters are also tax exempt.

Finally, dividends from a Spanish subsidiaryto its EU parent company are tax-exemptin Spain, provided that certain requisitesare met (among others, 25% ofparticipation held during one year). Thisrule is not applicable if the parent companyis located in a tax haven, or when amajority of the voting rights of the parentcompany is held directly or indirectly by anindividual or legal entity not resident in theEU, unless the parent company effectivelyengages in a business activity directlyconnected with the activity of thesubsidiary, or has as its business purposethe administration and management of thesubsidiary, or evidences that the parentcompany was formed for valid economicreasons and not merely to take advantageof the tax exemption.

In 1991 the Spanish tax authoritiesidentified 48 territories classified as taxhavens. These include such “traditional”havens as the Bahamas, Liechtenstein,Monaco, Gibraltar, certain holdingcompanies resident in Luxembourg, etc.

Spanish law generally sets tax rates lowerthan the standard rate for residents forincome accruing to nonresidents that donot have a permanent establishment inSpain. The tax is normally levied on thegross income, except for income forservices rendered, technical assistance andinstallation and erection projects, in whichcase the tax is levied on the differencebetween the gross income and the payroll,material procurement and suppliesexpenses as defined in the relevantregulations. In this connection, nonresidentsoperating in Spain not through a permanentestablishment are obliged to withhold andmake payments on account from salariespaid as well as other payments subject towithholding or payment on account whichcan be considered deductible expenses inorder to determine the nonresidentincome obtained in Spain.

Capital gains are generally calculated onthe basis of the difference betweenacquisition cost and sale price, to whichthe same rules as those established forresident individuals are generally applicable.

Purchasers of property located in Spainfrom nonresidents that do not have apermanent establishment in Spain mustdeduct withholding tax at 5% from thepurchase price on account of the vendor’scapital gains tax liability.

This withholding is not applicable if thetransferred property was acquired by thetransferor more than ten years prior toDecember 31, 1996.

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There are certain exceptions to thisobligation to make a withholding, such ascases in which the property is transferredas a nonmonetary contribution for theformation of, or capital increase at, acompany resident in Spain.

The tax rates are as follows:

In the case of nonresidents without apermanent establishment in Spain there isno possibility of offsetting losses againstfuture profits or capital gains. Moreover, anonresident without a permanentestablishment can only deduct from the taxpayable the amount of the taxes withheldfrom its income and the amountscorresponding to donations and allowancesas described in the Personal Income TaxLaw for resident individuals.

Liability for nonresidents’ income tax ariseswhenever Spanish-source income becomesclaimable by the nonresident entity or ispaid, whichever is earlier; as for capital gains,liability arises when they are generated and

in the case of income attributed to urbanreal estate, on December 31.

In general, a separate tax return andsupporting documentation must be filedwithin one month from the above date. It isnot necessary to file a separate tax returnwhere tax has already been withheld atsource or prepaid on the income.

In most cases the above-mentioned taxreturns can be filed monthly or quarterlydeclaring different types of incomeobtained during the preceding period.

In addition, the Law establishes a generalobligation of making withholdings andprepayments on account of the income paidto nonresidents by entities, professionals andentrepreneurs who are resident in Spain.Some exceptions to this general rule areenvisaged in the Law and the Regulations.

- New tax regime for nonresidentsseconded to Spain

A new regime has entered into force forthe year 2004, by virtue of whichnonresident individuals who are secondedto Spain due to labour reasons, andbecome tax resident in Spain, can elect tobe taxed in Spain as nonresidents, whencertain requirements are met.

- Tax treaties

Tax treaties may reduce, or evencompletely eliminate, the taxation inSpain on the income earned by entitieswhich do not have a permanentestablishment here.

Companies without a permanentestablishment in Spain which are residentin countries with which Spain has a taxtreaty are generally not taxed in Spain ontheir business income earned here, nor forcapital gains (other than on real estate).

Type of Income Tax Rate (%)

General 25 (*)

Dividends 15Interest 15Transfers or reimbursements of

shares and participations in collective investment schemes 15

Special cases:• Income from reinsurance

activities 1.5 • Income obtained by entities

engaging in international shipping or aviation 4

• Seasonal foreign workers 2

Capital gains 35

(*) See exemptions above. The tax rates applicable to retirement pensions obtained by anonresident individual will vary between 8% for amounts of up to g 9,616.19, 30% for the following g 5,409.11 and 40% for amountsin excess of g 15,025.30. With effect as of January 2005 royaltypayments to entities or permanent establishments residing in theEU will be subject to a 10% rate, under certain circumstances.

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However, capital gains on the sale ofshares of companies can be taxed inSpain under the special clauses of certaintreaties (including most notably shares ofreal estate companies, transfers of shareswhen a substantial interest is held, etc.).

Certain other types of income (royalties,interest or dividends) are taxed atreduced treaty rates, as detailed in thefollowing table:

Treaty tax rates

Recipient Company’s Type of Income

Country of Residence Dividends (%) Interest (%) Royalties (%)

Argentina 15 or 10 (1) 12.5 3, 5, 10 or 15 (19)

Australia 15 10 10Austria 15 or 10 (2) 5 5Belgium 15 or 0 (1) 10 or 0 (25) 5Bolivia 15 or 10 (1) 15 or 0 (15) 15 or 0 (5)

Brazil 15 15 or 10 (4) 15 or 10 (5)

Bulgaria 15 or 5 (1) – – Canada 15 15 10Czech Republic 15 or 5 (1) – (14) 5 or 0 (5)

China 10 10 10Chile 10 or 5 (44) 15 or 5 (45) 10 or 5 (46)

Cuba 15 or 5 (1) 10 or 0 (36) 5 or 0 (5)

Denmark 15 or 0 (21) 10 6Ecuador 15 0 or 5 or 10 (17) 10 or 5 (18)

Finland 15 or 10 (1) 10 5France 15 or 0 (28) 10 or 0 (29) 5 or 0 (30)

Germany 15 or 10 (1) 10 or 0 (10) 5Greece 10 or 5 (41) 8 or 0 (43) 6Hungary 15 or 5 (1) – – Iceland 15 or 5 (41) 5 (42) 5India 15 15 or 0 (26) 10 or 20 (27)

Indonesia (*) 15 or 10 (1) 10 or 0 (26) 10Ireland 15 or 0 (21) - 5, 8 or 10 (16)

Israel 10 0 or15 or 10 (38) 7 or 5 (39)

Italy 15 12 or 0 (10) 8 or 4 (5)

Japan 15 or 10 (6) 10 10Korea 10 or 15 (1) 10 or 0 (24) 10Lithuania 15 or 5 (1) 10 or 0 (47) 15 or 5 (46)

Luxembourg 15 or 10 (13) 10 or 0 (10) 10Mexico 15 or 5 (1) 15 or 10 (20) 10 or 0 (18)

Morocco 15 or 10 (1) 10 10 (9) or 5 (5)

Netherlands 15, 10 (7), 5 (7) 10 6Norway 15 or 10 (1) 10 or 0 (34) 5 or 0 (35)

Philippines 15 or 10 (8) 0 or 15 or 10 (22) 10, 20, 15 (23)

Poland 15 or 5 (1) – (14) 10 or 0 (5)

Portugal 15 or 10 (1) 15 5Romania 15 or 10 (1) 10 10Russia 15 or 10 or 5 (33) 5 or 0 (37) 5Slovakia 15 or 5 (1) – (14) 5 or 0 (5)

Slovenia 15 or 5 (1) 5 (40) 5Sweden 15 or 10 (2) 15 or 0 (10) 10Switzerland 15 or 10 (1) 10 or 0 (11) 5Thailand 10 (1) 0 or 15 or 10 (31) 5, 8 or 15 (32)

Tunisia 15 or 5 (3) 10 or 5 (12) 10Turkey 15 or 5 (1) 15 or 10 (48) 10United Kingdom 15 or 10 (8) 12 10United States 15 or 10 (1) 10 or 0 (15) 5 or 8 or 10 (16)

USSR (**) 18 Exempt 5

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Notes:

(*) This tax treaty is also applicable to East Timor.(**) The Double Tax Treaty signed between Spain and the former USSR

is, from a Spanish tax perspective, currently applicable to thefollowing republics: Armenia, Azerbaijan, Belarus, Georgia,Kazakhstan, Kyrgyzstan, Moldova, Uzbekistan, Tajikistan,Turkmenistan, and Ukraine. Notwithstanding the above, said DoubleTax Treaty is not being applied by certain former USSR republics.

(1) The lower rate applies if the recipient company owns 25% or moreof the capital of the payer company.

(2) 10% if the recipient company has owned 50% or more of the capitalof the payor company for at least one year before the date ofdistribution of the dividend.

(3) The lower rate applies if the recipient company owns 50% or moreof the capital of the payor company.

Spain-Tunisia treaty: other than a partnership.(4) 10% on interest (paid to a financial institution in one of the treaty

States) on loans and credits at a term of 10 years or more tofinance the acquisition of capital equipment and tools.

(5) The lower rate applies for royalties for the use of or license to usethe copyright on literary, artistic or scientific works if these areproduced by a resident of a Contracting State.

Spain-Brazil treaty: Films included.

Spain-Czech Republic (scientific works excluded), Spain-Slovakia andSpain-Poland treaties: Copyright royalties exempt in source country.

Spain-Cuba and Spain-Italy, Spain-Bolivia (scientific works excluded)and Spain-Morocco treaties: Films excluded.

(6) 10% if the recipient company has owned 25% or more of the capitalof the payor company for at least six months before the year out ofwhose earnings the dividend is distributed.

(7) 1) 10% if:

a. The recipient company owns 50% or more of the capital of thepayor company.

b. The recipient company owns 25% or more of the capital of thepayor company and at least one other company resident inThe Netherlands also owns 25% or more of the payorcompany’s capital.

2) 5% if the recipient company is not taxable in The Netherlandsunder Dutch corporate income tax for the same dividends.

(8) 10% if the recipient company owns at least 10% of the capital of thepayor company.

(9) Royalties for licenses for use of patents, drawings, etc.(10) In Germany, when the interest from Spain is paid to:

• Deutsche Bundesbank or

• Kreditanstalt für Wiederaufbau of the Federal Republic.

No tax liability if the debtor is the Government, a local entity or anautonomous agency.

(11) Except for interest from Spain paid to a bank resident in Switzerlandin respect of loans fully or partly repayable in five years or more.

(12) 5% in the case of loans exceeding 7 years.(13) 10% if the recipient company has owned 25% or more of the capital

of the payor company for at least one year before the date ofdistribution of the dividend.

(14) Interest paid is not subject to withholding tax, unless the loan wasprovided to a permanent establishment owned by the beneficiary inSpain.

(15) No tax liability arises if the interest is paid in connection with a loanto a finance entity at more than 5 years or if the beneficiary is theState, a local entity or a government agency or if it is paid inconnection with loans for the transfer of industrial, commercial orscientific equipment.

(16) 5% for literary, dramatic, musical and artistic rights.

8% for film, tape and commercial, industrial or scientific royaltyrights.

10% in all other cases.(17) 5% for credits for the sale of industrial, commercial or scientific

equipment, the sale of goods and the execution of construction,installation and erection projects.

Loans at over 5 years are tax-exempt, as is interest paid to the Stateof Ecuador or its political subdivisions or public financial institutions.

(18) Exemption for intellectual property rights in the country of origin(Spain-Ecuador treaty: 5%).

(19) 3% for new rights.

5% for literary, dramatic, musical and artistic rights.

10% for commercial, industrial or scientific royalty rights.

15% in all other cases.(20) The lower rates apply when the beneficiary is a bank (including

savings banks in Spain). However, the 15% rate applies in all casesuntil January 1, 2000.

(21) The lower rate applies if the recipient company owns 25% or moreof the voting rights of the payor company and the provisions of theEU Parent-Subsidiary Directive apply.

(22) 10% for credits for the sale of industrial, commercial or scientificequipment, and interest paid in connection with bonds.

No tax liability arises if bonds are issued by the State, one of itspolitical subdivisions or a local entity or the interest is paid inconnection with a loan granted, guaranteed or ensured by theCentral Bank or certain financial institutions.

(23) 10% for royalty payments made by entities registered with thePhilippines Investment Council.

20% for film, TV and radio tapes.15% in all other cases.

(24) No tax liability arises if:

- The interest is paid in connection with loans for the transfer ofindustrial, commercial or scientific equipment or the transfer ofgoods.

- The interest is paid to the State, its political subdivisions or publicfinancial institutions.


- The interest is paid in connection with loans for the transfer ofindustrial, or commercial equipment, goods or services.

- The interest is paid in connection with loans granted, guaranteedor ensured by a public institution to encourage exports.

- The interest is paid in connection with accounts or nominativeadvances between financial institutions.

(26) No tax liability arises if the collector and beneficiary is the State,one of its political subdivisions, a local entity or the Central Bank.

(27) 10% for the use of, or right to use, industrial, commercial orscientific equipment.

20% for technical assistance service royalty payments and in allother cases.

(28) No tax liability arises if the collector and beneficiary is a companysubject to corporate income tax and:

- Being resident in France, owns at least 10% of the capital of thepayor company.

- Being resident in Spain, owns a significant holding in the capital ofthe payor company.

(29) No tax liability arises if the payor is the State or one of its politicalsubdivisions, if the interest is paid in connection with loans for thetransfer of industrial, commercial or scientific activities orequipment, or loans granted by financial institutions.

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- Tax sparing arrangements

Due to the existence under Spanishregulations of relief from the tax oncertain types of income (mainly interestincome), the tax sparing arrangementscontained in many of Spain’s tax treatiesare relevant. Under these arrangements

the nonresident lender benefits from taxsparing, and therefore can deduct in itscountry not only the effective taxwithheld in Spain from the interest butalso the tax that would have beenpayable had relief not been provided bySpain.

(30) No tax liability arises for the use or license to use the copyright onliterary or artistic works (films and tapes or visual recorded worksexcluded).

(31) 10% if the recipient is a financial institution (including insuranceentities)

0% if the loan is granted by the Central Bank or (in the case ofThailand) by the Export-Import Bank of Thailand, by localauthorities or by those institutions owned by the government.

15% in all other cases.(32) 5% for literary, dramatic, musical, artistic and scientific rights (film,

TV and radio tapes excluded).

8% for commercial, industrial or scientific equipment under financialleasing.

15% in all other cases.(33) 5% if a.- the beneficial owner is a company (other than a

partnership) that has invested at least 100,000 ECU in the capital ofthe company paying the dividends; b.- these dividends are exempt inthe other Member State.

10% when only one of the above two conditions are met.

15% in all other cases. (34) There is no taxation if:

a. The beneficial owner or payer is a Contracting State, a politicalsubdivision a local authority, or an organization of any of theabove.

b. Interest from debt securities guaranteed or underwritten by aState.

c. Interest paid by reason of long-term loans (over five years)granted by banks or other financial institutions in a ContractingState may only be taxed in that State.

d. Interest paid in relation to the sale on credit of industrial,commercial or scientific equipment may only be taxed in theState in which the beneficial owner is resident.

(35) The royalties received for the use of, or the right to use, ships oraircraft under bare-boat charter, or containers used in internationaltraffic, may only be taxed in the Contracting State in which therecipient is resident.

(36) There is no taxation in the State of origin if the interest is paid:

By another Contracting State, a political subdivision or a localentity.

By an enterprise of a Contracting State to an enterprise of anotherState, in relation to the sale on credit of merchandise and industrial,commercial or scientific equipment.

By reason of long-term loans (over five years) granted by a creditor financial institution resident in another Contracting State.

(37) Exempt when the recipient is the beneficial owner and 1) is aContracting State or one of its political subdivisions; or 2) theinterest is paid by reason of long-term loans (at least seven years)granted by a financial institution.

(38) Exempt when paid in relation to loans granted or guaranteed by aState or any public financial institution determined by mutualagreement.

Reduced rate of 5% in relation to the sale on credit of industrial,commercial or scientific equipment.

(39) 5% for the use of, or the right to use, any copyright of literary,dramatic, musical or artistic work, or for the use of, or the right touse, industrial, commercial or scientific equipment.

(40) Only taxable in the State where the recipient is located if it is thebeneficial owner and, in addition is 1) a Contracting State, a politicalsubdivision or a local entity, or 2) the payer is a political subdivisionor a local entity.

(41) The lower rate applies if the recipient company (excludingpartnerships) is the beneficial owner and owns 25% or more of thecapital of the payer company.

(42) Only taxable in the State where the recipient is located if it is thebeneficial owner, or the beneficial owner is a Contracting State, apolitical subdivision or a local entity.

(43) Interest from a Contracting State is exempt from taxation in thatState if: 1) the payer is the Contracting State, one of its politicalsubdivisions, or one of its local entities, 2) is paid to the otherContracting State, to one of its political subdivisions, to one of itslocal entities, or to a body (including financial institutions) thatbelongs in full to this other Contracting State, political subdivisionor local entity, or 3) is paid to another body (including financialinstitutions) in connection with loans granted under an agreementconcluded between the Contracting States.

(44) The lower rate applies if the beneficial owner is a company thatowns, directly or indirectly, 20% or more of the capital of the payercompany.

(45) The lower rate applies if the interest is derived from:

a. Loans granted by banks and insurance companies.

b. Bonds and securities that are regulary and substantially traded ona recognized securities market.

c. A sale on credit paid by the purchaser of machinery andequipment to the beneficial owner that is the seller of themachinery and equipment.,

(46) The lower rate applies for the use or right to use any industrial,commercial or scientific equipment.


a. Interest is derived from the promotion of the export and isagreed upon by the mutual agreement of the competentauthorities of both Contracting States.

b. The interest is paid with respect to an indebtedness arising as aconsequence of the sale on credit by an enterprise of anymerchandise, or industrial, commercial or scientific equipment,except where the sale or indebtedness is between relatedpersons.

(48) The lower rate applies if the interests derive from a loan granted bya bank or the interests are paid in connection with a credit sale ofgoods or equipments.

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- Various treaties are in an advanced phaseof negotiation (among them, the treatieswith Algeria, Egypt, Latvia, Iran, SouthAfrica, Malaysia, Venezuela, Costa Rica,New Zealand, Estonia, Guatemala andVietnam).

The Spanish new treaty with Belgium hasbeen published during the year 2003,being completely into force on January 1,2004.

– Tax on property in Spain of nonresidentcompanies

Nonresident companies owning real estatein Spain are subject to an annual tax of 3%on the cadastral value of the property atDecember 31 each year.

This tax does not apply to:

- International bodies and foreign Statesand public institutions.

- Companies resident in countries withwhich Spain has a tax treaty in forcewhich includes an exchange ofinformation clause, provided that theirdirect or indirect owners are eitherSpanish residents or residents in acountry with which Spain has a taxtreaty with an exchange of informationclause.

For this exemption to be applicable,nonresident entities must report certaininformation to the tax authorities on anannual basis (e.g. real estate owned inSpain and the names of the direct orindirect individual owners of thecompany) to which the related residencecertificates must be attached.

- Companies which have a business activityin Spain, as defined in the regulations,other than merely managing property.

- Listed companies.

- Nonprofit charitable or cultural entitieswhich are recognized as such by theState with which Spain has a tax treatywith an exchange of information clause,provided that real estate owned in Spainis used in their ordinary activities.

This tax is a deductible expense of thenonresident entity for corporate incometax purposes.

– Tax representative

Nonresidents (i) obtaining income in Spainthrough a permanent establishment, or (ii)obtaining income in Spain from economicactivities which do not constitute apermanent establishment and provideentitlement to the deduction of certainexpenses, or (iii) which are entities subjectto the pass-through regime and carry onbusiness activities in Spain, all or a portionof which is carried on by them,continuously or habitually, throughinstallations or workplaces of any kind, orwhich act in Spain through an agentauthorized to conclude contracts in thename and for the account of the entity, or(iv) when they are specifically required todo so by the tax authorities because of thenature or the amount of income obtained,are required to appoint a Spanish residentas their tax representative before the endof the period for reporting incomeobtained in Spain. The appointment mustbe notified to the authorities within twomonths. Failure to appoint a representativeor to notify the authorities can lead to afine of between g 600 and g 6,000.

The tax representatives (if residents) ofpermanent establishments are deemed tobe the persons registered as theirrepresentatives in the Mercantile Register,or the persons empowered to contract ontheir behalf.

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Persons who, pursuant to theNonresident’s Income Tax Law, are:

a) representatives of permanentestablishments of nonresident taxpayers,or

b)of the entities described in (iii) above,

are jointly and severally liable for payingover the tax debts relating to them.

The payor of income accrued without theintermediation of a permanentestablishment by nonresident taxpayers, orthe bailee or manager of the assets orrights of nonresident taxpayers not used bya permanent establishment, shall be jointlyand severally liable for the payment of taxdebts relating to income paid by him or toincome and/or gains from assets or rightswhose bailment or management has beenentrusted to him.

This liability shall not exist where thepayor or manager is subject to theobligation to withhold and prepay tax.

The depository and the party managingthe assets of a nonresident or payingincome to a nonresident are jointly andseverally liable for the tax liabilities arisingfrom those assets or on such incomewhen there is no obligation ofwithholding.

4. Net worth taxResident individuals pay net worth tax ontheir worldwide assets at December 31 ofeach year, valued in accordance with taxrules. Nonresidents are taxable on propertysituated, or rights exercisable, in Spain.However, tax treaties may affect theapplication of this rule.

Certain assets are exempt from this tax,such as those forming part of Spain’shistorical heritage, household effects, objetsd’art and antiques, provided that their valuedoes not exceed certain limits established bythe regulations; the vested rights ofparticipants in pension plans and funds;copyrights for so long as they remain part ofthe author’s net worth; assets or rightsrequired for a business or professionalactivity performed habitually, personally anddirectly by the taxpayer and constituting hismain source of income; and equity interestsin entities in certain circumstances (mainlyfamily businesses).

The regulations establish different valuationmethods for each type of asset.

Law 21/2001 on the tax and administrativemeasures under the financing system ofcommon regime Autonomous Communitiesand cities with a statute of autonomyestablishes the tax scales. However, they willonly apply if the Autonomous Community inwhich the taxpayer resides has not approveda different scale or has not assumed theregulatory powers conferred on it.

Thus, in the absence of the relatedAutonomous Community regulations, thefollowing rates are applicable:

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These rates are applicable to residentstaxable on their worldwide assets and tononresidents taxed on property situated, orrights exercisable, in Spain.

Also, unless the related AutonomousCommunities regulate otherwise, theminimum exempt amount and the amountfrom which a return must be filed is g 108,182.18. The taxpayer’s habitual placeof residence is tax exempt up to a maximumamount of g 150,253.03.

The gross tax payable in relation to this tax,together with the portion of the tax payablerelating to the general component of taxableincome for personal income tax purposesmay not exceed, in the case of residenttaxpayers, 60% of the general component oftaxable income for personal income taxpurposes. Should the sum of bothcomponents exceed the above mentionedlimit, the gross tax payable in relation to thistax will be reduced up to said limit, but suchreduction could not exceed 80%.

5. Inheritance and gift taxInheritance and gift tax applies to Spanishresident heirs, beneficiaries and donees andis charged on all assets received (located inSpain or abroad). Nonresident beneficiariesare also subject to this tax as nonresidenttaxpayers, and must pay the tax in Spain only

on the acquisition of assets and rights(whatever their nature), that are located,exercisable or to be fulfilled in Spain.

The inheritance and gift tax base can bereduced by 95% if it results from a transmissionmortis causa to spouses, children or adoptedchildren or, in their absence, ascendants, fosterparents or collateral relatives up to the thirddegree of a professional business, an individualenterprise, or interests in entities or usufructson them of the donor or deceased whichwere exempt from net worth tax. Therequirements are as follows:

– The beneficiary of a transmission mortiscausa must keep the assets received for atleast 10 years.

– The beneficiary cannot carry outtransactions that result in a substantialdiminution in the value of the assets.

The 95% reduction in the tax base alsoapplies to inter vivos transfers of interests inan individual enterprise, professional businessor in entities belonging to the donor whichare exempt from net worth tax to spouses,descendants or adopted children providedthat the following requirements are met (inaddition to the two requirements imposedfor transmissions mortis causa):

– The donor must be at least 65 years old orbe permanently disabled.

– If the donor had been dischargingmanagement duties, he/she mustdiscontinue them and stop receivingremuneration in that connection.

There is another 95% reduction in the valueof the habitual abode of the deceased in caseof mortis causa transmission to spouses,ascendants, descendants or collateralrelatives of over 65 years when they hadlived with the deceased during the twoprevious years.

RemainingTax Base Tax Payable Tax Base Applicable

(up to Euros) (Euros) (up to Euros) Rate (%)

0.00 0.00 167,129.45 0.2167,129.45 334.26 167,123.43 0.3334,252.88 835.63 334,246.87 0.5668,499.75 2,506.86 668,499.76 0.9

1,336,999.51 8,523.36 1,336,999.50 1.32,673,999.01 25,904.35 2,673,999.02 1.75,347,998.03 71,362.33 5,347,998.03 2.1

10,695,996.06 183,670.29 upwards 2.5

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The tax is calculated by adjusting a tax scaleof progressive rates (depending on the valueof the estate or gift) with a coefficient thattakes into account the previous net worthand the age of the beneficiary, and thedegree of kinship with the donor.

As with other taxes transferred to theAutonomous Community governments,inheritance and gift tax legislation has beenadapted to recognize the legislative power ofthose governments to approve reductions inthe tax base and rates and in the coefficientsfor adjusting the tax payable, based on thetaxpayer’s previous net worth.

Inheritance and gift tax legislation alsoprovides that in the case of transmissionsmortis causa, the tax must always be paid inthe Autonomous Community in which thedeceased was habitually resident (except inthe case of nonresident testators, jurisdictionfor whom rests with the State taxauthorities). As for acquisitions of assets orrights by way of gift, or any other inter vivoslegal transaction for no consideration, the

tax must be paid in the AutonomousCommunity in which the acquiror ishabitually resident (except in the case oftransfers of real estate, in which case theAutonomous Community with jurisdictionwill be that in which the property is located).

Law 21/2001 also establishes the reductions,rates and coefficients to be applied if theAutonomous Community in question has notassumed the powers transferred, or where ithas not yet made any regulations, in thatconnection.

The Government is considering thepossibility of progressively eliminating thistax at central government level, althoughsince it is a tax which the AutonomousCommunity governments are responsible forcollecting, it has already been eliminated inpractice by some Autonomous Communitygovernments (Cantabria, the BasqueCountry, etc.).

The tax rates and adjustment coefficients for2004 are as follows:

Tax rates

Tax Base Tax Payable Remaining Tax Base Applicable(up to Euros) (Euros) (up to Euros) Rate (%)

0.00 7,993.46 7.65%7,993.46 611.50 7,987.45 8.50%

15,980.91 1,290.43 7,987.45 9.35%23,968.36 2,037.26 7,987.45 10.20%31,955.81 2,851.98 7,987.45 11.05%39,943.26 3,734.59 7,987.45 11.90%47,930.72 4,685.10 7,987.45 12.75%55,918.17 5,703.50 7,987.45 13.60%63,905.62 6,789.79 7,987.45 14.45%71,893.07 7,943.98 7,987.45 15.30%79,880.52 9,166.06 39,877.15 16.15%

119,757.67 15,606.22 39,877.15 18.70%159,634.83 23,063.25 79,754.30 21.25%239,389.13 40,011.04 159,388.41 25.50%398,777.54 80,655.08 398,777.54 29.75%797,555.08 199,291.40 Upwards 34.00%

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Coefficients based on degree of kinship and previous net worth

Groups under article 20

Previous net worth in Euros I and II III IV

0 – 402,678.11 1.0000 1.5882 2.0000> 402,678.11 – 2,007,380.43 1.0500 1.6676 2.1000> 2,007,380.43 – 4,020,770.98 1.1000 1.7471 2.2000> 4,020,770.98 1.2000 1.9059 2.4000(1)

(1) This coefficient is applicable if the successors are not known, without prejudice to the refund of the respective amount when they are known.

Reductions in the tax base in transmissions mortis causa

Acquirors Reduction

Group I: Children and adopted g 15,956.87 plus g 3,990.72 for children under 21 each year under the age of 21 of

the successor up to g 47,858.59

Group II: Children and adopted children aged 21 and over, spouses, g 15,956.87

Based on degree of kinship ascendants and adoptive ascendants

Group III: Collateral family members in second and third degree of kinship, g 7,993.46ascendants and descendants by affinity

Group IV: Collateral family members in fourth degree of kinship or further —removed and nonfamily heirs

Physically, mentally or sensorially handicapped persons (disability of g 47,858.59between 33% and 65%)

Physically, mentally or sensorially handicapped persons (disability g 150,253.03

Other compatible reductions greater than 65%)

Spouses, ascendants, descendants, 100% of the amounts received adoptive or adopted, if beneficiary under the insurance policy, of insurance policy up to g 9,195.49, generally

Spouses, descendants, adoptive or Up to 95% adopted in case of family businesses under certain or habitual abode circumstances

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6. Value added tax (VAT) The Spanish VAT legislation (Law 37/1992,which came into force on January 1, 1993)implements the EU Directives on the tax,whose main rules are harmonized in thedifferent Member States.

This tax is of an indirect nature, its mainfeature being that it does not normally implyany cost to traders or professionals, but onlyto end-consumers as traders are generallyentitled to deduct VAT borne against VATcharged.

Within the Spanish territory, VAT is notapplicable in the Canary Islands, Ceuta andMelilla.

The Canary Islands Indirect General Tax(CIIGT), which came into force on January 1,1993, is based on VAT and is an indirectgeneral tax levied on goods and servicessupplied in the Canary Islands by traders andprofessionals and on imports of goods. Thestandard CIIGT rate is 5%. Another indirecttax (Tax on Production, Services andImports) is applicable in Ceuta and Melilla.

a) Taxable events

The following transactions are subject tothe tax when carried out by traders orprofessionals in the course of theirbusiness activities:

– Supplies of goods, generally defined astransfers of the right to dispose oftangible property, although certaintransactions which do not imply suchtransfer may also be treated as suppliesof goods for the purposes of the tax.

– Intra-EU acquisition of goods (in general,acquisitions of goods dispatched ortransported to the Spanish VAT territoryfrom another Member State).

– Imports of goods. These transactions aresubject to the tax regardless of whetheror not the importer is a trader.

– Supplies of services.

b) VAT rates and exemptions

VAT rates are as follows:

The standard rate is 16%, applicable tomost sales of goods and services.

A reduced rate of 7% is applicable,amongst others, to sales and imports of:

– Human and animal foodstuffs, exceptalcoholic beverages

– Water

– Pharmaceutical products

– Private homes

and, among others, to the followingservices:

– Domestic transportation of passengersand their luggage

– Hotels

– Restaurants

– Theatres and cinemas

There is a super-reduced rate of 4%applicable to:

– Bread, flour, milk, cheese, eggs, fruits andvegetables

– Books, newspapers and magazines notmainly containing advertising

– Pharmaceutical specialties

– Cars of handicapped persons

– Prostheses of handicapped persons

– Certain officially sponsored housing

Following the EU model, certaintransactions are VAT-exempt (e.g. supplies

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of goods and services relating to insuranceand financial activities, health, education,rental of residential property, etc.). Asthese transactions imply that no VAT ischarged by the trader, their performancedoes not qualify for the right to deduct theVAT borne as described below.

However, other exempt transactions(mainly those related to internationaltrade, such as exports) give the right todeduct the VAT borne.

c) Place of supply of taxable transactions

Spanish VAT is levied on transactions whichare considered to be performed within theterritory in which it applies.

For the above purposes, the Lawestablishes rules to determine the place inwhich a certain transaction is carried out.

Thus, in the case of supplies of goods, thegeneral rules establish that the supply takesplace in the Spanish VAT territory whenthe goods are made available to theacquiror in such territory. However, if thegoods are dispatched or transported, theplace of supply is generally that from whichsuch transport is initiated.

Other specific rules apply to, for instance,supplies of goods to be installed orassembled prior to supply, etc.

With respect to services, the followingcases may be distinguished:

As a general rule, services are deemed tobe supplied in the Spanish VAT territorywhen the supplier has a place of businessin such territory (for these purposes, seebelow the concept of permanentestablishment).

However, there are some exceptions tothis general rule, namely:

– Services related to immovable propertysituated in the Spanish VAT territory arealways considered to be supplied in suchterritory.

– Transport services are deemed to besupplied in the Spanish VAT territorywith regard to the part of the journeytaking place within the territory ofapplication of the tax, including its airspace and territorial waters. However,specific rules apply with regard to intra-EU transport services.

– Certain services are considered to besupplied in Spain when physically carriedout within the Spanish VAT territory.This is the case, amongst others, ofcultural, artistic, sporting, scientific,educational, entertainment or similaractivities, etc.

– Other services are deemed to besupplied in the Spanish VAT territorywhen the recipient of the service has itsplace of business or permanentestablishment within such territory. It isthe case, for instance, of services such astransfers and concessions of copyright,patents, licenses, manufacturer’s orcommercial trademarks and otherintellectual or industrial property rights;advertising services; counseling, audit,engineering, research, legal, consultancy,accounting, tax or other analogousprofessional services; financial andinsurance transactions; etc.

– Telecommunication services and radioand television broadcasting services arealso deemed to take place in theterritory in which the recipient has itsplace of business if it is a trader orprofessional. If, on the other hand, therecipient is a nontrader, Spanish VAT willbe due if the “effective use and

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enjoyment” of the services takes placewithin its territory of application.

– Finally, other specific rules apply toservices such as certain intermediationservices or works on movable tangibleproperty, as well as for certainelectronically supplied services (seeChapter 8).

d) Permanent establishment

As mentioned above, the concepts of“place of business” and permanentestablishment are relevant for the purposesof determining the place of supply ofcertain transactions. Additionally, they willalso be relevant in defining the VATpayer,i.e. the person obliged to charge thecorresponding tax.

“Place of business” is defined in the Law asthe place where the VATpayer centralizesthe management of, and habitually exercises,his business or professional activity.

“Permanent establishment” means anyfixed place of business from which tradersor professionals carry on economicactivities. Additionally, the Law specificallyconsiders as permanent establishments forVAT purposes:

– The management headquarters,branches, offices, factories, workshops,installations, stores and, in general,agencies or representatives authorized tocontract in the name and for the accountof the VATpayer.

– Mines, quarries or tips, oil or gas wellsor other places of extraction of naturalproducts.

– Works of construction, installation orassembly lasting over twelve months.

– Farming, forestry or livestockexploitations.

– Installations used on a permanent basisby a trader or professional for thestorage and subsequent supply of hismerchandise.

– Centers for purchasing goods oracquiring services.

– Immovable property exploited underlease or any other arrangement.

It should be noted that, although theconcept and cases in which a permanentestablishment is considered to exist aresimilar for both direct taxes and VAT, theyare not fully coincident.

e) Taxpayer

The taxpayer is the person obliged tocharge VAT. This obligation falls normallyon the traders or professionals who makethe corresponding supplies of goods orservices subject to the tax.

Notwithstanding the above rule, someexceptions are established under which itis the recipient of the supply who has toaccount for the VAT due. It is generally thecase in which the supplier has no businesspresence in Spain (place of business orpermanent establishment) as well as in thecase of intra-EU acquisitions.

It must be noted that if the supplier has apermanent establishment in the SpanishVAT territory, it will be considered as theVATpayer of the corresponding supplies,regardless of whether or not it carries outthe taxable transactions from suchestablishment.

The status of VATpayer gives rise to otherobligations, namely:

– Submit declarations relating to thecommencement, modification andcessation of the activities that result intheir being subject to the tax.

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– Apply to the tax authorities for a taxidentification number, and notify andsubstantiate same in such situations asare required.

– Issue and deliver invoices for all itstransactions, and keep copies thereof.

– Keep such accounts and records as arerequired (specific VAT books).

– Submit regularly or at the request of thetax authorities information on itseconomic operations with third parties.

– Submit the appropriate returns (and anannual summary return) and pay in theresulting amount of the tax. Thesereturns are filed quarterly or monthly,depending on the turnover of theVATpayer.

– Appoint a representative to comply withits obligations when the VATpayers arenot established (i.e. do not have theirplace of business or a permanentestablishment) in the Spanish VATterritory. This obligation is onlyincumbent on traders not established inthe EU, unless they are established in acountry with which instruments ofmutual assistance exist.

f) Deduction of input VAT

VATpayers are generally entitled to deductfrom the amounts of VAT charged ontaxable transactions carried out by themthe amounts of tax borne, insofar as thegoods and services acquired are used bythem to perform, amongst others, thefollowing transactions:

– Supplies of goods and services subject toand not exempt from VAT.

– Transactions that, although exempted,relate to international trade (exports orintra-EU supplies).

– Transactions performed outside theSpanish VAT territory which would havegiven rise to the right to deduct had theybeen performed within said territory.

Tax borne on goods or services which arenot used directly and exclusively for businessor professional purposes is not generallydeductible, although some exceptions applyto capital goods (partial deduction).

The right to deduct is also conditionalupon formal requirements and it may beexercised in a period of four years.

There are several deduction regimes, themain features of each of them being thefollowing:

– General “pro-rata” (deductible proportion) rule

This rule applies when the VATpayermakes both supplies of goods or servicesgiving rise to the right to deduct andother transactions which do not give riseto such right (e.g. exempt financialtransactions). It also applies in case itreceives subsidies not directly linked tothe price of taxable transactions(although specific rules exist for thedifferent types of subsidies).

In such case, the VAT paid in each taxperiod is deductible in the proportionwhich the value of the transactions givingthe right to deduct bears to the totalvalue of all the transactions carried outby the VATpayer in the course of hisbusiness or professional activity.

Thus, a percentage of deductible VAT hasto be calculated by application of thefollowing formula:

This percentage is rounded up.

Transactions entitling the right to deduct

Total transactions + subsidies X 100

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– The special “pro-rata” (deductibleproportion) rule

The right to deduct under the specialdeductible proportion procedure may beexercised when the VATpayer opts to doso (this option has to be normallyexercised within the month of Decemberprior to the tax year in which it willapply). In such case, the following rulesapply:

- VAT paid on acquisitions or imports ofgoods and services used exclusively fortransactions giving the right to deductmay be deducted in full.

- VAT paid on acquisitions or imports ofgoods and services used exclusively fortransactions not giving the right todeduct cannot be deducted.

- VAT paid on acquisitions or imports ofgoods and services used only partly fortransactions giving the right to deduct,may be deducted in the proportionresulting from the application of thegeneral pro-rata rule.

– Deduction system for different sectors ofbusiness or professional activity

When the VATpayer carries on differentbusiness activities, it has to apply thecorresponding deduction rules separatelyto each activity.

Business activities are considered to be“different” when they are classed indifferent groups in the NationalClassification of Economic Activities andthey have different applicable rules fordeduction (amongst others, this requisiteis understood to be met when theirdeductible proportions, calculated inaccordance with the general pro-ratarule differ by more than 50 percentagepoints).

Thus, the VATpayer has to apply eitherthe general pro-rata rule or the specialpro-rata rule as described above in eachof its sectors of activity. VAT paid onacquisitions or imports of goods andservices used in both activities may bededucted in the proportion resultingfrom the application of the general pro-rata rule.

g) Refunds

Where the VAT charged exceeds thedeductible VAT borne, the VATpayer has topay the difference through its periodicmonthly or quarterly returns.

If on the contrary, at the end of the yearthe amount of deductible VAT borneexceeds the amount of VAT charged, theVATpayer is entitled to a refund which, ingeneral, can only be requested through thelast return of the year.

Such refund has to be obtained, in general,within the six months following thedeadline for filing the last return of theyear (January 30).

Special rules apply to VAT borne in Spainby non-established traders. In these cases,the following requirements have to be met:

– Persons asking for a refund must beestablished in the European Union or,failing this, must evidence reciprocity fortraders or professionals established inSpain in their home country (that is, thattheir country would refund an analogoustax borne by a Spanish trader). Total orpartial reciprocity is considered to existwith Canada, Monaco, Hungary,Switzerland and Japan.

– The non-established trader must nothave carried out any transaction in theSpanish VAT territory for which it maybe considered the VATpayer.

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– Persons not established in the EuropeanUnion must appoint a representativeresident in the Spanish VAT territorywho will be charged with complying withthe relevant formal or proceduralrequirements and who will be jointly andseverally liable together with theinterested party for any incorrectrefunds. The tax authorities may demandsufficient guarantees from saidrepresentative in this connection.

– VAT borne in Spain is refundableprovided that it was borne onacquisitions or importations of goods oron services, insofar as said goods orservices are used to carry out thetransactions that qualify for the right todeduct (both in Spain and the country inwhich the trader is established).

Refund claims may only be related to theimmediately preceding year or quarter andthe deadline for applying for a refund isJune 30 of the following year.

7. Transfer tax and stampdutyTransfer tax is levied on a limited number oftransactions, including most notably:

However, if the vendor is a company or anindividual real estate developer, the transferof buildable land or the first supply ofbuildings is taxed under VAT. Second andsubsequent supplies of real estate bycompanies, traders or professionals in thecourse of their activity may opt to pay eithertransfer tax or VAT. This option is applicableif the acquiror is a trader or professionalwho can deduct all his VAT borne and thevendor elects to pay VAT rather thantransfer tax.

Transfers of shares of Spanish companiesare generally exempt from any indirecttaxation, except when more than 50% ofthe capital stock of a company istransferred and at least 50% of the assets ofsuch company consist of real estate locatedin Spain: in this case the transaction will beconsidered for indirect taxation purposes tobe a transfer of real estate subject totransfer tax at 6%.

Transfer tax is a cost to theacquiror/beneficiary.

In real estate transfers, taxpayers notresident in Spain will have their tax domicile,for the purposes of compliance with theirtransfer tax and stamp tax obligations, in thedomicile of their representative, who theymust appoint pursuant to the Nonresidents’Income Tax Law.

In the event of failure to appoint arepresentative or to notify the authorities,the tax domicile of the nonresident taxpayerwill be deemed to be the real estatetransferred.

Tax Rate (*) (%)

Corporate transactions such as incorporation, capital increase/reduction at companies, etc. 1

Transfers of real estate 6Transfers of movable assets

and administrative concessions 4Certain rights on real estate 1Certain mercantile law public deeds 0.5

(*) The Autonomous Communities are entitled to opt to apply a different rate in certain cases. In fact, most of them have opted to apply a 7% rate to real estate transfers.

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8. Excise taxesIn Spain there are several excise taxes in linewith the EU Directives on this matter.

These specific consumption taxes are leviedon the related products (alcohol andalcoholic beverages, beer, oil and gas andmanufactured tobacco) in the manufacturing,processing or import phases.

In general, these excise taxes are notapplicable in the Canary Islands, Ceuta andMelilla (taxes on alcohol and beer are alsoapplicable in the Canary Islands).

The special tax on certain vehicles wasintroduced as a consequence of theelimination of the higher VAT rate. This specialtax is also applicable in the Canary Islands,Ceuta and Melilla. This tax is levied at a 12%rate in mainland Spain, 11% in the CanaryIslands and 0% in Ceuta and Melilla (forvehicles under 1,600 c.c. or 2,000 c.c. if diesel:7% in mainland Spain and 6% in the CanaryIslands). A 50% reduction in the tax base isenvisaged for vehicles with five to nine seatsand for families with three or more children.

Also, there is a special tax on electricity(applicable to all Spanish territory). This taxis levied on the intra-EU production,importation and acquisition of electricpower. The tax base is determined by takingthat used for VAT purposes and multiplyingit by a coefficient of 1.05113. The applicabletax rate is 4.864%.

9. Customs duties onimportsMost customs duties levied in Spain arestandard-rate duties which are generallypayable on imports when the goods clearcustoms. With very few exceptions the

duties are ad valorem, i.e. on CIF or similarinvoice value. The rest are minor customsduties relating to storage and deposit rightsand the sale of abandoned goods.

Following Spain’s accession to the EU in1986, the gradual decrease in customs dutiesbetween Spain and the EU culminated intheir complete elimination on January 1,1993. Customs duties on imports fromcountries which do not belong to the EU arethose included in the EU’s Common ExteriorTariffs.

The “Harmonized Goods ClassificationSystem” and the EU Tariff (TARIC) havebeen in force in Spain since 1987. Also, sinceSpain’s accession to the EU, only theexemptions established by the EU have beenapplicable.

10. Tax on insurancepremiumsThis is an indirect tax which is levied in asingle payment on insurance andcapitalization transactions based on actuarialtechniques and arranged by insuranceentities operating in Spain, including thoseoperating under the principle of freedom toprovide services, its regulation being asfollows:

– Transactions arranged by insurance entitiesunder agreements with State socialsecurity agencies or with public companiesentrusted with the management of specificsocial security regimes are not subject tothis tax. There are also numerous exemptactivities, such as compulsory socialwelfare insurance, group insuranceproviding alternative systems to pensionplans, life insurance, capitalizationtransactions, reinsurance transactions,

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surety insurance, export credit insurance,agricultural insurance, health insurance,transactions relating to guaranteed pensionplans, and certain insurance transactionsrelating to international transportation andthe vessels and aircraft used for suchtransportation.

– The tax is levied at a single rate of 6% onpaid premiums.

– The taxpayers under this new tax aregenerally insurance entities carrying outtaxable transactions, which must chargethis tax in full to the persons taking outinsurance subject to the tax. The rules setforth in the VAT regulations shall beapplicable for the purposes of charging thistax.

– The tax becomes due at the time ofpayment of the premium by thepolicyholder.

– Taxpayers (insurance companies) aregenerally obliged to file a tax return andpay the tax on a monthly basis.

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A Law enacted in December, 1988,introduced a new scheme aimed atrationalizing the local taxation system andfacilitating the activity of local entities. Underthis legislation, local authorities areempowered to modify some aspects of thistype of taxes. This Law, which was partiallyamended with effect from January 1, 2003,establishes two different types of municipaltaxes, which can be classified as follows:

– Periodic taxes:

- Tax on real estate (“Impuesto sobreBienes Inmuebles”).

- Tax on business activity (“Impuesto sobreActividades Económicas”).

- Tax on motor vehicles (“Impuesto sobreVehículos de Tracción Mecánica”).

– Other taxes:

- Tax on erection and installation projectsand construction works (“Impuestosobre Construcciones, Instalaciones yObras”).

- Tax on increase in urban land value(“Impuesto sobre el Incremento delValor de los Terrenos de NaturalezaUrbana”).

1. Periodic taxesa) Tax on real estate

This tax is levied annually on owners ofreal estate or on holders of rights in remthereon based on the cadastral valuedetermined pursuant to the PropertyCadastre regulations, at different rates upto a maximum of 1.30% for urban propertyand 1.22% for rural property.

b) Tax on business activity

This tax is levied annually on any businessactivity conducted within the territory ofthe municipality.

However, the following taxpayers areexempted from this tax:

– Individuals.

– Taxpayers who start a business activitywithin Spanish territory, during the twofirst tax periods in which they carry outsaid activity.

– Taxpayers subject to corporate incometax and entities without legal personalitywhose net sales (at group level accordingto Article 42 of the Commercial Code)in the previous year were under g 1million.

– In the case of taxpayers subject tononresidents’ income tax, the exemptionwill only apply to those operating inSpain through a permanentestablishment, provided that theyobtained net sales of under g 1 million inthe previous year.

The tax payable is calculated on the basisof various factors (type of activity, area ofpremises, net revenues, etc.). Theminimum tax rates published by theGovernment can be adapted by themunicipality.

c) Tax on motor vehicles

This tax is levied annually on the basis ofthe horsepower of the vehicle.Municipalities may double the minimum taxrate.

III. Local taxes

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2. Other taxesa) Tax on erection and installationprojects and construction work

This tax is levied on the actual cost of anywork or construction activity that requiresprior municipal permission, excluding VATand any similar taxes.

The tax rate will be set by eachmunicipality up to a top rate of 4%.

b) Tax on increase in urban land value

This tax is levied on the increase disclosedin the value of urban land whenever land istransferred.

The tax rate is set by the municipality upto a top rate of 30%. The tax base is theincrease in land value (defined as thedifference between the transfer price andcadastral value). This tax is deductible forpersonal income tax purposes from thetransfer value of real estate.

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Spanish tax regulations establish severepenalties for infringements. In this respect,note must be made of the recent publicationof General Taxation Law 58/2003, onDecember 17, 2003, which will come intoforce on July 1, 2004, and will abolish theGeneral Taxation Law in force since 1963.The main objectives of the abovementionednew Law are the following: to strengthentaxpayers’ safeguards and legal certainty; toencourage the unification of the approachestaken by the tax authorities in inspections; toenable the use of new technologies andmodernize tax procedures; to establishmechanisms that reinforce the fight againstfraud, the control of taxes and the collectionof tax debts; and to reduce the current levelof tax litigation.

In general, according to the new Law, thefailure to pay taxes to the tax authorities canbe penalized with fines ranging from 50% to150% of the amount not paid and, in certaincases, with forfeiture of the right to taxrelief, to receive subsidies from the State andto contract with the State or other publicagencies for a period of up to five years.Fines may be reduced or increaseddepending on several criteria.

Any delay in payment of tax debts gives riseto an additional surcharge of 5% if payment ismade within three months after theobligation became due, of 10% if payment ismade after this three-month period butwithin six months after the obligationbecame due, of 15% if payment is made afterthe six-month period but within twelvemonths after the obligation became due andof 20% (in this case, plus late paymentinterest) if the payment is made after twelvemonths since the obligation became due.

The legislation also establishes significantrequirements for furnishing information tothe tax authorities, with heavy fines fornoncompliance.

In the case of infringements by legal entities,the directors of the entity may be jointly andseverally liable for payment of the fine if theyhad consented to or participated in thecommission of the infringement.

The fraudulent nonpayment of more than g 90,151.82 of tax constitutes a tax offense.The g 90,151.82 threshold is per year andper tax.

It is also a tax offense to fraudulently obtaina state subsidy of more than g 60,101.21.

Tax offenses are punishable by fines of up tosix times the amount defrauded andimprisonment for between one and fouryears.

In the case of legal entities, the tax offense isdeemed to have been committed by the legalentity’s directors or its legal representative.

IV. Infringements and penalties

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Exhibit I

Calculation of corporate income tax

A Limited Liability Company tax resident inSpain (Teleco, S.L.) has as business activitythe supply of telecommunication services.According to the financial statements of theyear, the company obtained a profit perbooks of g 500,000. The company hasregistered in its accounting records thefollowing transactions that may give rise tothe need of making the corresponding taxadjustments to the profit per books:

– Teleco, S.L. has its business domicile in arented building, paying to the owner ofsaid building an annual amount for thisconcept of g 36,000.

– The company has recorded a corporateincome tax expense amounting to g 185,000.

– It has recorded an allowance for bad debtsamounting to g 10,000. As of the date onwhich the tax accrued, the related accountreceivable was less than six months past-due.

– Teleco, S.L. purchased certain software onJuly 1, of the preceding year, for an amountof g 60,000. This tax period has registereda depreciation of said software amountingto g 30,000.

– In the previous tax period the companyregistered an allowance for bad debtsamounting to g 35,000. At the date onwhich the corporate income taxcorresponding to that year accrued, therelated account receivable was less thansix months past-due.

– The company has recorded a provision forother expenses (provision for incentives)in the amount of g 20,000 to cover theexpense to be incurred in relation to thebonus payable to employees. However,there is no contract or similar documentthat records the company’s commitmentto pay the aforementioned bonus.

– The company purchased some computerson October 1 of the previous year,amounting to g 12,000. This tax periodhas registered a depreciation of saidcomputers amounting to g 5,000.

– The company has incurred in expenses onscientific R&D in the amount of g 62,000during the year. The average expensesincurred in the previous two yearsamounted to g 12,000.

– Some employees of the company haveattended international telecommunicationfairs abroad in order to launch theproducts of the company, incurring inexpenses amounting to g 14,000.

– Teleco, S.L. has incurred training expensesfor its employees in the amount of g 9,000. The average of those incurred inthe two preceding years amounts to g 2,500.

– The company holds financial investments incertain companies. In this connection, thecompany obtained dividends in a grossamount of g 30,000, bearing withholdingtaxes in the amount of g 4,500.

– According to the information furnished bythe company, tax installment paymentswere made during the tax period in theamount of g 95,000.

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Corporate income tax calculation

Euros

Profit of the year 500,000

Positive adjustments

Corporate income tax expense 185,000Allowance for bad debts 10,000Excess depreciation of software 10,000Excess depreciation of computers 2,000Provision for incentives 20,000

Negative adjustments

Allowance for bad debts recorded in the previous tax year <35,000>

Tax base 692,000

Tax rate 35%

Gross tax payable

Tax credits 242,200Expenses in scientific R&D <28,600>International fairs <3,500>Employees training expenses <450>

Net tax payable 209,650

Withholdings and prepayments

Withholding on dividends <4,500>Withholding on rental income <5,400>Tax installments payments <95,000>

Net amount payable 104,750

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The Dutch company TPC, B.V. seconds oneof its employees to Spain in September 2003.This employee worked in the Netherlandsuntil August 2003. The salary of theemployee corresponding to the September-December period amounts to g 120,000,and is paid by the Spanish branch. Theemployee continues making contributions tothe Dutch Social Security System, amountingto g 800 for those four months.

In addition, the employee opens a bankaccount in Spain and has received interestamounting to g 600 and has borne awithholding tax of g 100 on said interest.

In year 2003, he buys and sells shares of aSpanish company and obtains a capital gain ofg 10,000. Relating the same operations withanother Spanish company shares, he obtains,on the contrary, a capital loss of g 2,000. Healso transfers shares of a Dutch companyand obtains a capital gain of g 5,000.

The employee will be considered as anonresident in Spain for tax purposes duringthe 2003 tax year, as he was not physicallypresent in Spain for more than 183 days andhis centre of economic interest was notlocated in Spain this year.

The employee will be taxed separately foreach income obtained and the tax will beaccrued when the deemed incomes becomereceivable or on the date of actual paymentif it is prior.

1. Salary income: The Spanish branch pays thesalary and, therefore, it must pay eachmonth (or every three months if itsoperational sales volume of the prior yearwas less than g 6,010,121) thewithholdings on the gross salary, withoutdeducting any expenses. In consequence,in this case, the branch would have to pay

to the tax authorities 25% of the grosssalary paid to the employee, amounting tog 30,000.

2. Interests derived from the bank account: As anonresident, the employee could claim thereimbursement of g 100 withheld by theBank, as the interest obtained fromnonresidents bank accounts are exemptfrom taxation.

3. Shares: Only the sale of Spanish shares issubject to taxation. Additionally, gains andlosses cannot be compensated.

Therefore, the capital gain obtained fromthe sale of the first shares would besubject to taxation.

However, according to the Double TaxTreaty signed between Spain and theNetherlands, said capital gain can only besubject to taxation in the Netherlands,being the country of residence of theemployee, and as a consequence, it will beexempt in Spain.

Exhibit IINonresident case: Income obtained without a permanent establishment

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A Spanish company, leader in the sale ofspecialized machinery, delivers measuringmachines for the automotive industry tovarious countries, among others Spain. Therecipients of these machines are taxablepersons for VAT purposes, duly registered intheir respective countries of residence.

In the course of its business activities, thecompany incurs every month in the followingexpenses:

– g 900,000 plus VAT for the purchase ofraw materials necessary for its production,all the purchases being made within theSpanish market.

– g 30,000 plus VAT for the rental of itsfactory.

– g 7,500 plus VAT for other businessexpenses.

The goods and services acquired are subjectto Spanish VAT at the general rate of 16%.Consequently, the input VAT for the Spanishcompany every month amounts to g 150,000(i.e. 937,500 x 16%).

On the other hand, the Spanish companysells every month its products in the Spanish,EU and other international marketsaccording to the following.

– Spanish sales: g 1,000,000 plus VAT

– EU sales: g 200,000

– International sales: g 100,000

The Spanish company must charge VAT forthe supplies performed within the Spanishmarket at the general rate of 16% (i.e.1,000,000 x 16% = g 160,000). However, thesupply of goods to an EU Member State, orthe supply of goods to other third territories(export of goods), would be exempt fromVAT provided that all the regulatoryrequirements are met; among others, the

demonstration of the transport of productsoutside the Spanish VAT territory and thatthe recipient of the goods is a VATentrepreneur when the goods are suppliedto other EU Member States.

As the Spanish company’s turnover of theprevious year exceeded the amount of g 6,010,121.04, the company is consideredto be a large company and it is thereforeobliged to submit the returns on a monthlybasis. Otherwise, the returns must besubmitted quarterly.

The output VAT must be recorded in suchreturn (i.e. g 160,000). However, thisamount may be offset with the input VATborne in the prior acquisitions of goods andservices derived from its business activity(i.e. g 150,000).

The difference between the output VAT andinput VAT will amount to g 10,000 that willbe the final quota to be paid to the TaxAuthorities when submitting the return.

Exhibit IIIVAT example

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I n v e s t m e n t a i d a n d i n c e n t i v e s i n S p a i n

153

aid

Spain

Investmentand

inincentivesI. Introduction 155

II. State incentives for training and employment 1561. Training incentives 156

a) Ongoing TrainingPrograms 156

b) European Social Fund 156

2. Employment incentives 156a) Fostering of indefinite-

term employment and of the transformationof temporary contracts into indefinite-term contracts 156

b) Local employmentinitiatives 158

c) Fostering of rural employment 159

III. State incentives for specific industries 1601. Agrofood and other

related industries 160a) Aid for investment

in industrial infrastructures 160

b) Fostering of activities of rural interest 161

c) Measures for promoting and fostering new technologies 161

2. Energy 1623. Mining 1634. Research,

Developmentand Innovation(R&D&I) 165

5. Audiovisual industry 1676. Tourism industry 169

IV. Incentives for investment in certain regions 1711. Granted by the State 171

a) Eligible sectors 172b) Eligible investments 172c) Eligible projects 172d) Types of incentives 173e) Project assessment 173f) Compatibility of

different incentives 173g) Applications 174h) Project implementation

and subsequent modifications 174

i) Payment procedure 174j) Methods of payment 174

2. Aid granted by Autonomous Community and Municipal governments and Local Councils 176a) Types of projects 176b) Main sectors 176c) Project requirements 176d) Types of incentives 176e) Eligible investments 176f) Procedure 176g) Cooperation agreements

with the SpanishCentral Government 176

3. Special reference to investments in the Canary Islands 177

Investment aid and incentives in Spain

5

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154

aid

Spain

Investmentand

inincentivesV. SME incentives 178

1. Plan for the Consolidation andCompetitivenessof SMEs 178

2. SME incentivesgranted by AutonomousCommunity governments 179

3. ICO’s “Línea PYME” 180

VI. Internationalization incentives 181

VII. EU aid and incentives 1821. European Investment

Bank (EIB) 182a) Global loans 182b) Individual loans 183

2. European Investment Fund (EIF) 183

3. Structural funds 184a) European Social Fund

(ESF) 185b) European Agricultural

Guidance and Guarantee Fund (EAGGF) 186

c) European Regional Development Fund (ERDF) 186

d) Cohesion Fund 187e) Financial Instrument for

Fisheries Guidance (FIFG) 187

4. Research and Development programs 188

5. EU initiatives to favor businessfinancing 192a) Seed capital (CREA) 192

b) Mutual guarantee companies 192

c) I-TEC 192

6. Joint European Ventures (JEV) 193

VIII. Compatibility 1941. General State

incentives 194a) Training 194b) Employment 194

2. State incentives for specific industries 194

3. Incentives for investments in certain regions 194a) Granted by the State

(ZPE-ZID) 194b) Granted by

the Autonomous Community and Municipal governments and Local Councils 194

4. EU aid and incentives 195

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155

In order to respond to investmentexpectations and the need to promotegrowth, the Central Government, thegovernments of the AutonomousCommunities and certain provincial andmunicipal authorities have implemented asystem of aid and incentives to encouragethe training and hiring of workers withcertain characteristics, the creation of newcompanies, and research and developmentand innovation (R&D&I) investment projects.

Furthermore, since Spain is an EU MemberState, potential investors are able to accessEuropean aid programs, which providefurther incentives for investing in Spain.

These investment aid measures can beclassified as follows:

– State and regional incentives for trainingand employment

– State incentives for specific industries

– Incentives for investments in certainregions

– State incentives for SMEs

– Incentives for internationalization

– EU aid

Most of the aid that can be obtained fromthe various agencies depends largely on thespecific characteristics of each investmentproject (i.e. the better the prospects of theproject, the more possibilities there are ofobtaining financing and aid).

Apart from the tax incentives discussed inother chapters (the basic tax incentivesanalyzed in Chapter 4 are investment taxcredits), the main general State incentives forinvestors are described in the followingparagraphs.

I. Introduction

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156

These incentives, which form part of theGovernment’s employment promotion policyand can signify important savings in laborcosts, can be divided into two types:

1. Training incentivesa) Ongoing Training Programs

In replacement of the Second NationalOngoing Training Agreement (“AcuerdoNacional de Formación Continua”, ANFC)covering the period from 1998 to 2002, onDecember 13, 2000, the employers’organizations and labor unions signed theThird National Ongoing TrainingAgreement which, together with the ThirdTripartite Ongoing Training Agreemententered into with the Spanish Ministry ofEmployment on December 19, 2000,constitutes the current legal framework forongoing training.

The two agreements provide for thefinancing, through December 31, 2004, of theimplementation of corporate and individualinitiatives for the preparation of ongoingtraining programs aimed at improving theskills and qualifications of workers and thecompetitiveness of companies.

In this connection, anyone wishing tofinance training initiatives under the ThirdNational Ongoing Training Agreement(ANFC) and the Third Tripartite Agreementmust submit an application to the TripartiteFoundation for Ongoing Training in theterms and conditions established in therespective calls for applications.

The major new development introduced bythe Third National Ongoing TrainingAgreement is the creation of the TripartiteFoundation for Ongoing Training (formedby the Central Government and the socialpartners), which eliminates the overlappingof the functions in this area performed by

the Foundation for Ongoing Training(FORCEM), with which this foundation ismerging, and the National EmploymentInstitute (INEM).

In any case it should be borne in mind thatthe aid provided under these Agreementsconsists largely of subsidies that cover partof the cost of training plans (mainly thecost of instructors, leases on facilities,materials, utilities, including water, gas andelectricity, etc.).

b) European Social Fund

Other subsidies are granted by the Stateand by the EU for projects fostering thetraining of workers (see “EU aid andincentives” in Section VII below).

2. Employment incentivesa) Fostering of indefinite-term employmentand of the transformation of temporarycontracts into indefinite-term contracts

The Spanish Central Government offers awide range of employment incentives,consisting mainly of reductions in employersocial security contributions, aimed atpromoting the stable hiring of workers(especially of unemployed persons includedin groups such as unemployed women aged16-45, unemployed women who are hiredin industries or professions where womenare under-represented, the long-termunemployed, the unemployed over the ageof 45, individuals receiving theunemployment benefit granted under theSpecial Social Security System forAgriculture, and the handicapped) and atencouraging the conversion of temporarycontracts into indefinite-term contracts.

The catalogue of incentives to employmentin the Employment Fostering Plan for 2004is summarized in Table 1:

II. State incentives for training and employment

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Discount in the employer social security contribution

Group of unemployed persons for ordinary contracts Duration of the discount

Persons unemployed for 6 or more months 1/3

Persons over 45 and up to 55 1/3

Persons over 55 and up to 65 1/3/4

Recipients of benefits/aids for unemployment for whom one year or more of said benefit remains 1

Unemployed participating in the program that contemplatesthe active insertion income 1

Women from 16 to 45 years old 1

Women in Persons over 45 years old or

professions with low unemployed for more than 6 months 1

rate of feminine Persons under 45 years old employment 1,3

unemployed for less than 6 months 1

Persons unemployed for 12 or more months, hired in the 24 months after having a childRecipients of unemployment aid for workers included in the Special Agricultural System of Social Security 1

Persons who evidence that the Administration has granted them the status of victim of domestic violence by any member of the family unit with which they live (including the hiring of discontinuous permanent workers or temporary workers)

Workers in a situation of social exclusion hired by non-profit seeking companies and entities

Specific-term and temporary contracts made before 1.1.2004 and transformed before 31.12.04; and training contracts, relief and substitution contracts regardless of their date

Practical experience or relief contracts made initially on a part-time basis, maintaining at least the duration of the working hours 3

Temporary contracts

Indefinite-term contracts

20% 30% 2

50% 60% 2

45% 55% 2

55% 65% 2

50% 60% 2

50% 60% 2

45% 55% 2

65%45% 75% 2

50%

25%

70%60%

35%

100%

90%85%65%

65%

25%

25%

24 months12 first monthsRest of term12 first monthsRest of term12 first monthsFrom 13th to 24th month24 monthsRest of term for workers over 45 and up to 55Rest of term for workers over 55and up to 6524 months

12 first monthsFrom 13th to 24th month

24 months

12 months

12 first monthsFrom 13th to 24th month24 months

24 months

24 months

24 months

Table 1

2004 Program to foster employment*

(*) Discounts are incompatible with each other and the beneficiary should opt for those of a single one of the events in which he is included.(1) If it is the first person hired by a self-employed worker registered as such before 1.1.2003, who has not had, for the performance of his activity, persons under salary

reporting to him in the twelve preceding months, the discount in the contributions will be increased by 5%.(2) Amount of the discount of contributions if the contracts are made on a full-time basis with a woman. The increase of note 1 may be added to this amount.(3) These groups may also use the contract to promote permanent employment, which establishes an indemnity of 33 days of salary per year worked (maximum of 24 months of

salary) in the event of unfair disciplinary dismissal. The groups that may use the contract to promote permanent employment are: young people from 16 to 30 years old, womenengaged in professions with a low rate of female employment, persons over the age of 45, unemployed workers registered for 6 months or more and workers who, on the dateof the new contract to promote indefinite-term employment, are employed in the same company under a specific-term or temporary contract, including, trainee contracts madebefore December 31, 2004.

(4) Indefinite-term contracts that are made with workers aged sixty or over, with a length of service in the company of five or more years, will generate the right in 2004 to adiscount in the employer contributions to social security for ordinary contingencies, except for temporary incapacity arising from them, in the following amounts: (i) 40% forthose meeting the requirements for the first time in 2004, (ii) 60% for those who already met the requirements in 2003; and (iii) 70% for those who already met therequirements in 2002. These percentages will be increased by 10% each fiscal year until a maximum of 100% is reached.

Transformation of temporary contracts into indefinite-term contracts

Transformation of temporary contracts into part-time indefinite-term contracts

Contracts with handicapped workers

Full-time or part-time indefinite-term or temporary contracts

Initial full-time or part-time indefinite-term contracts

75% for a maximum of three years.The term of the contract should be at least 12 months.Aid of g 3,906 per contract.Discount: - 70% per handicapped worker under 45 years old.

- 90% per handicapped worker over 45 years old.If the contract is made for an indefinite term and on a part-time basis, the aid isreduced proportionally to the duration of the working hours.

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b) Local employment initiatives

In addition to the general employmentincentives detailed in the previous section,additional aid and subsidies may be grantedfor investment projects aimed at generatingeconomic activity and new jobs in local andregional areas of Spain. Such projects mustbe sponsored by the correspondingAutonomous Community (regional)Government and/or MunicipalGovernment.

Applications for these incentives must befiled with the National EmploymentInstitute (INEM). This is the governmentbody in charge of selecting the eligibleprojects and granting the aid and subsidiestherefor.

In addition to the necessary sponsorshipand support given by the local or regionalgovernment, the eligible projects mustmeet the following requirements:

– Projects must provide for the hiring ofworkers on an indefinite-term basis orthe recruitment of new partners in thecase of projects involving cooperatives orlabor companies.

– Projects must provide for theincorporation of a new company with amaximum number of 25 employees atthe time of incorporation.

– Projects must provide for the productionof products and/or services which relateto emerging economic activities or whichcover unsatisfied needs of the area in thecase of traditional activities.

– Projects must be technically,economically and financially viable.

Incentives available for selected projectsare as follows:

– A financial subsidy aimed at thereduction by up to three percentagepoints of interest rates on loans grantedto the company related to itsincorporation and establishment. Themaximum amount of this subsidy will beg 5,108 per indefinite-term job created.

– A subsidy for the support ofmanagement activities (e.g. subsidies forthe external contracting of market ortechnical studies, reports, and/or trainingprograms). This subsidy will only beavailable during the first year after theincorporation of the company and willcover 75% of the cost of the qualifyingservices up to a maximum of g 12,020.

– A subsidy for technical assistance for thehiring of highly-qualified technicalexperts, covering 50% of total laborcosts (including employer social securitycontributions for a maximum period ofone year). This is a one-time subsidywith a ceiling of g 18,030.

– A one-time subsidy for each indefinite-term employment contract amounting tog 4,808 for each worker hired on a full-time basis (or the related proportion ofsuch overall amount in the case ofindefinite-term part-time contracts). Thissubsidy is not compatible with thatdescribed in the preceding point.

– A subsidy for cooperatives and laborcompanies amounting to g 4,808 perunemployed working partner recruitedon an indefinite-term basis. This subsidyis not compatible with those described inthe two preceding points.

All the aforementioned incentives may beincreased by 10% when the project isrelated to certain activities, among whichare those connected with the protection

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and maintenance of natural areas, wastemanagement, collective transport, thedevelopment of local culture and the careof children, the handicapped and the aged.

These incentives and subsidies arecompatible with others granted by othergovernment agencies or public or privateentities, although the total amount of thesubsidy may not exceed 80% of thesubsidized activity.

Lastly, Autonomous Communitygovernments which, as a result of theincreasing administrative decentralizationprocess currently underway in Spain, havebeen transferred management powers inrelation to these and other employmentprograms, may adapt these incentivemeasures to their own organization.

c) Fostering of rural employment

Aid is provided for companies promotingemployment initiatives in ruralcommunities (see “State incentives forspecific industries”, Section III below).

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The Central Government has provided, andcontinues to provide, financial aid and taxbenefits for activities carried out in certainindustries which are considered to bepriority sectors in view of their growthpotential and their impact on the nation’soverall economy (e.g. activities in theagrofood industry, energy, mining,technological development, research anddevelopment, etc.). In addition, theAutonomous Community governmentsprovide similar incentives for most of theseindustries.

Financial aid includes both nonrefundablesubsidies and interest relief on the loansobtained by the beneficiaries, orcombinations of the two.

Besides the official restructuring programswhich were initiated some years ago forcertain industries (shipbuilding, steel andtextiles, among others) and which are nowsubstantially completed, the major industrialdevelopment programs currently in force are:

1. Agrofood and otherrelated industriesa) Aid for investment in industrialinfrastructures

With a view to contributing to theimprovement and modernization ofagricultural structures and operations, asystem of incentives has been establishedwhich is aimed at financing theimplementation of plans to upgrade farmsand at supporting initiatives to improveprofessional agricultural qualifications. Inshort, the objective is to assist youngfarmers who are setting up for the firsttime.

Assistance may take the form of capitalsubsidies, interest relief, and subsidies

covering part of the annual repayments ofthe principal, or assistance in defraying thecost of guarantees, or a combinationthereof.

Capital subsidies of up to 15% of theprojected investment, reaching up to 20%in specially disadvantaged areas areavailable. A further 5% may be added tothe applicable percentage according to theforegoing for improvement plans aiming toobtain ecological products, if theseconform to the legislation for ecologicalfarm production and their indication infarm and food products.

The interest relief may be up to 8.5percentage points annually, in such a waythat the interest rate for the borrowermust not be less than 1.5%, depending onthe circumstances. The loans may cover upto 90% of the difference between the costof the approved investment and thesubsidy.

In any event, the maximum amount of thegrant may not exceed 50% of theinvestment in the disadvantaged areasincluded in the lists approved atCommunity level, and may not exceed 40%in other areas.

The subsidies are granted on a 50-50basis by the Ministry of Agriculture,Fisheries and Food and the relevantAutonomous Community governments,and may be channeled through public andprivate banks. Applications must be filedwith the competent body of theAutonomous Community where theinvestment is to be located. Moreinformation on these grants can beobtained from, among other agencies, theGeneral Secretariat of Agriculture andFood, which reports to the above-mentioned Ministry.

III. State incentives for specific industries

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In the Autonomous Community of theCanary Islands, these subsidies are subjectto a special system. In agriculturaloperations that do not exceed 20European Dimension Units, the maximumtotal amount of the subsidy is 75% of theamount of the investment apt for subsidy–in the case of investments made,particularly, to promote diversification,restructuring or reorientation towards asustainable agriculture.

Specifically, capital subsidies will be of up to40% of the investment forecast in theimprovement plan.

b) Fostering of activities of rural interest

The initiatives to foster the diversificationof rural life consist of incentives forinvestments, employment and other relatedactivities:

– The investment aid consists of interestrelief on loans obtained to financeinvestments of up to g 72,121 for eachfull-time job created and maintainedduring the year, and not exceeding 90%of the value of the investments. Thesebenefits are granted by the Ministry ofAgriculture, Fisheries and Food.

– The employment aid takes the form ofdirect subsidies of up to 50% of the laborcost of the job created during the firstyear of activity (subject to a ceiling of g 3,606). These subsidies are approvedand paid by the relevant AutonomousCommunity governments.

– Lastly, other types of aid are envisagedfor related activities (business studies,business training and retraining, technicalassistance for company management, etc.)up to a maximum of between 50% and90% of the costs incurred in carrying outthe activity (with maximum limits that

vary depending on the type of activitysubsidized). This aid is paid by theAutonomous Community governments.

The incentives described above areincompatible with any other aid providedby the Central Government or theTripartite Foundation for Ongoing Training,in which the beneficiaries, objectives orinvestments coincide.

Additionally, the incentives granted tofoster economic activity and job creation inrural communities will be subject to theceilings envisaged for incentives granted forregional investment projects.

Finally, entities, companies andprofessionals related to production andmarketing in the agricultural industry thatprovide statistical, accounting and pricingdata to the Ministry of Agriculture,Fisheries and Food may obtain an annualsubsidy of at most g 2,206 per recipientand year for statistical and pricing data andg 126 for accounting data. The abovefigures are the amount of the aid grantedin 2003, according to the amountsapproved by Order APA/9812003, of April10, since to date no data are available onthe amount of the aid forecast for 2004.

c) Measures for promoting and fosteringnew technologies

With a view to fostering the use of newtechnologies in the agricultural area, anincentive is provided for the acquisition ofnew machines and equipment that involvetechnological innovation.

The incentive consists of a subsidy (theamount of which varies) which is grantedprovided that the investment in the newmachinery is made within a year and themachines or equipment acquired are notsold within five years.

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2. EnergyIn compliance with the 1997 ElectricityIndustry Law, on December 30, 1999, theCouncil of Ministers approved the Plan forthe Promotion of Renewable Energies (2000-2010) which defined the strategy to befollowed in the energy area to foster thegrowth of renewable energies. The ultimateaim of the Plan is to ensure that the varioussources of renewable energy will be able tocover 12% of primary energy consumption in2010.

In order to encourage compliance with theaforementioned Law, the Plan for thePromotion of Renewable Energies envisagesa series of measures and incentives (of a taxor structural nature, etc.) that are aimed,inter alia, at eliminating the barriers whichimpede the introduction of renewableenergies in a market dominated by fossilfuels.

In this connection, the Plan envisages thegranting of incentives for investments intechnological innovation made by companiesin the area of renewable energies, thecreation of lines of public aid (a subsidy forthe promotion of technological innovationand investment incentives for the extensionor start-up of the manufacturing of capitalgoods) and the granting to SMEs of apercentage of relief from the cost of theguarantees provided by mutual guaranteecompanies to cover risks.

Within the framework of this Plan for thePromotion of Renewable Energies, theInstitute for Energy Diversification and Saving(IDAE) has set up certain specific aidprograms for the solar thermal power andsolar photovoltaic power industries.

Since 2003, these programs have beenincluded within a single program: the ICO-

IDAE funding for renewable energy andenergetic efficiency projects (preferentialfunding for solar thermal and photovoltaicenergy under 100kWp).

Along these lines, the beneficiaries will beany individual or corporation, of a public orprivate nature, and the investments apt forfinancing will be any project for investment innew fixed assets for the purpose of usingresources in renewable energies orimproving energetic efficiency: facilities,equipment and expenses necessary for theirstart up. If civil engineering works arerequired, these may not represent more than20% of the total investment apt for financing.

Projects apt for financing will be forenergetic efficiency (saving; replacement inindustry; energetic efficiency in buildings andenergetic efficiency in public lighting) andrenewable energies (eolic self-consumptionunder 4 W; biomass; mini-hydraulic under 1 MW; thermal solar; photovoltaic andthermo-electric; energetic use of biogas andenergetic valuation of waste).

The funding will finance up to 70% of theamount of the projects. Solar energytechnologies (thermal and photovoltaicunder 100kWp) may avail themselves of amaximum financing of 96% and 89%,respectively. Loans may be requested for amaximum amount of up to g 6,310,500 (perbeneficiary and year), with a repayment termof 5, 7 or 10 years, as selected by thebeneficiary, and with a term of grace of up to2 years. Solar projects have a singlerepayment term of 7 years and no term ofgrace.

The variable interest rate is EURIBOR at 6months + 1%. The IDAE discount consists ofa reduction of the interest rates (which maybe of 2% or 3.5% according to whether thefunding is for energetic efficiency or

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renewable energy projects, respectively).After this discount is applied, the finalinterest rate will be EURIBOR -1% orEURIBOR -2,5%.

The resources of this funding in 2003 were g 179,700,00, of which the IDAE providedfunds with a value of g 34,700,000 allocatedboth to the reduction of interest rates in allthe projects and to directly support solarthermal energy and solar photovoltaicenergy projects of less than 100kWp.

The funding provided by ICO is compatiblewith any complementary aid or subsidyreceived from the EU or other institutions,subject in all cases to compliance with theconditions established by the EuropeanUnion.

Although the term of this ICO-IDAE fundexpired on December 31, 2003, it is verylikely that it will be renewed in 2004.

Furthermore, in order for the objectives ofthe Plan for the Development ofRenewable Energies to be fully achieved,certain R&D actions will have to be taken,which has led to the involvement of theenergy industry in the various R&D&Iprograms currently being implemented atEU and national level.

Particularly to be noted at the State level isthe Program for the Development ofTechnological Research (PROFIT), aninstrument whereby the Ministry of Scienceand Technology makes a series of calls forpublic aids (nonrefundable subsidies,refundable advances or a combination of thetwo) to promote the performance bycompanies and other entities of R&Dactivities, according to the targetsestablished in the 2004-2007 NationalScientific Research, Development andTechnological Innovation Plan (R&D&I), in

the part on Promotion of TechnicalResearch (see pp. 165-167).

The PROFIT (2004-2007) currently in forceafter the PROFIT included in the previousNational R&D&I Plan (2000-2003) alsoincludes the R&D activities performed in theenergy sector.

Specifically, within the National Energy Plan,included in PROFIT (2004-2007) theoptimizing of conventional forms and uses ofenergy for these to be cleaner and moreefficient (e.g., R&D to improve carburant intransport, R&D in nuclear safety, R&D in thefield of radioactive waste) and the promotionof renewable energies and emergingtechnologies (e.g., eolic energy, solar energy,evaluation and forecast of renewable energyresources) are considered a priority matter.

3. MiningThe Secretary of State for Economy, Energyand the SME of the Ministry of Economy andFinance grants incentives for prospecting,geological-mining research and non-energymining activities, valid until December 31,2006.

These incentives, consisting mainly ofsubsidies of a variable amount, according towhether or not the regions in which theprojects are performed may avail themselvesof the exceptions expressly contemplated inArticle 87.3 of the EC Treaty, are usuallyearmarked for geological and mining researchand prospecting projects and forenvironmental projects.

The 2003 call for subsidies for geological-mining exploration and research and non-energetic mining activities of theenvironment was published by theResolution of March 7, 2003, and to date no

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information is available on the call forsubsidies of this kind for 2004.

Additionally certain aids exist arising fromthe Mining Safety Plan (the Plan is in effectuntil December 31, 2007) which have thepurpose of promoting mining safety anderadicating, insofar as possible, the accidentrate of the mining activity in Spain. Thesesubsidies are granted to publicly- orprivately-owned companies (except forthose engaging in coal extraction, groupingsof said companies and nonprofitinstitutions). The 2003 call for thesesubsidies was made by the Resolution ofMarch 10, 2003, of the State Secretariat forEnergy, Industrial Development and theSmall- and Medium-Sized Company. The callfor 2004 is expected for the first quarter ofthis year.

Aid is also available to finance projectsaimed at reducing the industry’s productioncapacity and initiatives aimed at promotingthe alternative development of miningareas.

The incentives to promote alternativedevelopment in mining areas consist mainlyof nonrefundable subsidies, although theInstitute for the Restructuring of Coal Miningand the Alternative Development of MiningRegions may propose other alternatives –inthe scopes of regional reactivation and ofmining reorganization– consisting of aids tothe operation and activity reduction ofactivities of coal mining companies, aids toreduce supplies, aids for labor costs, aids forthe storage of autochthonous coal at thermalpower stations and aids for the transport ofcoal for the development of infrastructuresin coal mining regions, etc.

The 2004 call to submit applications forsubsidies for projects aimed at promotingthe alternative development of miningregions is expected to be published in thefirst quarter of the year.

Table 2 shows in detail the application of thevarious programs managed by the Institutefor the Restructuring of Coal Mining and theAlternative Development of Mining Regionsaccording to the Autonomous Communitieswhere it is intended to perform thequalifying action:

Table 2

Application of Institute for the Restructuring of Coal Mining programs

Operation Reorganization Reorganizationand reduction technical labor Alternative

of activity Storage Transport costs costs development

Andalusia Yes Yes No (1) Yes Yes YesAragón Yes Yes Some areas Yes Yes YesCastilla y León Yes Yes Some areas Yes Yes YesCastilla-La Mancha Yes Yes No (1) Yes Yes YesCataluña Yes Yes Some areas Yes Yes YesGalicia No (2) No (2) No (2) No (2) Yes YesAsturias Yes Yes No (1) Yes Yes Yes

(1) Thermal power stations consume coal from their own basin.(2) Does not produce CECA coal.

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In respect of the regions able to opt tosubsidies granted by the Institute for theRestructuring of Coal Mining and theAlternative Development of Mining Regions,Table 3 shows the scopes in whichmunicipalities may have access to subsidies.

4. Research, Developmentand Innovation (R&D&I)Encouraging technological improvement andinnovation and research and developmentprojects has in recent years become one ofthe priorities of public authorities in Spain. Inthis connection, the Government hasrecently approved a new version of the“National Plan for Scientific Research,Development and Technological Innovation”which is in line with the Sixth EU RTDFramework Programme (valid until 2006) andis partly financed by the EU Structural Funds.The National Plan will be in force in the2004-2007 period.

Within this framework, the Ministry ofScience and Technology is responsible forthe management of certain scientific researchand technological development policiesunder the Program for the Development ofTechnological Research (PROFIT), which inturn forms part of the National Plan forScientific Research, Development andTechnological Innovation (2004-2007).

Under the aforementioned Program and forthe duration thereof, the Ministry hasdefined the terms and conditions for thegranting of aid.

The incentives thus envisaged may consist ofrefundable advances, subsidies or acombination of the two and are granted forcertain projects in line with any of thestrategic actions of the respective NationalPrograms included in PROFIT.

Table 4 shows the main features of PROFIT:

Table 3

Accessible Subsidies, by municipalities

Infrastructures Employment TrainingGenerators

1. RECHAR Municipalities(1) ✔ ✔ ✔

2. Municipality of Puertollano ✔ ✔

3. Municipalities of the Bierzo region ✔ ✔

4. Municipalities adjacent to those specified in 1. ✔

(1) The RECHAR municipalities are defined by a relevant loss ofcoal mining employment after 1990.

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SUBSIDIES: Non-refundable aid to partly coverthe eligible costs of the respectiveproject or action.For a project to be able to obtain asubsidy charged to PROFIT, itshould have a minimum totalbudget of g 60,000 (with theexceptions to this limit establishedby Order CTE/3185/2003, ofNovember 12)

REFUNDABLE ADVANCES: Loans with no interest, with varying terms ofgrace and repayment, depending on the project.Maximum amount may not be more than 75% ofthe costs of the projects. Maximum repaymentterm: 15 years.For a project to be able to obtain a subsidycharged to PROFIT, it should have a minimumtotal budget of g 1,000,000 (with the exceptionsto this limit established by Order CTE/3185/2003,of November 12)

COMBINEDMODE (SUBSIDY +ADVANCE): This combinationwill depend onthe assessmentof the projects.

TYPE OF AID

ELIGIBLEAPPLICANTS

THEMATICFIELDS

MANNERS OF ACTIONS

CALLS

Enterprises(Validly organizedcorporations)

SMEs Groupings or associations of enterprises

Private non-profit-making R+D centers

Technologicalcenters

Public Law Entities (excluding publicresearch agencies, Public Corporationsor EPES when they perform projects forsupplementary actions andsupplementary actions of internationalcooperation and of the National Plan forEconomic and Legal Social Science)

LIFE SCIENCES• National Program

for Biomedicine• National Program

for Health and WelfareTechnologies

INFORMATION SOCIETYTECHNOLOGIES• National Program for

Electronic Technology andCommunications

• National Program forComputer Technologies

• National Program forInformation Society Services

• Horizontal strategic actionon security and trust ininformation systems,communications andinformation society services

TRANSVERSALSTRATEGICACTIONS• Strategic action

for touristtechnologies

• Strategic actionfor nano-science andnanotechnology

HUMANITIES,SOCIAL ANDECONOMICSCIENCES• National

Program forSocial,Economic andLegal Sciences

SECURITYANDDEFENSE• National

Program forSecurity

TRANSPORTANDCONSTRUCTION• National Program

for Means ofTransport

• National Programfor Construction

ENVIRONMENTAL ANDFOOD TECHNOLOGIESSCIENCES• National Program

for AgrofoodTechnologies andResources

• National Program forEnvironmental Sciencesand Technologies

INDIVIDUALTECHNOLOGICALPROJECT OR ACTIONTechnological project oraction performed by asingle company, publicresearch agency, privatescientific research andtechnological developmentnon-profit-making company,technological center orentity of public law.

TECHNOLOGICAL PROJECTS OR ACTION IN COOPERATIONProjects developed by various companies, public research agencies, non-profit private R&D centers or entities of public law, whose relations areinstrumented through an agreement, arrangement or contract thatestablishes the rights and obligations of the various participants.In technological actions or projects in cooperation, one of the members willact as the coordinator and beneficiary of the subsidy and the others asparticipants. The coordinator will apply for the subsidy and will beresponsible for all purposes for the performance of the project or actionbefore the Ministry of Science and Technology. To this end, it will channelthe relation with the participants and, if necessary, submit thedocumentation supporting the performance of the project or action. Thegranted subsidy will be paid to the coordinator.

PROMOTION OF RESEARCH FOR2004Until December 23, 2003 (in the caseof applications filed for supplementaryactions, until September 2, 2004)

PROMOTION OF TECHNICAL RESEARCH WITHIN THETHEME AREA OF INFORMATION SOCIETY TECHNOLOGIESUntil December 23, 2003 (in the case of applications filed forsupplementary actions and supplementary internationalcooperation actions, until September 2, 2004).

CHEMISTRY, MATERIALSAND DESIGN ANDINDUSTRIAL PRODUCTION• National Program for

Chemical Sciences andTechnologies

• National Program forMaterials

• National Program for IndustrialDesign and Production

ENERGY• National Program

for Energy,except for theNational Sub-Program forThermonuclearFusion

Table 4

Program for the development of technological research (PROFIT)

In any event the granting of this aid will require guarantees to be furnished to the General Administration of the State.

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In addition, to date ICO has providedfunding of g 210 million for Innovation andTechnological Development Projects.

Eligible investments are those aimed at theimprovement and modernizing of technology,provided that the proportion of theinvestment relating to real estate does notexceed 30% and the proportion relating tointangible assets (research, cooperation,indirect costs, etc.) does not exceed 50%. Inany case, the maximum limit for the loan is70% of the investment, after approval isgranted by the Center for IndustrialTechnological Development (CDTI), with alimit per year and beneficiary of g 1,500,000at a fixed or floating interest rate. The termfor repayment will be 5 years (without aterm of grace or with a term of grace of 1year) or of 7 years (with a term of grace of 2years).

Also, CDTI provides financial assistance of g 530 per g 10,000 of investment to be usedfor the early repayment of loans.

Lastly, CDTI continued to accept untilOctober 2003 applications in relation tospecific R&D&I strategic projects (clusters)carried out in conjunction with organizationsfrom countries that participate in the EurekaProgram as part of the following Europeanstrategic projects: EURIMUS (2002-2003),SCARE (1998-2004); PIDEA (1998-2003),ITEA (2001-2004) and MEDEA (2001-2004).However, at present, clusters are managedthrough the General Directorate for theInformation Society of the Ministry ofScience and Technology.

5. Audiovisual industryThe promotion and fostering of theproduction by Spanish companies andEuropean Union Member State companiesand companies from the European EconomicArea established in Spain, of films andaudiovisual material, as well as theestablishment of conditions which wouldfavor their creation and dissemination, andthe adoption of measures for theconservation of film-making and audiovisualheritage constitute the objectives of the Lawdated July 9, 2001, which regulates thefostering and the promotion of film-makingand the audiovisual industry.

– Film production will be fostered by theannual granting of aid to film producers toreduce the cost of film production, takinginto account objective criteria such asviewer acceptance during the period ofprojection in movie theatres, and the boxoffice receipts obtained by movie theatersover a given period of time.

Specifically, the producers of full-lengthmotion pictures can generally receive aidfrom the “Instituto de la Cinematografía yde las Artes Audiovisuales” (ICAA –Spanish Institute for Film-Making andAudiovisual Arts) for an amount equal to15% of the gross box office receipts whichthey obtain during the first two years ofscreening in Spain, up to a maximum of g 901,518.

In any case, the amount of the aid will beless than 50% of the cost of the filmsproduced, with possible exceptions in thecase of experimental films, documentaries,pilot animation series programs and low-budget films.

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The ICAA also grants aid to producers forprojects to make full-length motionpictures which incorporate new directorsand experimental productions with a clearartistic and cultural content, within therelated budgetary constraints and followinga public call to submit applications. This aidis nontransferable and may not exceed theproducer’s investment or g 300,506 perfilm.

In the same way, producers of short filmscan receive aid from the ICAA forproduction up to a maximum limit which isdetermined annually, and they can alsoreceive aid for films already made, whichcannot exceed 75% of the producer’sinvestment and it may never exceed g 60,101 per film.

– Scriptwriting is also eligible for aid fromICAA, which grants incentives to authorsand production company joint ventureswhich write scripts for full-length motionpictures for cinema or television in any ofSpain’s official languages.

– In order to foster the distribution inSpanish movie theaters of quality films ofoutstanding artistic value, the ICAA cansubsidize up to 50% of the cost of contactprinting of copies, of subtitles and theadvertising expenses required to makedistribution plans in Spain which cover aminimum of 15 provinces and 5Autonomous Communities. The maximumamount of this aid is g 60,101 per film.

Similarly, the owners of the movie theatreswhich have obtained the aforementionedincentives can also receive aid of up to 5%of the gross box-office receipts which theyobtain in their movie theaters for theprojection of these films, during the firstyear of screening.

Without prejudice to the aforementionedaids granted by the ICAA, it should be addedthat there is a Film Production Financing Linefor Projects promoted by ICO and the“Instituto de Cinematografía y ArtesEscénicas” (the Spanish Institute for Film-making and the Audiovisual Arts), throughwhich loans are granted on subsidies anddirect loans for the production of full-lengthmotion pictures and the acquisition ofproduction equipment.

In the case of the loans on subsidies, theprincipal cannot exceed 90% of the aid forthe full-length motion pictures productionproject granted to the ultimate beneficiaryby ICAA, and the direct loans for theproduction of full-length motion pictures andthe acquisition of production equipmentcannot exceed 50% of the budget for thefilm up to a limit of g 1,000,000. Themaximum aggregate amount per producerwill be g 4,000,000 within each yearlyfunding of the Financing Line. In exceptionalcases, a maximum aggregate amount perenterprise of up to g 5,000,000 may begranted.

These loans are repayable over a period ofbetween one and three years, and bearinterest at EURIBOR ICO at six months + 0.75 percentage points. Direct loans willbenefit from a reduction in the rate ofinterest of 1.65% for the financial aid of theICAA.

Although the initial term of this line offinancing expired on December 31, 2003, itwill foreseeably be automatically extendedannually, unless any of the parties expresslygives notice of termination, something whichhad not occurred as of the date of thisGuide.

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Additionally, the ICO maintains, firstly, aFinancing Line for cinematographic displayand production equipment funded to datewith g 5,000,000 and, furthermore, aFinancing Agreement for audiovisual worksof RTVE and FAPAE (Federation of SpanishAudiovisual Producers), managing aids toFAPAE member producers.

Furthermore, the ICO has recently openedtwo financing lines to support the audiovisualsector of Galicia through the ICO-TVG-AGAPI Financing Agreements:

– The main purpose of the Fiction SeriesProduction Agreement is to finance newlyproduced serial audiovisual works, thebroadcasting and other rights of whichhave been acquired by TVG.

– The purpose of the Full-Length FeatureFilms, TV Films and DocumentariesAgreement is to finance the production ofnewly produced, full-length audiovisualworks, TV films and documentaries, thebroadcasting and other rights of whichhave been acquired by the public televisionof Galicia.

6. Tourism industryAgainst the backdrop of monetary union andeconomic and social convergence, and in acompetitive environment characterized bythe globalization of supply and demand andthe internationalization of tourismcompanies, the Spanish tourism industry hasto base its position of leadership on quality.

It is with this in mind that the Integral Planfor Spanish Tourism Quality (PICTE) wascreated. This Plan, which replaces theSpanish Tourism CompetitivenessFramework Plans (1996-1999), seeks todefine, from the standpoint of cooperation

between the business community and thepublic authorities, the main plans of actionfor creating supply and bringing it to themarket, as well as establishing thesustainability and profitability targets to beachieved.

The PICTE, which covers the period from2000 to 2006, is being implemented throughspecific Programs which, taking quality astheir main underlying objective, encompassthe main action plans for the tourismindustry: Quality in Tourist Destinations,Quality in Tourist Products, Quality inBusiness Sectors, Quality in Training,Technological Development and Innovation,Internationalization of Tourism Companies,International Cooperation, StatisticalInformation and Economic Analysis, andPromotion of and Support for Foreign Trade.

Particularly noteworthy from the businessstandpoint are the Technological Innovationand Development Programs applied toTourism and that relating to theInternationalization of Spanish tourismCompanies.

In the area of technological innovation anddevelopment, Information Technology (IT)systems are being applied in the tourismindustry through projects that coordinatemanagement and e-mail (EDITRAVEL andEDIHOTEL) and projects that linkinformation systems with reservations(TURCENTRAL, SIT).

Interested entities can apply for the productat the General Directorate of Tourism,which will grant the license for use, at nocost to the applicant, of each of theproducts. This agency also provides, withinits budgetary constraints, technical assistance(a help desk) and training courses on the useof the products so that their potential isbetter utilized.

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The EDITURISMO Program (EDITRAVEL-EDIHOTEL) consists of the electronicexchange of documents among the variousplayers in the industry, mainly travel agenciesand hotels, and their suppliers and financeentities, in order to replace hard copies withe-mail messages, thereby eliminatingadministrative costs.

The TURCENTRAL Program is a computersystem, aimed at autonomous and localgovernment entities and businessassociations, which captures tourisminformation on reservations by organizing itinto a database or mainframe, therebymaking it possible to market and exploit suchinformation.

The TURISCAL Program is a pilot projectpromoted by the Directorate-General ofTourism to give IT support to themanagement of the Spanish Tourism QualitySystem, its main recipients being hotelestablishments and associations.

The Tourist Quality Line of the ICO shouldbe added to this. Its purpose is to promotethe improvement of tourist quality, financinginvestment projects of the hotel sector. Theaids should be requested at the main banksand savings banks. The line is funded to datewith g 150,000,000. The maximum amountof the loan may not exceed g 4,500,000 perinvestment project and year, either in a loanor in a leasing transaction or in the globalcomputation of transactions performed bythe final beneficiary.

The ICO finances up to 70% of the intendedinvestment project, with repayment terms offrom: 5 years (with or without one year ofgrace); 7 years (with or without 2 years ofgrace) or 10 years (with or without 2 yearsof grace), as selected by the beneficiary.

The entrepreneur may opt either for a fixedinterest rate throughout the life of the loan,according to the reference rate of ICO +0.75% or a variable rate referred toEURIBOR at 6 months + 0.75%.

This Line is compatible with other aids orsubsidies to be granted by national orautonomous agencies, subject to the EUlegislation in force.

The conditions mentioned are for theTourist Quality Line for 2003. This Line isexpected to continue in 2004 although it isnot yet known whether the featuresexplained above will be maintained.

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1. Granted by the StateRegional incentives are granted by the Statein accordance with EU requirements andlimits. Their granting is centralized basicallyin the General Subdirectorate of RegionalIncentives.

These incentives are aimed at promotingdevelopment in certain areas, and theyconsist of financial assistance for investmentprojects in specific regions.

The main objective of this regional policy isto achieve economic equilibrium among thedifferent Spanish regions (measured in termsof per capita GNP). In practice, this policyinvolves the promotion of start-ups,expansions or modernization of enterpriseslocated in the less developed geographicalregions and in areas experiencing particulareconomic difficulties.

This aid scheme is based on nonrefundablesubsidies (although the relevant legislationalso envisages the possibility of privilegedfinancing, such alternative is not used inpractice) for a percentage of the cost of theinvestment. They are granted for investmentprojects that will be located in one of Spain’seligible areas.

The geographical coverage of regionalincentives is very broad, covering more than80% of Spain and encompassing around 79%of the Spanish population.

The maximum subsidies vary from one areato another, but in most parts of the countrythe subsidies can currently be for up to 50%of the investment. Specifically, as shown inthe map of regional aid for Spain authorizedby the Commission for 2000-2006 (see page175), the cumulative maximum limit of thesubsidies and/or regional aid granted by thevarious public authorities is 50% forinvestments in the Autonomous Communities

of Andalucía, Extremadura and the CanaryIslands, with lower limits for the rest of theeligible Autonomous Communities.

The granting of regional State incentives isaimed at financing investment projectscarried out in the so-called Areas ofEconomic Promotion, defined under theframework determined by the EU map ofState regional aid. In this connection, for2000-2006, the entire territory of theAutonomous Communities included inObjective number 1 of the Structural Funds(Galicia, Asturias, Castilla y León, Castilla-LaMancha, Extremadura, Valencia, Andalucía,Murcia, Ceuta, Melilla and the CanaryIslands) is classified as eligible. Similarly,projects carried out in certain parts of theAutonomous Community of Aragón(specifically the provinces of Teruel andHuesca and certain areas of Zaragoza) and,on a transitional basis, in the AutonomousCommunity of Cantabria, may also benefitfrom regional incentives.

Two types of “eligible” areas are also definedaccording to their specific circumstances:

– Economic Promotion Areas (“Zonas dePromoción Económica” or “ZPEs”).

ZPEs are less developed geographical areasof Spain. ZPEs can only be established inclass I, II and III, only during the period2000-2006.

– Industrialized Areas in Decline (“ZonasIndustrializadas en Declive” or “ZIDs”).

These areas are defined when specialcircumstances (as determined by theCentral Government) so require. They areusually areas strongly affected by industrialrestructuring processes, with seriousrepercussions on the level of businessactivity and employment in those areas. Atpresent the figure of the ZIDs is out of use.

IV. Incentives for investment in certain regions

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ZPEs and ZIDs are established by RoyalDecree, and each Royal Decree identifies thearea covered and the ceiling on the level of aidthat can be granted once all the subsidies fora given project have been aggregated,regardless of the type or source of thesubsidies.

The above-mentioned Decrees also definewhat are known as “priority areas” (the onlyareas in the ZPE where the subsidy mayreach the maximum limit), the “eligible”sectors, the type of investment projectsqualifying for aid, the requirements forobtaining the incentives, etc.

In exceptional circumstances, the Ministry ofEconomy and the Government’s StandingCommittee for Economic Affairs may (at theproposal of the Board of Governance) raisethe above-mentioned limits for certain areas,but always within the limits established bythe EU. Such a situation has only arisen onvery few occasions, in certain areas(particularly in ZIDs), and only for shortperiods of time.

These ZPEs and ZIDs have certain basiccommon characteristics, which can besummarized as follows:

a) Eligible sectors

These are stipulated in each Royal Decree.Other sectors not expressly included inthe Royal Decree are deemed in principlenot to be eligible, although in exceptionalcases they may receive aid if the Ministryof Economy (following a report from theGoverning Council) considers that suchsectors can contribute to the objectivesestablished in the Royal Decree for theeligible area.

The main eligible sectors, notwithstandingwhat is established by each Royal Decree,are:

– Extractive and processing industries,particularly those which apply advancedtechnology or use alternative energies.

– Agrofood and aquaculture industries, andthe processing and preservation of fishproducts.

– Industrial support services and those whichsignificantly enhance trade networks.

– Specific tourist facilities with an impacton development in the area.

b) Eligible investments

In each project, the subsidies must be usedto defray some of the following expenses(as defined in each Royal Decree):

– Acquisition of the land necessary toimplement the project.

– Utility (gas, electricity, etc.) extensionand connection.

– Development and outside work adaptedto the needs of the project.

– Civil engineering work for offices,laboratories, warehouses, etc.

– Capital equipment and other fixed assets.

– Planning work, project engineering, andtechnical management of work.

– Other investments in tangible fixed assets.

c) Eligible projects

– Definition

- Creation of new establishments thatgenerate new jobs.

- Expansion of existing activities or start-up of new activities in the sameestablishment.

- Modernization of the business.

- Transfer of establishments locatedoutside the set of eligible areas to alocation within one of them.

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– Requirements

- The project must relate to an eligiblesector and activity and be located inone of the designated areas.

- It must be technically, economically, andfinancially viable.

- Generally, at least 30% of theinvestment must be equity-financed.However, depending on the features ofthe project, a higher rate might berequired.

- It must not be started beforesubmission of the application.

- Investments in fixed assets must bemade in new fixed assets.

- Start-up projects must lead to jobcreation and the investment must be of at least g 601,012 (since it isconsidered that large projectscontribute more to regionaldevelopment).

- Expansion projects (of former or newactivities) must create new jobs andsignificantly increase productioncapacity. The investment must besignificant with respect to thecompany’s net fixed assets and must inall cases exceed g 601,012.

- Modernization projects must meet thefollowing requirements:

* Productivity must be notablyimproved and the employment levelat least maintained.

* The investment project (which in anyevent must have a cost of at least g 601,012 million) must entail theacquisition of technologicallyadvanced machinery.

d) Types of incentive

These incentives consist of nonrefundablesubsidies. The regulations implementing thelaw governing these incentives provideother types of aid, such as subsidies for theinterest on loans obtained by applicantsfrom finance entities, relief of up to 50%from employer social securitycontributions for common contingencies,or any combination thereof. However, theregulations governing each eligible area donot envisage these other types of incentive,but only provide for incentives consistingof nonrefundable subsidies.

e) Project assessment

The project must be evaluated using themethods established by each Royal Decree,which will thus determine the percentage ofsubsidy to be granted for each project. Themain criteria can be summarized as follows:

– Total amount of the eligible investment.

– Number of jobs created.

– Contribution to the area’s economicdevelopment and the use of its factors ofproduction.

– Value added of the project (if a start-up)or increase in productivity in other cases.

– Use of advanced technology.

– Location.

f) Compatibility of different incentives

No other public financial aid can bereceived if the limits established by eachRoyal Decree for each type of area areexceeded.

The subsidy received is compatible withother aid, provided that the sum of all theaid obtained does not exceed the limitestablished by the relevant Royal Decreeand EU rules do not preclude it(incompatibilities between Structural Funds).

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g) Applications

– Documentation

- Standardized application form.

- Documentary evidence of the applicant’spersonal information or, in the case ofan incorporated company, its registrationdata. If the company is in the process ofbeing incorporated, the draft bylaws andinformation about the promoter.

- Investment project memorandum.

- Evidence, as of the date in question, offormal compliance by the company withits tax and social security obligations.

- Formal declaration of other public aidapplied for or obtained by the applicant.

– Where to submit

The competent body of the AutonomousCommunity where the project isintended to be carried out.

– Granting agency

The “Dirección General de PolíticasSectoriales” (General Directorate forSectorial Policies) or the “ComisiónDelegada del Gobierno para AsuntosEconómicos” (Government StandingCommittee for Economic Affairs) if theprojected investment exceeds g 6,010,121.

– Time period for decision

The granting agency must issue itsdecision on the application within eightmonths from the date of filing (althoughthis period can be extended).

Acceptance of the aid must be expresslynotified by the applicant to the grantingagency within fifteen business days fromreceipt of the notification. Otherwise,the aid is rendered null and void.

h) Project implementation andsubsequent modifications

The investment can be started before thesubsidy is granted, but not beforesubmitting the application for it.

In addition, the General Subdirectorate ofRegional Economic Incentives may require,in the related notification, that parts of theinvestment be executed in accordance witha schedule.

Subsequent changes in the projects whichdo not affect relevant aspects of theproject must be submitted to the GeneralSubdirectorate of Regional EconomicIncentives, which will decide on them.

However, justified modifications of theinitial project that give rise to a variation inthe incentives, the amount of the approvedinvestment or the jobs created will besubject to the formal proceduresestablished for the assessment of a newproject.

i) Payment procedure

Successful applicants must request paymentof the subsidy at the competent body ofthe relevant Autonomous Community.

j) Methods of payment

Payment of the subsidy can be made in anyof the following ways:

– In installments, as the investments areprogressively completed. In this case,guarantees must be provided to theGeneral Subdirectorate of RegionalEconomic Incentives, under theconditions established by this agency.

– In a lump sum, if the total investment hasbeen made and all of the conditions havebeen met (at this time any guaranteesprovided are released).

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Map of regional incentives

50 %40 %37 %35 %30 %20 %

Subvention limits

Andalucía 50%Aragón

Teruel 30%Huesca 20%Zaragoza* 20%

Asturias 40%Canarias 50%

* Only for the following regions: Pre-Pyrenees, Moncayo, Campo de Borja, Jalón Medio, La Almunia, Calatayud, Cariñena, Daroca-Romanos-Used, Belchite, Bajo Aragón-Caspe and Bárdenas-Cinco Villas.

** Cantabria: (2000) 40%; (2001) 35%; (2002) 30%; (2003) 25% ; (2004-2006) 20%.Source: General Directorate for Sectorial Policies.

Castilla-La Mancha 40%Guadalajara 30%

Cantabria**Castilla y León 40%

Burgos y Valladolid 35%Palencia y Segovia 37%

Ceuta 40%

C. Valenciana 35%Extremadura 50%Galicia 40%Melilla 40%Murcia 40%

(**)

(*)

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2. Aid granted byAutonomous Communityand Municipalgovernments and LocalCouncilsAll the Spanish Autonomous Communitygovernments provide similar incentives, on asmaller scale, for investments made in theirregions. Only some of them are compatiblewith the EU and State regional incentives.Specifically, if State regional incentives havebeen applied for a given project, the limitsestablished in each Royal Decree must betaken into account.

Additionally, some Autonomous Communitygovernments (Aragón and Madrid) grantinvestment incentives in areas not coveredby state legislation but which are included inEU regional aid maps.

Most Autonomous Community incentivesare granted on an annual basis, and thegeneral conditions of the incentives usuallydo not change from year to year.

In view of the impossibility of including herea detailed description of the aid available ineach Autonomous Community, wesummarize below their main features (whichare generally very similar to those of theregional State incentives).

a) Types of project

Opening of new establishments, expansionof activities, modernization andtechnological innovation. The creation ofnew jobs is normally required.

b) Main sectors

Agriculture and forestry, craftwork, fishing,industrial support services, processingindustries, tourism, culture, industrialdesign, electronics and computing.

c) Project requirements

Mainly the same as those which apply atthe State level.

d) Types of incentive

The main incentives are:

– Nonrefundable subsidies.

– Special loan and credit terms andconditions.

– Technical counseling and training courses.

– Tax incentives.

– Guarantees.

e) Eligible investments

– R&D&I and training expenses, promotionof apprenticeship and trainee contracts

– Capital equipment and other fixed assets.

– Planning, modernization, managementenhancement, and design projects.

– Acquisition of the real estate necessaryto implement the projects.

f) Procedure

The documentation required is very similarto that described for regional Stateincentives and normally has to be filed withthe competent body of the “Consejerías”(Departments) of the AutonomousCommunities. Most of the AutonomousCommunities have agencies that provideinformation and advice on requesting aid.Many of them also provide access towebsites with updated databases of thesubsidies available.

g) Cooperation agreements with theSpanish Central Government

In addition to the aid offered by eachAutonomous Community government, inrecent years there has been an increase incooperation agreements between the

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Autonomous Community governments andthe Central Government. The mainobjective of these programs is the jointimplementation of projects in the followingareas:

– Technological modernization and thepromotion of innovation.

– Aid for independent trade anddevelopment of business cooperation.

– Development of SMEs in general.

– Singular actions: agreements with localcouncils.

3. Special reference toinvestments in the CanaryIslandsThe Canary Islands Autonomous Communityhas traditionally enjoyed a regime ofcommercial freedom involving less indirecttax pressure and exclusion from the sphereof certain State monopolies.

These conditions have given rise to aneconomic and tax system which is differentfrom that which exists in the rest of Spain(see Chapter 4). An attempt has been madeto reconcile as far as possible these specialcircumstances with the requirements ofSpanish membership of the European Union.

In this regard, the Central Government isvery flexible in its application of theregulations in granting regional incentives andlocating investments in the Canary Islands,and imposes only those limitations stipulatedin EU legislation. Investments in theperipheral islands are given preferentialtreatment by means of requiring a minimumlevel of investment lower than thatestablished for the rest of Spain.

These efforts have led to the creation of theCanary Islands Special Zone (“Zona EspecialCanaria” or “ZEC”) which is aimed atattracting international capital and companiesto the Canary Islands, thereby contributingto economic and social progress in theIslands (see also Chapter 4).

Lastly, incentives aimed at upgrading andmodernizing the banana and tomato growingand fishing-related industries are alsoavailable. Furthermore, under an EU initiativeit is planned to make subsidies available tofacilitate the restructuring of the fishingindustry.

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1. Plan for theConsolidation andCompetitiveness of SMEsIn recent years the Spanish Government andthe Autonomous Community governmentshave shown special interest in promoting anddeveloping SMEs, in view of their provenability to create jobs. In this connection, theOffice of the Secretary of State for Economy,Energy, and Small and Medium-SizedEnterprises promotes the granting of certainincentives and aid schemes designedespecially for SMEs, which are groupedtogether under the “Plan for theConsolidation and Competitiveness of theSmall and Medium-Sized Enterprise (SME)”for 2000-2006.

The action plans established in the Plan forthe Consolidation and Competitiveness ofthe SME are grouped into two types ofmeasure:

a) The full integration of the SME into theInformation Society.

b)The incorporation of innovative businesstechniques.

For this purpose, it is intended to:

– Take specific actions with the more directparticipation of businessmen in thepreparation and performance of theprojects.

– Allocate aid to increase thecompetitiveness of companies and,consequently, create employment andwealth.

– Analyze projects that give rise to goods orservices for SMEs.

The SME Plan establishes that the directbeneficiaries of the subsidies, in each of themeasures, are intermediary agencies so that

such agencies can promote projects withSMEs in various different areas.

Additionally, SMEs may be the directbeneficiaries of certain lines relating toinnovation in business techniques: design,intercompany cooperation networks andquality systems.

– Design: The Plan provides subsidies topromote projects aimed at theincorporation, assimilation, or applicationof design techniques at SMEs with a viewto enhancing new or pre-existing productsand/or services or to enhancing themarketing and promotion of products andservices.

– The subsidies provided are aimed atpromoting and strengthening projectsaimed at providing SMEs with mechanismsfor adapting to the competition broughtabout by the global market. For thispurpose, financing is provided for jointactions performed by companies with aview to reaching cooperation agreementsthat improve their competitive position.

– Quality systems: Subsidies are provided topromote projects that facilitate for SMEsthe implementation of standardizationsystems and the initiation of certificationprocesses (ISO 9,000; ISO 14,000) by anofficially accredited certifying entity.

Eligible expenses are:

– Investments in tangible and/or intangibleassets, excluding the acquisition andrefurbishment of real estate, furniture,office equipment (except computerequipment), and means of transport. Themaximum subsidy in this connection is g 10,000.

– External professional services (externalexpenses in respect of consulting andother services relating to the project).

V. SME incentives

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In no case are the company’s normaloperating expenses eligible.

In all cases the aid applies exclusively toexpenses allocable to the project and in nocase may financing exceed the total cost ofthe project.

If the direct beneficiary is an SME, theceilings on the subsidy will be in line with theregional limits established by the EuropeanCommission and set forth in Table 5, basedon the map of regional aid approved forSpain (see page 173):

(*) For amounts under g 13,000, in terms of the subsidy, the intensity may exceed 50%. In this case the beneficiary enterprise is subject to the De Minimis Rule (Commission Regulation (EC) No. 69/2001 of January 12, 2001).

Type of action or project

Investments in tangiblefixed and intangibleassets, with theexceptions provided for in Article 1.5 a) 1.

Small enterprises

Medium-sized enterprises

Soft aid (study andassessment)

Unassisted regions

15.0%

7.5%

Up to 50%

Art. 87.3 a) of theTreaty establishing theEC

Ceiling on regional aid+15%

Up to 50% (*)

Art. 87.3 c) of theTreaty establishing theEC

Ceiling on regional aid+10%

Up to 50% (*)

Table 5

Regional limits for SME aids: Maximum intensity of aid (gross)

2. SME incentives grantedby AutonomousCommunity governmentsIt is the responsibility of the AutonomousCommunity governments to establish therules governing these subsidies and to openthe period for accepting applications in thefirst quarter of each year.

It is also their responsibility to process anddecide on the applications for subsidiessubmitted to them and to pay the subsidiespursuant to the terms of the Royal Decreeof June 1, 2001, establishing the system of

managing the “Plan for the Competitivenessof the Small and Medium-Sized Enterprise”.

Lastly, they are also responsible forcontrolling and monitoring the projectsapproved, without prejudice to the controlto be exercised by the European Union andthe relevant bodies of the CentralGovernment with respect to the projectsfinanced with EU funds.

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3. ICO’s “Línea PYME” In addition to the program outlined above,SMEs have access to another series of aidinstruments sponsored by the public sector.Noteworthy in this connection are the“Línea PYME” offered by ICO (“Instituto deCrédito Oficial”) and the “FONPYME” (Fundfor SME foreign investment operations)offered by COFIDES (“Compañía Españolade Financiación del Desarrollo”), the officialSpanish agency for development finance,which is explained in detail in Section VI,below, “Internationalization incentives.”

“Línea PYME” provides preferential access tothe official credit which has financed a largenumber of investments since its creation in1993.

In order to facilitate financing for SMEs, since2000 ICO has been developing a specific lineof financing with preferential terms topromote the investment projects of SMEs inSpain.

For year 2003, a total of g 3,000 million ismade available to SMEs by ICO’s “LíneaPYME” to finance up to 70% of their netinvestment projects, subject to a ceiling of g 1.5 million per beneficiary and year, andrepayable in a period of 5 or 7 years, withdifferent grace period.

These data conform to the features of the“Línea PYME” in 2003, and at even date it isnot known whether or not it will berenewed in 2004.

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Although it is not the aim of this publicationto address incentives for Spanish investmentabroad, this section is included in view of theobvious interest that Spanish investmentabroad has sparked in foreign investors as aplatform for international expansion.

In this connection, in December 1997 theSpanish Government approved the creationof three funds for the purpose of fosteringSpanish investment abroad: the Fund forGuarantees relating to Financing ofInvestments Abroad (GIEX), the Fund for Investments Abroad (FIEX) and the Fund for Investments Abroad by SMEs(FONPYME). The latter two funds aremanaged by the “Compañía Española deFinanciación del Desarrollo” (COFIDES).

The GIEX was created to issue partial andconditional guarantees to secure thecommercial risks inherent in long-termfinancing transactions granted by financialinstitutions for foreign investment projects ofSpanish companies. Nevertheless, thisinstrument is not operative at present.

The purpose of FIEX is to foster theinternationalization and foreign businessactivities of Spanish companies throughshort-term, minority interests in the equityof companies located outside Spain. ThisFund complements the investments made bythe corresponding Spanish company.COFIDES, as the Fund manager, may nottake part in the operational management ofthe investee company.

Only in exceptional circumstances may theMinistry resolve to acquire a majorityholding or authorize the Fund manager totake over the operational management of theforeign company.

For 2004, FIEX has been increased by g 90,151,820. The FIEX ExecutiveCommittee is entitled to approvetransactions of up to g 157,000,000 in 2004.

FONPYME is intended to foster, throughshort-term minority interests in the capitalof companies located abroad or throughother investment vehicles, theinternationalization and foreign investmentsof Spanish SMEs. The Fund therefore makesthe investment in the foreign company on ajoint basis with the SME concerned.COFIDES cannot, except in exceptionalcases, take part in the operationalmanagement of the foreign company in whichthe Fund has an ownership interest, oracquire a majority holding in it.

For 2004, FONPYME has been increased byg 9,019,690, and its Executive Committeemay approve transactions of up to g 17,000,000 in 2004.

VI. Internationalization incentives

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EU aid focuses on depressed regions,normally in underdeveloped rural areas withlow levels of income and high unemploymentrates, and on regions with industries in crisis(steel, shipbuilding, etc.).

Most of the EU incentives (specifically loansand subsidies) supplement development plansfinanced by the Spanish Government. Suchaid is routed through Spanish officialinstitutions and finance entities, which act asintermediaries. Accordingly, the relatedapplications for subsidies must be addressedto such entities.

The broad range of instruments at the EU’sdisposal includes, most notably thefollowing:

1. European InvestmentBank (EIB)Projects eligible for EIB support are basicallythose which promote the development ofless favored regions and those of commoninterest to several Member States orbenefiting the EU as a whole, such asenvironmental protection, improved use ofenergy resources, improved industrialcompetitiveness in the EU, the developmentof SMEs and improved European transportand telecommunications infrastructure.Additionally, projects aiming at extending andmodernizing infrastructure in the health andeducation sectors may also qualify for EIBsupport.

Within the EU program ”Innovation 2000Initiative”, the role of the EuropeanInvestment Bank in financing SMEs has beenreinforced. As part of this initiative, the EIBhas approved a number of measures tofacilitate the financing of projects in thefollowing five areas:

– Human capital formation.

– Research and development.

– Information and communication technologynetworks.

– Diffusion of innovation.

– Development of SMEs andentrepreneurship.

There are two types of loan:

a) Global loans

Global loans are similar to credit linesgranted to financial institutions, whichonlend the proceeds for small or medium-scale investment projects meeting the EIB’scriteria.

This is the main type of support offered toSMEs by the EIB. It is provided by grantingloans to intermediary banks, which in turn,provide funding for small and medium-scalebusiness initiatives.

The loans are granted by the EIB to banksin all the Member States, which act asintermediaries. These financialintermediaries conduct an analysis of theinvestment, and of the economic, technicaland financial viability of each of theprojects. They are responsible for grantingthe loans for small and medium-scaleinvestments and for the administration ofsuch loans.

Specifically in Spain, global loans are routedmainly through Instituto de Crédito Oficial(ICO), Banco Bilbao-Vizcaya Argentaria,(BBVA), Banco Español de Crédito,Santander Central Hispano (SCH) andBanco Popular.

There are many different types of loansand credits, with varying maturities,amounts and interest rates, but their

VII. EU aid and incentives

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general terms can be summarized asfollows:

– Coverage of up to 50% of the overallinvestment costs.

– Grace period: up to three years.

– Repayment period: between 4 and 12years for industrial projects, and up to 20years for infrastructure and energyprojects.

– Eligible companies: those with fewer than500 employees and net fixed assets notexceeding g 60,101,210 before theproject. Over one third of the capital ofeligible companies must not be held by alarge company.

– The amount awarded under a global loanranges from g 20,000 to g 12.5 million.

– Free of fees and other charges, exceptfor minor administrative expenses.

They must be applied for through anintermediary financial institution.

b) Individual loans

The European Investment Bank grantsindividual loans directly to investors orthrough financial intermediaries forprojects of over g 25 million.

The main characteristics of these loans areas follows:

– Coverage of up to 50% of the totalinvestment costs.

– Public- or private-sector projects carriedout mainly in infrastructure and theindustrial sector for a minimum amountof g 25 million.

– Long-term loans, with repayment periodsof between 5 and 12 years for industrialprojects, and between 15 and 20 yearsfor infrastructure projects, although the

repayment period may be extended inspecial cases.

– Grace period: depends on the nature ofthe project, usually up to five years.

– In granting these loans, the EIB requiresfirst-class security.

Applications must be filed directly with theEIB.

Once finance has been provided for theproject, its progress is monitored regularlyin order to ensure compliance with theaims of the EIB’s financing decision.

The EIB does not directly grant interestrelief, although this may be financed bythird-party institutions.

EIB loans are compatible with aid fromother EU agencies, up to a limit of 90% ofthe investment.

2. European InvestmentFund (EIF)The EIF was created for the dual purpose offostering the development of Trans-Europeannetworks in the transport,telecommunications and energy industriesand of promoting the development of SMEs.

The Fund operates in two ways:

– By providing guarantees for loans of allkinds.

– By temporarily acquiring and managingminority holdings in companies involved indeploying Trans-European networks.

The EIF finances, among others, the followingmechanisms:

– The SME Guarantee Mechanism, aiming atcreating jobs through the granting of loansand financial support to innovative SMEs.

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– The European Technology Mechanismaiming at fostering employment for theestablishment and growth of innovativeSMEs through short-term investments inventure capital funds operating in the EU.

On December 20, 2000, the Council of theEuropean Union approved the newmultiannual Programme for Enterprises,covering the period 2001-2005. ThisProgramme devoted to SMEs foresees thedevelopment of the existing EuropeanCommission instruments managed by the EIF.In this sense, the SMEs guarantee activity ofthe EIF will be extended during the wholeperiod of the Program.

3. Structural fundsStructural funds, which are the biggest itemof EU expenditure, are used to financeinitiatives (either public or private) toachieve structural improvements in theMember States and thus narrow the gapbetween the most prosperous and thepoorest regions in the EU.

Seven new Regulations governing thestructural funds from 2000 to 2006 wereissued in June and July 1999. The structuralfunds for this period will continue to supportprograms in the 15 Member States but mostof the programs will focus on the regionswhich need the most aid.

As proposed by the Commission, theEuropean Council decided to reduce tothree the number of priority objectives ofthe structural funds, in accordance with thesimplification and concentration of structuralactions:

– The new Objective 1 will promote thedevelopment and structural adjustment ofregions whose development is lagging

behind, i.e. those whose per capita GDPis less than 75% of the Communityaverage.

– The new Objective 2 will support theeconomic and social conversion of areasfacing structural difficulties. A maximum of18% of the population of the EU will becovered by this Objective.

– The new Objective 3 will support theadaptation and modernization of policiesand systems of education, training andemployment.

g 195 million will be allocated to the fundsfor the period 2000 to 2006, the breakdownby objective being as follows:

– Objective 1: 69.7%.



The remaining 6% will be used to financeinnovation and technical assistance projects,as well as other Community initiatives.

The Community initiatives selected forpromotion during the period 2000-2006 areas follows:

– INTERREG III: program of cross-border,transnational and inter-regionalcooperation to promote the harmoniousand balanced development andorganization of European territory.

– LEADER +: the objective of the program isto promote rural development by means ofintegrated development programs andcooperation with local action groups.

– EQUAL: program that promotestransnational cooperation to foster newpractices to eliminate all forms ofdiscrimination and inequality as regardsaccess to the labor market.

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– URBAN: the objective of this initiative is topromote the economic and socialrehabilitation of cities and neighborhoodsin crisis, in order to foster sustainableurban development.

The contribution of the funds to projects inSpain will be subject to the following limits:

– With respect to Objective I, thepercentage financed by the structural fundsmay not exceed 75% of the total cost.However, since Spain will be a beneficiaryof the Cohesion Fund during the 2000-2006 period, the ceiling may be raised to80%. If the investments are made bycompanies, the limit is reduced to 35% ofthe total cost.

– An upper limit of 50% of the cost isestablished for other projects. In the caseof investments in companies, and withrespect to the Objective 2 area, the ceilingis set at 15% of the total cost.

However, the aforementioned limits may beincreased by a maximum of 10% in cases inwhich sources of financing other than directaid are used.

The EU’s structural funds, for which practicallyall of Spain qualifies, are the following:

a) European Social Fund (ESF)

The ESF aims to support measures toprevent and combat unemployment and todevelop human resources and socialintegration in the labor market in order topromote a high level of employment,equality between men and women,sustainable development and social andeconomic cohesion.

The financial support of the ESF mainlytakes the form of assistance to persons andis devoted to the following activities todevelop human resources:

– Education and vocational training.

– Employment aids and aids for self-employment.

– In the fields of research, scientific andtechnological development, post-graduatetraining and the training of managers andtechnicians at research establishments andin enterprises.

– Development of new sources ofemployment, including the social economy.

Furthermore, ESF will contribute to theCommunity’s initiative to combat all formsof discriminations and inequalities inconnection with the labor market(EQUAL). The proposed strategiessupported by the fund are in line with theEuropean Strategy Programme forEmployment and with the Spanish NationalEmployment Plan.

The ESF does not provide credit directly tocompanies, but rather funds officialagencies and not-for-profit entities thatdraw up plans in accordance with theirobjectives.

The aid provided by the ESF takes the formof project cofinancing and, therefore, theinvolvement of an official agency is required.ESF subsidies (mostly nonrefundable)normally amount to 50% of the projectcost.

However, they cannot exceed the financialaid granted by the related public bodies ofthe Member State for the same project atState, regional or local level.

The application must be made to therelevant agencies of the AutonomousCommunities or to the Ministry of Labor(specifically to the European Social FundAdministrative Unit).

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b) European Agricultural Guidance andGuarantee Fund (EAGGF)

The objective of this program is toestablish a Community framework ofsupport for sustainable rural development.In this connection, a number of measureshave been introduced which focus on thereconversion of agricultural activities andcould involve, for example, theimprovement of farm structures, theprocessing and marketing of produce, theintroduction of new technologies, thepromotion of non-food production, thecreation and maintenance of jobs inagriculture.

The total value of the subsidies, expressedas a percentage of the volume of eligibleinvestments, is limited to a maximum of40% and, in disadvantaged regions, to 50%.In the case of investments made by youngfarmers, the percentages may increase to45% and 55%, respectively.

Eligible investments are those whichcontribute to the improvement of thesituation in the basic agriculturalproduction industry, the viability of whichcan be demonstrated and which meet theminimum requirements relating to theenvironment, hygiene and animalhusbandry.

Apart from the program described above,through this Fund, aid is provided for otherrural development measures such asinvestments in agricultural holdings, aid foryoung farmers, training, fostering of agro-environment, forestry investments andpromoting the adaptation and developmentof rural areas.

Different requirements are established foreach specific program for the granting ofthis kind of assistance.

Applications must be filed with theAutonomous Community in which theinvestment is going to be made.

c) European Regional Development Fund(ERDF)

The ERDF is intended to help redress the main regional imbalances in the EU by contributing to the reduction of the gap between the levels of development of the various regions, including ruralareas.

The ERDF promotes regional actions thatcontribute to:

– Investments in infrastructure which

- in the less prosperous regions, help toincrease the economic potential,development, structural adjustment andcreation and maintenance of sustainablejobs in those regions,

- support the diversification of economicsites and industrial areas in crisis or therenewal of depressed urban areas andthe revitalization of rural areas andareas depending on fishing.

– Productive investments to create andsafeguard sustainable jobs.

– The development of the indigenouspotential of the regions by measureswhich encourage and support localdevelopment and employment initiativesand the activities of SMEs.

This aid must always be requested fromthe Spanish Central Government or thecompetent regional development agenciesin each Member State.

The inclusion of ERDF incentives inMember State programs means that thetypes of projects, requirements andpriorities, procedural formalities and

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methods of quantifying financial aid arethose established by the nationalgovernments through their regional policyagencies.

d) Cohesion Fund

The European Union is dedicated tofostering economic and social cohesion: ithas set itself the objective of promotingeconomic and social progress and ofgradually removing differences in standardsof living.

In this regard, the advent of the euro hasstrengthened the need for a higher degreeof convergence between the economiesand economic policies of the participatingMember States.

The Cohesion Fund finances projectsrelating to the environment and Trans-European transport networks in memberStates whose GDP is less than 90% of theCommunity average.

For the period 2000-2006, the EuropeanCouncil has allocated g 18,000 million tothe Cohesion Fund.

In this regard, Spain, Greece, Portugal andIreland will continue to be beneficiaries ofthe Cohesion Fund in the period 2000-2006 because their GNP continues to bebelow the aforementioned margin. Thefunds allocated to Spain in this period were63.5% of the total, based on population,per capita GNP, improved prosperity in theprevious period and surface area.

The granting of the amounts allocated toeach eligible Member State (includingSpain) and the financing of new projectswith such amounts, are subject to thefulfillment by said Member State of certainrequisites regarding the containment ofpublic spending.

The new EU Regulation governing theCohesion Fund for the period 2000-2006establishes a new mechanism whichenables the Commission to inform theCouncil if a Member State does not meetthe obligations relating to budget deficitarising from the program for stability andconvergence.

e) Financial Instrument for FisheriesGuidance (FIFG)

This instrument is aimed at structuralactions carried out in the fisheries andaquaculture sector, and the processing andmarketing of their products. The areaswhich may receive assistance under thisfinancial instrument are, among others:

– Fleet renewal and modernization offishing vessels.

– Small-scale coastal fishing.

– Aquaculture.

– Processing and marketing of fishery andaquaculture products.

– Promotion and search of newcommercial channels.

– Innovative actions and technicalassistance.

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4. Research andDevelopment ProgramsThe EU has established multi-year programsdefining the lines of action in research, andhas assigned resources for executing theseprograms. The Program currently in forceand operating since January 1, 2003, is theSixth Framework Programme of theEuropean Community for Research,Technological Development andDemonstration Activities.

The main lines of the project are:

– Areas of action:

This programs consists of three main areasof action:

- Community research concentration andintegration.

- Structuring of the European ResearchArea (ERA).

- Strengthening of the bases of ERA.

– Participants:

The following may participate in the SixthRTD Framework Programme:

- Any legal entity established in a MemberState.

- Any legal entity established in anassociate State, in direct actions uponthe same conditions and with the samerights as a legal entity established in aMember State.

- Any international organization ofEuropean interest may participate inindirect actions upon the sameconditions and with the same rights andobligations as a legal entity established ina Member State.

- Any legal entity established in a thirdcountry, even when in this case itsparticipation will be limited to certainactivities included in the action“Community Research Concentrationand Integration”, or to the terms of theprior agreement for scientific andtechnical cooperation between the thirdcountry and the Community.

Set forth in Table 6 are the possibilities ofparticipating in the Sixth RTD FrameworkProgramme and the financial contributionof the EU, according to the country wherethe participant is established.

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– Initial budget:

The proposed budget is g 17,500 million,including g 16,270 million for the part ofthe European Community (EC) and g 1,230 million for the EURATOM part.

Most of this budget will go to the prioritythematic fields described below:

– Priority thematic fields:

(1) Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden, UnitedKingdom.

(2) Foreseen (the association to the VI RTD FP is not yet in force with any country; therefore, the final list may change): Bulgaria, Czech Republic,Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, Slovenia, Turkey.

(3) Foreseen (the association to the VI RTD FP is not yet in force with any country; therefore, the final list may change): Iceland, Israel, Liechtenstein,Norway, Switzerland.

(4) Argentina, Australia, Brazil, Canada, China, Chile, India, Japan, Kazakhstan, Russia, South Africa, Ukraine, USA; nevertheless this list is not closed

Country in which the Financial contribution participant is established Participation by the Community

EU Member States, “CentroComún de Investigación” (CCICommon Center for Research) 1

Associated Candidate States 2

Other Associated States 3

International Organizations ofEuropean Interest

Russia, New Independent States, Mediterranean Countries,Southwest of the Balkans,Developing Countries (with orwithout a cooperation agreement)

Third countries with acooperation agreement 4

Other third countries

Other international organizations

No restriction

No restriction

No restriction

No restriction

No restriction, but the rules ofminimum composition ofconsortiums should be observed


If the participation is forecast orif it is necessary to perform theproject


No restriction

No restriction

No restriction

No restriction

Within the limits of the availablebudget for internationalcooperation activities within thecontext of thematic priorities

If the contribution of theCommunity is necessary and it iscontemplated in the Work Program

If the contribution of theCommunity is contemplated or ifit is essential to perform theproject

If the contribution of theCommunity is necessary and it iscontemplated in the Work Program

Priority Budget in thematic fields million g

Life, genomic and biotechnology 2,255sciences applied to healthInformation society technologies 3,625Nanotechnologies, multi-functional and new production procedures 1,300Aeronautics and space 1,075Food quality and safety 685Sustainable development, planetary change and ecosystems 2,120Citizens and governance in a knowledge-based society 225

Total 11,285

Table 6

Sixth RTD Framework Programme

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– Calls:

Applications will be filed in the scope ofthe calls for applications, published in theEU official journal (DOCE), which may bepreceded by declarations of interest.

The following calls are now open (withapplication filing date after January 2004):

- Calls for scholarships (human resourcesand mobility):

Without providing an exhaustive list, thecall for Marie Curie scientific encountersand training courses (closing: April 20,2004), the call for international MarieCurie scholarships for third countries(closing: February 12, 2004), the call forMarie Curie seats (closing: Janaury 21,2004), may be noted.

- Calls by theme priorities:

No. 1 theme priority:

Second call in the field of biology,genomics and biotechnology applied tohealth (closing April 15, 2004).


Call for statements of interests in theprovision of assistance in the scope ofvarious technical, administrative andorganization activities pertaining to theDirectorates participating in theInformation Society Technologiesprogram.

Future and emerging technologies (opensystem-continued filing until December2004).


Theme call in the field of “Food qualityand safety” (closing: February 5, 2004).


Theme call in the field “Planetary changeand ecosystems” (closing: February 16,2004).

- Calls within the scope of infrastructures:

At present only the call for “Preliminarystudies, construction of newinfrastructures and accompanyingmeasures” (closing: March 4, 2004).

Lastly, other calls the applications forwhich may be filed after January 2004 exist,such as the “Specific support actions (SSA)for countries of the West Balkans” (March8, 2004) or the “Specific support actions(SSA) for developing countries” (March 8,2004).

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(1) Budget means financial plan in which all the resources and expenses necessary for the action are calculated.(2) As a general principle, the financial contribution of the Community may not cover 100% of the expenses of indirect actions, except for those proposals that

include purchase prices regulated by the provisions applicable to public procurement procedures or that adopt the form of a predefined lump sum previouslyestablished by the Commission.

(3) This percentage is variable according to the scopes. (4) Without prejudice to certain specific conditions, some specific entities, particularly public agencies, will receive a maximum financing of 100% of their

additional or marginal costs. (5) The percentages of aid may differ according to the provisions of the Community scope for State aids to research and development, depending on whether

the actions are related to research (50% as a maximum) or demonstration (35% as a maximum) or other actions performed, such as researcher training(100% as a maximum) or consortium management (100% as a maximum).

(6) For actions of support to the research infrastructures related to preparatory technical work (including feasibility reports) and the creation of newinfrastructures, the participation of the VI RTD FP is limited to a maximum of 50% and 10% of the budget, respectively.

(7) The activities of the integrated initiatives related to the infrastructure should include a network activity (coordination action: as a maximum 100% of thebudget) and at least one of the following activities: research activities (50% as a maximum) or specific service activities (specific support action, for example,transnational access to research infrastructures: as a maximum 100% of the budget).

(8) Also the CCI may participate in indirect actions in the same conditions as the entities established in the Member States.

Type of instrument RTD actions Contribution of the Community 1, 2

Excellence networks

Integrated projects

Specific focused researchor innovation projects

Participation in programsundertaken by variousMember States (Art. 169)

Specific research projectsfor SMEs

Human resources andmobility fostering anddevelopment actions

Coordination actions

Specific support actions

Integrated infrastructureinitiatives

Direct actions

Priority thematic fields.Support to policies and forecast of scientificand technological needs.

Priority thematic fields.Support to policies and forecast of scientificand technological needs.

Priority thematic fields.Support to policies and forecast of scientificand technological needs.Specific international cooperation actions.Fostering of interaction of research andinnovation.Development of harmonious relationsbetween science and society.

All the activities of the FrameworkProgramme.

Specific research activities for SMEs.

Promotion of human resources andmobility.

In all the activities of the FrameworkProgramme.

In all the activities of the FrameworkProgramme.

Aid to research infrastructures.

Non-nuclear activities of the “CentroComún de Investigación” (CCI – CommonResearch Center).

Aid to integration: maximum 25% of the valueof the capacity and the resources proposed bythe participants for the integration, as a fixedamount to support the common activitiesprogramme 3 .

Aid to the budget of a maximum of:• 50% for research.• 35% for demonstration.• 100% for certain other activities such as

researcher training and consortiummanagement 4, 5.

Aid to the budget of a maximum of 50% of thebudget 3.

It will be defined in subsequent decisionsadopted under Art. 169.

Aid to the budget of a maximum of 50% of thebudget 3.

Aid to the budget of a maximum of 100% of the budget 3, as the case may be as a lumpsum.

Aid to the budget of a maximum of 100% ofbudget 3.

Aid to the budget of a maximum of 100% of thebudget 3, 6,, as the case may be as a lump sum.

Aid to the budget: depending on the type ofactivity, as a maximum of 50% to 100% of thebudget 3, 4, 7 .

100% 8.

Table 7

What does the Sixth Framework Programmes finance?

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5. EU initiatives to favorbusiness financingThe Enterprise Directorate-General of theEuropean Commission has adopted certaininitiatives aimed at facilitating access tofinancing for European SMEs.

The main EU initiatives in this regard are:

a) Seed capital (CREA)

Under the CREA Program, theCommission has been promoting theinvestment of capital in business projects,covering part of their expenses during thestart-up phase. The assistance provided bythe Commission in this respect amountedto 50% of the operating costs up to amaximum of g 500,000 for a period ofthree years. Although, in theory, theprogram remains in force, applications arenot being accepted at present.

b) Mutual guarantee companies

Mutual guarantee companies consist ofgroups of companies, frequently linked tospecific-interest sectors or groups, whichoffer guarantees to banks to encourage thefinancing of SMEs. They also providespecialized counseling and issue reports onthe feasibility of projects.

The Commission finances 50% of the costof feasibility studies over a maximumperiod of one year and 50% of the cost ofcreating a mutual guarantee company overa maximum period of three years.

Applications should be remitted directly tothe Commission.

c) I-TEC

I-TEC Is part of the EuropeanCommission’s Innovation Program and waslaunched on July 1, 1997, in collaborationwith the European Investment Fund, toencourage investments in technologicallyinnovative SMEs.

The Commission offers participation inventure capital programs to recentlyformed SMEs through investments inspecialized venture capital funds. The fundssupported by the Commission undertaketo invest in SMEs which are not more thanthree years old and which aretechnologically innovative with high growthpotential. I-TEC has a budget of g 7.5million, and since 1997 has had thecollaboration of 28 investment funds.

The funds must invest at least 25% of thenew capital raised in newly formedtechnologically innovative SMEs.Investments must be made in at least fivedifferent companies.

The Commission finances up to 50% of theoperating costs of the funds, up to amaximum of 5% of the investmentseffectively made, with a maximum of g 500,000.

The funds will operate in the EU or itsassociate countries (i.e., Iceland, Israel,Liechtenstein and Norway).

Although, in principle, the I-TECprogramme is maintained in force in 2004,since 1998 it has not included any newinvestment funds.

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6. Joint European Ventures(JEV)This program was created in order to fosterthe establishment of transnational jointventures for SMEs in the Community. Underthis program, aid is provided to finance theanalysis and establishment expenses of newcompanies, including:

– Market research, legal, technical andenvironmental studies and the preparationof business plan.

– External expenses, such as fees of externaladvisers, auditors, lawyers, etc., with amaximum of g 650 per day.

– Travel and accommodation expenses, witha maximum of g 200 per day.

The maximum contribution per project is g 100,000, covering up to 50% of the eligibleexpenses, with a maximum of g 50,000, andup to 10% of the total amount of theinvestment made.

The program was extended in 2000 toDecember 31, 2005 with a funding fixed at g 51,000,000.

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VIII. Compatibility

As a general rule, the compatibility of thesedifferent incentives depends on the specificregulations governing each of them, some ofwhich identify certain incompatibilities(either absolute or up to certain limits),whereas others make no reference to thispoint and, therefore, it is assumed thattheoretically there is no incompatibility.

As a very general, non-exhaustive guideline,the situation in relation to compatibility is asfollows:

1. General State incentivesa) Training

In principle, there are no incompatibilitieswith other types of aid.

b) Employment

In principle, there are no incompatibilitieswith other types of aid. However, taken inconjunction with other incentives, theycannot exceed 60% of the social securitycost of each contract created under theseprograms.

2. State incentives forspecific industriesThese incentives are compatible with theother types of aid, but they cannot exceed(in terms of net subsidy) the limits set by theEU for incentives in certain areas.

3. Incentives forinvestments in certainregionsa) Granted by the State (ZPE-ZID)

In principle, no project will receiveadditional financial or industry subsidies (ofany nature or from any granting agency) ifthe maximum percentages stated in eachDecree are exceeded, since both types ofaid are combined with the regional aidwhen computing the related ceilings. Ifthese internal limits are exceeded under anEU provision (see above) they mustrespect the related EU ceilings.

b) Granted by the AutonomousCommunity and Municipal governmentsand Local Councils

The general limit applicable to regional, andindustry financial aid also covers theseincentives.

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4. EU aid and incentives These are, in principle, compatible withother types of aid, with the specificlimitations described above.

In fact, EU funds habitually finance many ofthe incentives (industrial and regional)described in previous Sections.

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Level of grant Where to apply When to apply How to apply

EUEIB EIB No specific rules. Ask intermediaries.

Spanish intermediary entities (banks, etc.).

EIF EIB, Spanish intermediary entities. No specific rules. Ask intermediaries.

ERDF Autonomous Communities governments. Depends on Depends on national rules.Ministry of Economy, national rules.General Directorate of Regional Economic Incentives.Other granting agencies.

ESF Provincial Offices of the Ministry of Labor. Depends on specific See Regulation 1784/1999.Government of the Autonomous Community program to which funds in which investment will be located. have been assigned.

EAGGF Government of the Autonomous Depends on specific See Regulation 1257/1999.Community in which investment program to which funds will be located. have been assigned.

FIFG Autonomous Community governments. Depends on national rules. Depends on national rules.Ministry of Agriculture, Fisheries and Food.

R&D&I European Commission, Directorate-General See regulations for each See regulations for each PROGRAMS for Science, Research and Development. program. program.

STATEREGIONAL Autonomous Communities governments No specific rules. Application + memorandum (ZPE-ZID) (Managing Office). + supporting documentation.

LABOR National Employment Institute (INEM). No specific rules. Depends on type of aid.INCENTIVES General Directorate of Labor.

Foundation for Ongoing Training.

AGRICULTURE Autonomous Communities governments. No specific rules. Depends on specific rules.AND FISHING

SMEs AID Autonomous Communities governments. No specific rules. Depends on specific rules.PROGRAM Instituto de Crédito Oficial (ICO).

Compañía Española para laFinanciación del Desarrollo (COFIDES).

MINING Ministry of Science and Technology. No specific rules. Depends on specific rules.

ENERGY IADE. Depends on calls. Depends on calls.

R&D Ministry of Science and Technology. Depends on calls. Depends on calls.

AUDIOVISUAL ICAA/ICO. Depends on calls. Depends on calls.INDUSTRYOTHER General Directorates of Normally, no specific rules. Depends on type of aid.

the different Ministries.

AUTONOMOUSCOMMUNITYAND MUNICIPAL GOVERNMENTS AND LOCAL COUNCILS

REGIONAL, “Consejerías” (Departments) Depends on specific rules. Depends on specific rules;INDUSTRY of the Autonomous Community however, very similar to AND LABOR governments State incentives: application

“Concejalías” (Departments) of + memorandum Local Councils. + supporting documentation.

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Maximum limits for Main types of aid subsidies and loans Effective amounts granted More information from

Loans with low interest Up to 50% of the project cost Varies greatly depending Banco de Crédito Local.and long maturities (75% for Trans-European on project. EIB.and grace periods. networks). Available as

cofinancing with national funds.Guarantees, venture capital. See comments in the See comments in the EIB.

corresponding paragraphs. corresponding paragraphs.Subsidies, preferential Up to 80% of the project Between 15% and Ministry of Economyaccess to official credit, cost. Available as cofinancing 30% of project cost. EU Commission, tax benefits. with national funds. DG XVI.

Subsidies. Up to 80% of the project cost. 50% of project cost. Ministry of Labor.Available as cofinancing with national funds.

Subsidies. Up to 50% of the project cost. Between 25% and Ministry of AgricultureAvailable as cofinancing with 50% of project cost. Directorate-General of national funds. Agriculture of EU Commission.

Subsidies, preferential access See comments in the Depends on national rules. Ministry of Agriculture.to official credit. corresponding paragraphs. Directorate-General of

Agriculture of EU Commission.Subsidies. Up to 100% of the project 50% of project cost. Directorate-General of Science,

cost. Available as Research and Development cofinancing with of the EU Commission.national funds. Center for the Development

of Industrial Technology (CDTI).

Subsidies. Up to 60% of the project Normally between 30% and Autonomous Communitiescost. 40% of the maximum limit. governments.

Ministry of Economy. General Subdirectorate of Regional Economic Incentives.

Reduction of social security Depends on type of subsidy. The maximum amount. INEM/“Consejerías” (Departments)costs, assistance to and of the Autonomous Communitytraining of employees. governments.

General Directorate of Labor.Low-interest loans. Up to 90% of the project Between 30% and 50%. Banco de Crédito Agrícola.

cost. Ministry of Agriculture, General-Secretariat of Rural Development and Conservation of Nature.

Subsidies and low-interest loans. Depends on type. Depends on type. General Directorate of the Policy on SME.

Subsidies. Up to 60% of the cost Up to 20% of the project The State Departmentof the project. cost. of Economy, Energy and SMEs.

Subsidies. g 210 and g 300 per m2 Depends on type of facility. IADE.of installed collection area.

Refundable loans, subsidies In the case of refundable Depends on type. Ministry of Science and or a combination of the two. advances, it may not exceed Technology.

75% of the project cost.Subsidies and loans. Depends on type. Depends on type. ICAA.

Subsidies and low-interest loans. Depends on type. Depends on type. General Directorates of the different Ministries.

Subsidies, special conditions for Depends on specific rules. Depends on specific rules. Autonomous Community and loans and credits and technical Municipal governments and counseling and training courses. Local Councils.

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A c c o u n t i n g a n d a u d i t i n g r e q u i r e m e n t s

199

Accountingauditingand

requirementsI. Legal framework 201

II. Accounting records 202

III. Financial statements 203

IV. Generally accepted accounting principles and standards 204

V. Valuation rules 206

VI. Consolidation 212

VII. Restatement legislation 213

VIII. Footnote disclosurerequirements 214

IX. Audit requirements 2151. Audit Law 2152. Corporations Law 215

X. Financial statement publication requirements 216

Exhibit I. Balance sheet asof December 31,20XX and 20YY 217

Exhibit II. Statements of income for the yearsended December 31,20XX and 20YY 218

Accounting and auditing requirements

6

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201

As mentioned in previous chapters, Spanishcorporate law was substantially modified byLaw 19/1989 to bring it into line with EUDirectives.

Law 19/1989 effectively wrote into Spanishlaw all the EU Directives on corporateaffairs, except for the Eighth Directive onaudits which had already been adoptedthrough Audit Law 19/1988; however, Law19/1989 did include several aspects relatingto audits (see Section IX, “AuditRequirements”).

Law 44/2002 on Financial Systems ReformMeasures (see pp. 46-47), currently in forcebut not yet implemented by secondarylegislation, reforms various aspects of theAudit Law, Corporate Law (SpanishCorporations Law, Limited LiabilityCompanies Law and Worker-OwnedEnterprises Law) and other Regulations inforce prior to the publication of theaforementioned Law. This Law is part of anintense legislative process in various areas,aimed at instilling confidence in the marketsand promoting the preparation of codes ofgood corporate governance to encouragetransparency.

On January 8, 2003, the Special Committeefor the Promotion of Transparency in theMarkets and at Listed Companies published areport disclosing a series of proposedmeasures and recommendations forcompanies, aimed at promoting transparencyin the financial markets. In this connection,Law 26/2003 amending Securities MarketLaw 24/1988 and the revised SpanishCorporations Law, Legislative Royal Decree1564/1989, introduces the first regulatoryinitiatives for the promotion of transparencyin the management of listed corporations.

Following the approval of the EuropeanParliament and Council’s Regulations on theapplication of International AccountingStandards in the European Union, the WhitePaper of the Accounting Reform, approvedon June 25, 2002, and published by theSpanish Accounting and Audit Institute(ICAC), represents the foundation on whichthe whole accounting reform process to beaddressed in Spain will be based. Work isalready in progress on the regulatory changeprocess that will be required to ensureconvergence with the European Union in theapplication of the International AccountingStandards for Listed Consolidated Groups in2005. This process will doubtless involvenumerous reforms in the area of Spanishaccounting principles aimed at bringing theseinto line with International AccountingStandards, albeit over a longer period oftime than that established for ListedConsolidated Groups.

I. Legal framework

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The regulations governing the accountingrecords to be kept by businesses in Spain arecontained in the Commercial Code, whichrequires all enterprises to keep orderlyaccounts, appropriate to their activity,mandatorily including an inventories andfinancial statements book and a journal,without prejudice to the requirements ofspecial laws or regulations.

Mercantile companies must also keep aminutes book to which all the resolutionsadopted by the shareholders’ meeting andother governing bodies of the company mustbe posted.

With regard to the formal requirements foraccounting records, the Commercial Codestates that enterprises must submit thebooks they are required to keep to theMercantile Register of the place where theyhave their registered offices, in order forthem to be stamped before they begin to usethem.

Alternatively, entries and annotations can bevalidly made by any suitable procedure onsheets which are subsequently sequentiallybound to form the mandatory books, whichmust be legalized within four months afterthe year-end.

The foregoing formal and proceduralrequirements are also applicable to theregistered share registers of corporationsand limited partnerships with shares and tothe registers of members of limited liabilitycompanies; both of these registers can becomputerized.

II. Accounting records

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Both the Spanish Commercial Code and theCorporations Law define annual financialstatements as consisting of the balance sheet,the statement of income and the footnotes,which jointly form a reporting package forthese purposes (a management report, whichis not considered part of the financialstatements, is also required). TheCorporations Law requirements regardingannual financial statements are also applicableto limited liability companies and limitedpartnerships with shares.

The Code and the Law also establishaccounting principles and valuation rules. TheLaw includes balance sheet and incomestatement formats which follow the modelsin Articles 9 and 24, respectively, of the EUFourth Directive, and stipulates theinformation to be furnished in the footnotes.

The procedures for full implementation ofthe relevant precepts of the CommercialCode and the Corporations Law are setforth in the Spanish National Chart ofAccounts, enacted by Royal Decree1643/1990, which made the National Chartof Accounts mandatory for all enterprises, ofwhatever legal form, for fiscal years beginningafter December 31, 1990.

The National Chart of Accounts has thefollowing contents:

Part I Accounting Principles

Part II Chart of Accounts

Part III Accounting Definitions and Relationships

Part IV Annual Financial Statements

Part V Valuation Rules

The National Chart of Accounts has beenadapted for various industries. Amongothers, adaptations for the followingindustries have been published:

– Construction companies

– Real estate companies

– Sports federations

– Healthcare companies

– Sports corporations

– Not-for-profit entities

– Toll road licensees

– Water supply and treatment companies

– Electric utilities

– Assurance entities

– Wine sector companies

III. Financial statements

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Per Spanish corporate law and currentaccounting regulations, generally acceptedaccounting principles and standards can bedefined as those stipulated in:

a) The Commercial Code and othercorporate legislation.

b)The Spanish National Chart of Accountsand the industry-specific adaptationsthereof.

c) Any accounting standards established bythe “Instituto de Contabilidad y Auditoríade Cuentas” (the Spanish Accounting andAudit Institute); and

d)Any other specifically applicable legislation.

In the case of transactions or economicevents not contemplated by theaforementioned legislation, the professionalaccounting standards issued by competentnational or international organizations will betaken into account, provided that thesestandards:

a) Do not contravene mandatory accountingprinciples and standards;

b)Have been generally accepted byprofessional practitioners in the form ofspecific declarations issued by theorganizations to which they belong; and

c) Allow a true and fair view to be obtainedof the net worth, financial position andoperating results of the entity beingaudited.

Part I of the National Chart of Accounts setsforth the accounting standards which aim toensure that a company’s annual financialstatements are clear and present a true andfair view of its net worth, financial positionand operating results. These standards are asfollows:

– Prudence

– Going-concern

– Recording

– Cost basis

– Accrual basis

– Matching of revenues and expenses

– No offsetting

– Consistency

– Materiality

The National Chart of Accounts expresslystates that if the application of the foregoingprinciples does not suffice to ensure thepresentation of a “true and fair view”, thefootnotes must include the necessaryexplanations about the accounting principlesapplied, and further states that if due to anexceptional occurrence the application of agiven accounting principle or standardmilitates against the presentation of a “trueand fair view”, then such principle orstandard should not be applied.

The National Chart of Accounts also statesthat in the event of a conflict between twomandatory accounting principles, theprinciple more conducive to the presentationof a true and fair view shall prevail, and theprinciple of prudence shall prevail over allthe other principles.

Upon its creation pursuant to Law 19/1988,the Spanish Accounting and Audit Institute(ICAC) assumed the functions of the former“Instituto de Planificación Contable”(Institute of Accounting Planning).Consequently, it has been legally assigned thefunctions of accounting development, whichare as follows:

IV. Generally accepted accounting principles and standards

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a) The performance of technical work, thedrafting of proposals for the NationalChart of Accounts and the approval of theadaptations of the Chart of Accounts tothe various areas of economic activity.

b)The establishment of methods forimplementation of those points of theNational Chart of Accounts and of theindustry-specific adaptations thereof whichare deemed necessary in order to ensurethe proper application of the standards.

c) The ongoing fine-tuning and updating ofaccounting planning.

The Spanish Accounting and Audit Institutehas also been legally assigned functionsrelating to auditing (control, supervision anddevelopment of the auditing activity).

Additionally, the Spanish Accounting andBusiness Administration Association (AECA),a private entity formed in February, 1979 hasbeen actively involved in the research anddevelopment of accounting principles andstandards.

The AECA’s Accounting Principles andStandards Committee is made up ofrepresentatives of Government, universities,professional organizations, companies andaudit firms.

Most of the documents published by theAECA through 1990 were included in thecurrent version of the National Chart ofAccounts.

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Part V of the current National Chart ofAccounts lays down valuation rules for thedifferent concepts included in the balancesheet and in the income statement.

Additionally, the ICAC has issued resolutionscontaining more detailed versions of certainof these valuation rules.

The main differences between the accountingprinciples and standards applicable in Spainand those issued by the IASC (InternationalAccounting Standards Committee1) and theUS GAAP are set forth very briefly below:

V. Valuation rules

Differences in accounting regulations:Main differences between Spanish accounting principles, IAS and US GAAP

Spain IAS US GAAP

As a general rule, fixed assets are recordedat acquisition cost and may not be revaluedvoluntarily. Only those revaluationsauthorized by law are permitted. The most recent legal revaluation took placein 1996.

As a general rule, positive or negativeexchange differences arising from the valuationat the year-end exchange rate of securities,accounts receivable and accounts payable areclassified by maturity date and currency. Unrealized positive exchange differencesarising in each homogeneous currency groupare not credited to income, but rather arerecorded under the “Deferred Revenues”caption on the liability side of the balancesheet.However, negative differences arising in eachgroup are generally charged to income.In some circumstances, unrealized positivedifferences can be credited to income for theyear.

As an alternative treatment, a tangible fixedasset item can be recorded for a revaluedamount subsequent to its initial recording asan asset. The revalued amount must be equalto the fair value of the asset as of the date ofvaluation, net of the related accumulateddepreciation and of any losses due to wearand tear. These revaluations may not beperformed on a selective or occasional basisand must be recorded considering therelated tax effect. The balancing entry forsuch revaluations will be a reserve account.As a benchmark treatment all assets areregistered by their cost.Under the First-Time Application Standard(IFRS 1) it is possible to maintain as cost thecost of those fixed assets that would havebeen revalued pursuant to asset revaluationlegislation.

As a general rule, exchange differences mustbe recorded as revenues or expenses in theperiod in which they arise, with the followingexceptions:a) The differences arising from monetary

assets which form part of the netinvestment in a foreign company must beclassified as equity until the investment issold, whereupon the accumulateddifference will be taken to income.

b) The differences arising from foreigncurrency liabilities relating to a formaldesignated net investment hedge in aforeign company will be classified as equityuntil the investment is sold.

c) Exchange rate differences on foreigncurrency loans (provided they are treatedas adjustments to interest costs) may berecorded as part of a qualifying asset.

Revaluations are not allowed.

As a general rule, exchange differences mustbe recorded as revenues or expenses in theperiod in which they arise, with the followingexceptions:a) Translation of financial statements of

foreign subsidiaries and associatedcompanies when the “current exchangemethod”, in which differences arerecorded in equity, is applied.

b) Cash flow and net investment coveragethat complies with certain requirements,in which exchange differences arerecorded in equity.

Capitalization of exchange differences isprohibited.

Fixed asset revaluations

Treatment of exchange differences

1 From January 1, 2005, these accounting principles and standards will be those applicable to the consolidated accounts of listedGroups of companies.

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Spain IAS US GAAP

The rights under financial lease contracts arerecorded as intangible assets at the cost ofthe related assets, and the total debt forlease payments plus the amount of thepurchase option are recorded as a liability. The difference between these two amounts,which represents the interest expense of thetransaction, is recorded under the “DeferredCharges” caption.Rights recorded as intangible assets areamortized over the useful life of the leasedasset.Deferred charges are taken to income by theinterest method.When the purchase option is exercised, thevalue of the recorded rights and the relatedaccumulated amortization is retired from theaccounts and is included in the value of theacquired asset.

As a general rule, research and developmentexpenses are expensed currently. However,they can be capitalized as intangible assetswhen they meet the following requirements: a) they are specifically itemized by project; b) the assignment, allocation and distribution

of the costs of each project are clearlyestablished;

c) there are sound reasons to foresee thetechnical success of these projects andthere is reasonable assurance as to theireconomic and commercial profitability;and

d) sufficient financing to ensure thecompletion of the various projects isreasonably guaranteed.

Research and development expensesrecorded as assets should be amortized assoon as possible and in any case within fiveyears from the conclusion of the research ordevelopment project which has beencapitalized.

The accounting for provisions for pensionsand similar obligations must include theexpenses incurred, based on the estimatesmade on the basis of actuarial calculations,for the purpose of providing sufficient in-house allowances for legal or contractualobligations, without prejudice to theallocation to the provision of the interestincome generated for the allowances.A transitional period has been established torecord a provision for the deficit existing onthe entry into force of the National Chart ofAccounts.

Lease contracts may be either OperatingLease or Finance Lease. The classification oflease contracts is done based upon ananalysis of the transfer of the substantialrisks and benefits associated with the use ofthe asset. Once a lease is classified as afinance lease, the contract should berecognized in the balance sheet of the lesseethrough the recording of an asset and aliability for an amount equal at thecommencement of the lease to the lower ofthe fair value of the asset (generally its cashvalue) and the value of the minimum leasepayments discounted at the implicit interestrate in the lease contract or, if this interestrate were not identifiable, at the incrementalrate of indebtedness of the lessee.The leased asset will be classified on thebasis of its nature, and will be amortizedover the useful life of the asset.

Research costs must be recognized as anexpense in the period in which they areincurred and should not be capitalized in asubsequent period. The development costs of a project may becapitalized if, and only if, the company is ableto demonstrate each of the following points;furthermore, they may only be capitalizedfrom the date on which the companycomplies with these points:a) the technical possibility of completing the

production of the intangible asset so thatit can be used or sold;

b) its intention to complete the intangibleasset in question in order that it may beused or sold;

c) its ability to use or sell the intangible asset;d) the manner in which the intangible asset

will generate probable income in the future;e) the availability of adequate technical,

financial and other resources to completethe development and to use or sell theintangible asset;

f) its ability to reliably evaluate the expenseassignable to the intangible asset during itsdevelopment.

The current service cost in respect of a definedbenefit plan must be expensed currently.Adjustments due to experience and tochanges in the actuarial assumptions and thecost of past services are recognized asincome or as a loss over the expectedremaining working lives of the employees,provided that they represent a variation ofover 10% with respect to the previouscalculation (or with respect to the fair valueof the assets assigned to the plan, if this ishigher). However, methods providing for afaster recognition of these adjustments andcosts are permitted (including that ofimmediate recognition).

The general recording method is similar tothat required under IAS. However, US GAAPhave certain very specific rules relating to theinitial classification of an Operating Lease orFinancial Lease transaction or of any kind ofleaseback transaction.

All research and development costs must beexpensed currently.

The recording method is very similar to thatrequired under IAS, but the legislation isextremely extensive, detailed and complex.

Recognition of research and development expenses

Recognition of pension commitments

Recording of leased assets

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Spain IAS US GAAP

This is not envisaged in Spanish legislation,except in the adaptation of the NationalChart of Accounts to constructioncompanies at which the application of thepercentage-of-completion method isobligatory, if certain conditions are met. Ifthese conditions are not met, in accordancewith the accounting principle of prudencethe completed contract method will be used.

Deferred tax assets and deferred taxliabilities are recorded using the incomestatement method. Accordingly, theexistence of a timing difference and,therefore, of a deferred tax asset or liability,is determined by differences in the allocationof expenses and revenues for tax andaccounting purposes. Deferred tax liabilities must be recognizedfor accounting purposes in all cases. Deferred tax assets are only recorded whenthere is reasonable evidence to suggest thatthey will be materialized in a period of notmore than 10 years, unless there aredeferred tax liabilities for equal or higheramounts with a similar materializationschedule.Deferred tax liabilities must be valued andrecorded at the tax rate prevailing in theyear in which the related timing differencearises. They may not be revalued foraccounting purposes if they materialize in thelong term.Tax assets arising from tax losses are onlyrecorded for accounting purposes whenthere is no reasonable doubt as to theirfuture recovery. These methods also apply tothe recording of tax relief and tax credits,which will be treated as timing differences.

When the outcome of a transaction relatingto the provision of services can be reliablyestimated, the revenues associated with thetransaction must be recognized by referenceto the percentage of completion of thetransaction at the balance-sheet date.When the outcome of a constructioncontract can be reasonably estimated, therevenues and costs associated with thecontract must be recognized as such byreference to the percentage of completion ofthe activity forming the subject matter of thecontract at the balance-sheet date. Anexpected loss on the construction contractshould be recognized as an expenseimmediately.When the outcome of a constructioncontract cannot be estimated reliably,revenue should be recognized only to theextent of contract costs incurred that it isprobable will be recoverable and contractcosts should be recognized as an expense inthe period in which they are incurred.

Deferred tax liabilities are recorded using thebalance-sheet, and not the income-statement, method.The balance sheet must always reflect thetemporary differences that arise due to theapplication of accounting and tax legislation.Deferred tax assets are recognized if theyare likely to be realized, without applicationof the 10-year time restriction under SpanishGAAP. Similarly, unused tax credits and reliefare recorded when there are reasonablegrounds to expect that they will be used inthe future.Tax assets must be recorded if it isconsidered that they are recoverable.The current and the deferred tax expensemust be recorded in the income statementas a period revenue or expense, exceptwhen it relates to:a) transactions or events that have been

directly recognized as assets or liabilitiesin the same or in a different period;

b) a business combination that constitutes anacquisition (in which case it will affect theamount of the goodwill arising on theacquisition).

For long-term construction contracts it ispreferable to apply the percentage ofcompletion method if the total costs can bereasonably estimated and there is sufficientinternal control to ensure that costs arecorrectly allocated. The completed contractmethod is obligatory where there are noreliable estimates or the inherent risks makeforecasting difficult.

As under IAS, deferred tax assets andliabilities are recorded by the liabilitymethod, which requires recognition of thetiming differences arising from application ofthe accounting and tax legislation in thebalance sheet.There is no deadline for recovery ofdeferred tax assets.A provision must be recorded forunrecovered deferred or other tax assetsunless recovery thereof is “more likely thannot”.Certain transactions, such as acquisitions ofcompanies and consolidation of subsidiariesor associated companies, give rise to therecognition of deferred tax assets andliabilities, although there are exceptions inUS GAAP accounting literature.

Deferred tax assets and liabilities

Recognition of revenues in long-term contracts

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Spain IAS US GAAP

Investments are recorded at acquisition cost.At least once a year and always coincidingwith the accounting close, the valuation ofinvestments will be reviewed and anynecessary value adjustments recorded if themarket value of the item in question is lowerthan its acquisition cost. The necessary valuation adjustments, if any,must be reflected by recording the relatedprovision to the allowance for diminution invalue, if they are not permanent in nature, orby directly reducing the asset in question, ifthey are permanent in nature.

Investments in Group and associatedcompanies are valued in the financialstatements of the Controlling Company atthe lower of cost or market, using thegeneral method indicated under thepreceding heading. However, for the purposeof valuing investments in Group andassociated companies, market value isdefined as the underlying book value of theownership interest adjusted by the amountof the unrealized gains disclosed at the timeof the acquisition and still existing at the dateof subsequent valuation.

Nonrefundable capital subsidies of all typesare recorded at the amount granted.They should be recorded on the liability sideof the balance sheet under the “DeferredRevenues” caption.They should be allocated to extraordinaryincome in proportion to the perioddepreciation on the subsidized assets.The subsidies for nondepreciable assetsshould be allocated to income in the year inwhich the related assets are sold or relievedfrom the accounts.

In individual financial statements, investmentsin subsidiaries and associated companies,regardless of whether these companies areexcluded from the scope of consolidation,can be carried by the following methods:a) Cost.b) Equity method.c) Recognition as a financial asset available

for sale (fair value).Alternative b) will foreseeably be eliminatedwith the entry into force of theImprovements Project for investmentsincluded in the scope of consolidation, whichis currently in progress.Other financial assets are initially recorded atcost. However, in subsequent valuationsfinancial assets held for trading and avalaiblefor sale financial assets must be recorded attheir fair values. Investments that will be heldto maturity and loans and receivablesoriginated by the enterprise will subsequentlybe valued at amortized cost. Real estate held for investment purposes isinitially recorded at cost. However, insubsequent valuations it may be recordedeither at cost or at fair value (in which caseit would not be depreciated and variations inthe fair value would be recorded in theincome statement).

A parent company may record in itsindividual financial statements investments inits consolidated or nonconsolidated Groupand associated companies by the equitymethod, at acquisition cost or by the methodof recording assets available for sale. Thepossibility of accounting for the companiesincluded in consolidation by the equitymethod will foreseeably be eliminatedfollowing the approval of the ImprovementsProject.

In order for subsidies to be recorded theremust be reasonable certainty that thecompany will meet the conditions entitling itto receive the subsidy and that the subsidywill be received.Subsidies will be systematically allocated toincome as the related costs are incurred,either as revenues or as a reduction in costs.Asset-related subsidies, includingnonmonetary subsidies (recorded at fairvalue) will be recorded as deferred revenuesor as a reduction of the net book value ofthe asset in question.

A distinction must be drawn betweenavailable-for-sale investments (which arerecorded at market value with the costdifference being allocated to the “OtherComprehensive Income” account), tradinginvestments (which are recorded at marketvalue and allocated to income) and held-to-maturity investments (which are investmentsin debt securities that are recorded atamortized cost). Temporary provisions forinvestments may not be recorded, but rathernonreversible write-downs in the case ofimpairments other than temporaryimpairments.

Investments in associated companies areinitially recorded at cost and subsequentlyaccounted for by the equity method.Normally consolidated financial statementsare prepared; however, if individual financialstatements are prepared, the investments insubsidiaries and associated companies arealways accounted for by the equity method.

Recorded as lower value of the related assetin the period in which they are received.They should be allocated to income as lessdepreciation of the subsidized asset.

Valuation of investments

Valuation of investments in group and associated companies

Capital subsidies

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Spain IAS US GAAP

Treasury stock acquired without an initialintention to retire them.- Shares of this typeare recorded on the asset side of the balancesheet at cost, a restricted reserve should berecorded for the amount of the treasurystock, and it is necessary to record a valueadjustment if cost is higher than the lowestof the following: underlying book value,average market price in the last quarter ofthe year or year-end market price.Treasury stock acquired for redemption.-Treasury stock acquired for redemptionshould be recorded on the liability side ofthe balance sheet as a reduction in equityonly when the requirements established incorporate legislation are met (Art. 170 ofthe Corporations Law).

Material prior years’ expenses and losses andrevenues and income should be recorded inthe income statement as extraordinaryexpenses or revenues, as appropriate.Nonmaterial expenses and losses andrevenues and income should be classified inthe income statement under the appropriatecaption. Errors may not be corrected with acharge to the beginning reserves balance.

The following evaluation methods will beused in fixed-asset swap transactions:a) The fixed asset received will be valued at

the net book value of the asset assigned,up to the limit of the market value of theasset received if this is less.

b) The assigned asset will be retired at itsnet book value.

If the market value of the asset received isless than the net book value of the assetdelivered, the related loss will be recorded inthe income statement.

Shares of treasury stock are never recordedas assets. They must be recorded as areduction of the equity of the issuingcompany, regardless of whether they areintended to be sold or retired.Gains or losses on transactions involvingtreasury stock constitute variations in equity,regardless of their nature and purpose, andcannot be recorded in the income statement.This method is applicable to shares of theissuing company acquired by the companyitself or by its subsidiaries.This standard does not affect treasury stockacquired in connection with employee stockoption schemes (a specific IAS standard isbeing prepared).

This requires that fundamental errorsrelating to prior years may be corrected witha charge to the beginning balance ofreserves, and the comparative informationmay be reconstructed (under the allowedalternative treatment, the correction of afundamental error should be included in netincome of the period. However, thisalternative will foreseeably be eliminatedwhen the Improvements Project comes intoforce).

In swaps involving assets of a similar nature,the item received is recorded at the fairvalue of the item delivered, plus anyadditional amounts that might have been paidin cash (similar to the Spanish regulations). Inthis case, no gain or loss is generated.In swaps involving assets of a differentnature, the item received is recorded at thefair value of the item delivered, plus anyadditional amounts that might have been paidin cash. In this case, a gain or a loss may begenerated, since it is considered that there isan effective capital gain/loss.An item of property, plant and equipmentmay also be exchanged for shares givingentitlement to assets of a similar or adifferent nature.

The cost of shares acquired must berecorded as a reduction of capital stock andadditional paid-in capital.Gains or losses on transactions involvingtreasury stock constitute variations in equity,regardless of their nature and purpose, andcannot be recorded in the income statement.

Corrections of material misstatements in thefinancial statements for a prior period giverise to modifications in the financialstatements for said period and do not affectthe calculation of net income for the currentperiod.Items presented as prior years’ adjustmentsshould be recorded in the financialstatements for a single period as adjustmentsto the opening balance of retained earnings.

Generally speaking, asset exchangetransactions are recorded at fair value,except where the assets exchanged are of asimilar nature, there is no reasonableestimate of fair value or the transactions inquestion are between related parties.In the first of these cases, the asset receivedis recorded at fair value and the cost value ofthe asset delivered is retired. In this case,both the losses and the gains on thetransaction are recorded in full.In other swaps the asset received is recordedfor the net book value of the asset delivered,except (1) where the exchange gives rise toa loss, in which case the loss is recognized;or (2) where there is a cash payment in theexchange transaction, in which case therecipient of the payment records a portionof the payment as a gain.

Exchange of assets

Treasury stock

Prior years’ adjustments

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Spain IAS US GAAP

For tangible fixed assets which, as a result oftheir use over several years, requireextraordinary repairs upon completion of ausage cycle exceeding one year, the revenueand expense matching principle requires aprovision to be recorded for each annualportion of the estimated amount of therepair to be made. Accordingly, each yearthe expense is charged to income based onthe amount estimated for the year of thecost of this repair. For this purpose a“Provision for Major Repairs” will berecorded to meet the expense of the repairin the year in which it should be made.

There is no specific guide for the treatmentof the biological assets, but rather generalaccounting standards and principles areapplied to them.

No provisions may be recorded for majorrepairs. However, if a major repair involvesthe replacement of the main components ofcertain items of property, plant andequipment, and if these components arerecorded separately and are depreciated at afaster rate than the main item, thereplacement cost is recorded as a separateasset and the asset replaced is retired fromthe books. The expense of the repair itself isexpensed.

The company must only record a biologicalasset when:a) The company controls the asset as a

result of past events.b) The company will probably obtain future

income associated with the asset.c) The fair value or cost of the asset can be

reliably calculated.Biological assets must initially be recorded atthe date of each balance sheet at their fairvalue less the estimated point of sale costs,unless the fair value cannot be obtained, inwhich case these assets would be valued atcost net of the related accumulateddepreciation/amortization and of any lossesdue to wear and tear.

Currently several methods can be used torecord major repair expenses: (1) the“Expense as Incurred Method”, in whichrepair expenses are charged to income asthey are incurred; (2) the “ComponentDepreciation Method”, in which a distinctionis drawn between the costs of tangible fixedassets that must be depreciated over theiruseful lives and those of assets which will beperiodically replaced; (3) the “Defer andAmortize Method”, in which the expensesincurred are capitalized and depreciatedthrough the date of the next major repair;and (4) the “Accrue in Advance Method”, inwhich the estimated cost of the next repairis capitalized and the related provision isrecorded. At the date of the repair, thedifference between the cost provisioned andthe actual cost is taken to income.The AICPA will shortly issue a newStatement of Position (SOP) which will limitthe recording of major repairs to the“Component Depreciation” method.

In a very limited number of cases inventoriescan be recorded at their net realizable value(sale price net of estimated selling expenses)provided that this value is higher than cost atthe balance sheet date. Biological assets arerecorded at their net realizable value only if: a) The inventories are interchangeable.b) There is a market and a market price for

them.c) They can be sold without the need for any

additional processing or significantdisposal costs.

d) It is difficult to obtain the cost of theinventories.

These requirements are normally only met inthe case of energy traders and companies inthe agricultural industry.

Note: The aim of this study is to make a preliminary comparison of the differences between accounting regulations in Spain, IAS and the US, but it is not a complete or exhaustive analysis of all the existing differences.

Major repairs

Biological assets

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Law 19/1989 also introduced, for the firsttime in Spanish mercantile legislation, thehitherto unrecognized concept of acorporate group.

Although the Commercial Code does notdefine a corporate group, the 1989legislation states that a mercantile companymust prepare consolidated annual financialstatements and a consolidated managementreport if it owns shares of another companyand it is in any of the following situations:

– that it has a majority of the voting rightsattached to the other company’s shares;

– that it is empowered to appoint or dismissa majority of the members of the othercompany’s Board of Directors;

– that it effectively has, by virtue ofagreements with other shareholders, amajority of the voting rights attached tothe other company’s shares; or

– that it has appointed, by use of its votingrights, a majority of the members of theother company’s Board of Directors inoffice when the consolidated financialstatements have to be prepared and duringthe two immediately preceding years.

In the cases envisaged above, the globalintegration method of consolidation must beused in preparing the consolidated financialstatements.

Law 19/1989 also states that if a companyincluded in a consolidated group managesanother company jointly with one or morecompanies outside the group, the managedcompany can be included in the consolidatedfinancial statements by the proportionalintegration method of consolidation.

This Law also stipulates that if a consolidatedcompany exercises notable influence on themanagement of another company outside thegroup with which it is associated by virtue ofa shareholding, such shareholding must becarried by the equity method in theconsolidated balance sheet under anappropriately captioned separate heading.

For the purposes of the preceding paragraph,notable influence on management is legallydeemed to exist if the first company owns atleast 20% of the other company’s unlistedcapital stock or, if the other company islisted on the Stock Exchange, at least 3%thereof.

VI. Consolidation

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Legally authorized restatements of carryingvalues are an exception to the general costbasis principle established by the CommercialCode and the National Chart of Accounts,and should be interpreted as adjustmentsauthorized by the Government to partiallyoffset the effect of inflation in past years inSpain.

The latest restatement was authorized byRoyal Decree-Law 7/1996, on urgent taxmeasures and measures to foster andderegulate economic activity.

VII. Restatement legislation

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The Commercial Code states that thefootnotes must complete, amplify andcomment on the information in the balancesheet and in the income statement, and addsthat a statement of changes in financialposition must be presented if legallyrequired.

The Corporations Law specifies theminimum contents of the footnotes, andboth this Law and the National Chart ofAccounts state that the footnotes are anintegral part of the annual financialstatements.

The footnotes must contain, inter alia, thefollowing information:

– Methods of valuation of the various itemsin the financial statements and methodsused to compute valuation provisions.

– Name, address and legal form ofcompanies in which the company is ashareholder or in which it directly orindirectly owns at least 3% of the investeecompany’s capital stock, if listed, or 20%, ifunlisted, disclosing the capital, reserves andincome/loss of the investee (if any seriousharm is caused to such companies bydisclosure of this information, it may beomitted, provided that the omission isdisclosed).

– Statement of changes in financial position.

– Variations in fixed assets and start-upexpenses accounts during the year.

– Classes of shares, if more than one, statingthe number and par value of the shares ofeach class.

– Redeemed stock, convertible debenturesand bonds or similar rights.

– Secured corporate debts or corporatedebts with a residual term of more thanfive years.

– Guarantees provided to third parties,without prejudice to their recognition on theliability side of the balance sheet, if applicable.

– Commitments for pensions and to Groupcompanies.

– Breakdown of net sales by area of activityand geographically defined market (if thisinformation is likely to cause serious harmto the company, it can be omitted,provided that the omission is disclosed).

– Average number of employees, bycategory, together with the year’spersonnel expenses.

– Difference between book income or lossand the tax base as a result of valuations inaccordance with tax rules. Prepaid anddeferred taxes.

– Salaries, per diems and other remunerationearned during the year by the directors,and liabilities for retirement pensions orpayments of insurance premiums forformer or current members of the Boardof Directors. These must be disclosed onan overall basis, by type of payment.

– Advances and loans to directors, disclosinginterest rates and main characteristics, andguarantee obligations assumed on their behalf,all on an overall basis for each category.

Additionally, the Spanish National Chart ofAccounts establishes in the rules for thepreparation of financial statements that thefootnotes must include any additionalinformation required to facilitatecomprehension of the financial statements, sothat they give a true and fair view of theCompany’s net worth, financial position andresults of operations. Lastly, various resolutionsof the Spanish Accounting and Audit Institute,industry-specific adaptations of the NationalChart of Accounts and tax legislation establishadditional disclosure requirements.

VIII. Footnote disclosure requirements

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215

1. Audit LawThe First Additional Provision of Law19/1988 made the audit of financialstatements for financial years beginning afterJuly 16, 1988, obligatory for all companiesand entities, regardless of their legal form,which are in any one of the followingsituations:

1. Companies whose shares are listed on aSpanish stock exchange.

2. Companies that issue debentures for saleto the public.

3. Companies engaging habitually in financialintermediation, including companies actingas commission agents and stockbrokers(even if operating as individuals), and allfinance companies and entities required tobe registered in the relevant registers ofthe Ministry of Economy and of the Bankof Spain.

4. Companies whose corporate purposeincludes any of the activities regulated bythe Private Insurance Law (Law 33/1984),within the regulatorily defined limits.

5. Companies receiving subsidies or financialaid from, or performing work for, orproviding services or supplying goods to,the State or Government agencies, withinthe regulatorily defined limits (not yetdefined).

6. Enterprises, including cooperatives andother entities, that exceed certain limits tobe defined by the Government.

At present, the limits referred to in theprevious paragraph are those establishedfor the purposes of preparing the abridgedbalance sheet (see following Section).

Royal Decree 1636/1990, enacting the AuditLaw Regulations, established the same limitsfor insurance companies and cooperatives asthose set in the Corporations Law; however,all life and third-party liability insurancecompanies must have their annual financialstatements audited.

2. Corporations LawThe Corporations Law made audits of annualfinancial statements obligatory for allcorporations (“sociedades anónimas”),except those authorized to file abridgedbalance sheets.

The corporations which can prepareabridged balance sheets are those which havemet at least two of the following threeconditions in two consecutive years at thebalance sheet date:

1. That total assets do not exceed g 2,373,997.81.

2. That net sales for the year do not exceedg 4,747,995.63.

3. That the average number of employeesduring the year does not exceed 50.

IX. Audit requirements

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216

X. Financial statement publication requirements

Under the Corporations Law, companies arerequired to file their annual financialstatements with their local MercantileRegister within one month from approvalthereof, together with a certificate of theresolutions adopted by the shareholders’meeting approving the financial statementsand the proposed distribution of income,and copies of each financial statement, of themanagement report and of the auditors’report (if the company is required to beaudited or was audited at the request ofminority shareholders).

The Mercantile Register, a public agency,“publishes” the corporate documentationfiled with it by certifying the entries made bythe Registrars, or by a certified extract, orby issuing copies of the entries made anddocuments deposited with it, all inaccordance with the provisions of theCommercial Code.

Listed companies are further required(under Securities Market Law 24/1988) tofile copies of their financial statements andrelated auditors’ report with the NationalSecurities Market Commission.

The official records and documentation filedwith the Mercantile Register and theNational Securities Market Commission maybe inspected by the general public.

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217

Exhibit IBalance sheet as of December 31, 20XX and 20YY (currency: Euros)

DUE FROM SHAREHOLDERS FORUNCALLED CAPITAL (A)

FIXED AND OTHER NONCURRENT ASSETS:Start-up expensesIntangible assetsR&D expenses, licenses, trademarks, patents, etc.GoodwillComputer softwareLeased assignment rightsDepreciationTangible fixed assetsLand and buildingsProduction equipment and machineryOther equipment, office furniture and fixturesAdvances and construction in progressOther tangible assetsProvisionsDepreciationFinancial investmentsHoldings in Group companiesHoldings in associated companiesLoans to Group companies and associated companiesOther long-term financial investmentsOther loansLong-term deposits and guarantee deposits providedProvisionsTreasury stock

Total fixed and other noncurrent assets (B)

DEFERRED CHARGES (C)

CURRENT ASSETS:InventoriesRaw materials and supplies and replacement partsFinished and semi-finished productsProvisionsAccounts receivableTrade receivablesReceivable from Group and associated companiesOther accounts receivablePersonnelPublic AdministrationsProvisionsShort-term financial investments Holding in Group and associated companiesLoans to Group and associated companiesOther loansShort-term deposits and guarantee deposits providedShort-term treasury stockCashPrepaid expenses

Total current assets (D)

TOTAL ASSETS (A+B+C+D)

SHAREHOLDERS’ INVESTMENT:Subscribed capital stockPaid-in surplusRevaluation reserveOther reserves:Legal reserveReserve for treasury stockReserves for shares of the controlling companyBylaws reservesOtherPrior years’ income/lossIncome/loss for the yearInterim dividends

Total shareholders’ investment (A)

DEFERRED REVENUES: Capital subsidiesExchange gains

Total deferred revenues (B)

PROVISIONS FOR CONTINGENCIES AND EXPENSES:Provisions for pensions and similar obligationsProvision for taxesOther provisions

Total provisions for contingencies and expenses (C)

LONG-TERM DEBT:Issuance of debentures and other marketable

securitiesPayable to credit entitiesPayable to Group and associated companiesOther payables Uncalled capital payments payableProvision to other operationsAdvanced revenues and advance interest collected

Total long-term liabilities (D)

CURRENT LIABILITIES:Issuance of debentures and other marketable

securitiesShort-term debt with credit entitiesShort-term debt with Group and associated companiesTrade accounts payableOther payables:

Public AdministrationNotes payableOther payablesCompensation payable

Short-term deposits and guarantee deposits providedProvision for other operationsAdvanced revenues and advance interest collected

Total current liabilities (E)

TOTAL SHAREHOLDERS’ INVESTMENT AND LIABILITIES (A+B+C+D+E)

ASSETS 20XX 20YY SHAREHOLDERS’ INVESTMENT AND LIABILITIES 20XX 20YY

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218

Exhibit IIStatements of income for the years endedDecember 31, 20XX and 20YY

Decrease in finished goods and work-in-processPurchasesPersonnel expensesPeriod depreciation and amortizationVariation in operating provisionsOther operating expenses Net revenuesInterest and similar expensesVariation in provisions for financial investmentsExchange losses

Financial revenuesOperating revenuesVariation in provisions for intangible assets, tangible

fixed assets and control portfolioLosses on intangible assets, tangible fixed assets and

control portfolioLosses on transactions involving treasury stock and

own debenturesExtraordinary expensesPrior years’ expenses and lossesExtraordinary revenuesRevenues before taxIncome taxIncome for the year

Net revenuesIncrease in finished products and work-in-processCapitalized expenses of in-house work on fixed assetsOther operating revenues

Operating lossIncome from shareholdingsIncome from other marketable securities and loansOther interest and similar revenuesExchange gainsFinancial lossOrdinary lossesGains on disposal of intangible assets, tangible fixed

assets and control portfolioGains on transactions involving treasury stock and

own debenturesCapital subsidies transferred to income for the yearExtraordinary revenues Prior years’ revenues and income

Extraordinary lossesLosses before tax

Losses for the year

DEBIT 20XX 20YY CREDIT 20XX 20YY

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L a b o r a n d s o c i a l s e c u r i t y r e g u l a t i o n s

221

Laborsecurity

and

regulationssocial

I. Introduction 223

II. General rules 2241. Non-discrimination 2242. Minimum age 2243. Form of contract 224

III. Contracts 2251. Types of contract 225

a) Contracts for a specific duration 225

b) Training contracts 226c) Contract to promote

hiring for an indefinite period 226

d) Part-time contract 227

2. Trial period 2273. Working hours 2274. Wages and salaries 228

IV. Termination of employment contracts 2291. Dismissals 2292. Classification of the

dismissal 230

V. Senior executive contracts 232

VI. Contracts with temporary employmentagencies 233

VII. Employee representation 2341. Functions of workers’

committees 2342. Collective labor

agreements 234

VIII. Acquisition of a Spanish business 235

IX. Relocation of workers under a crossborderworking arrangement 236

X. Visas and work and residence permits 2371. Nationals from

non-EU countries 2372. Nationals from EU

Member States 238

XI. Social security system 239

XII. Prevention of occupational risks 242

Labor and social security regulations

7

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223

The basic law in this field is the Workers’Statute (Legislative Royal Decree 1/1995),which defines the respective rights ofemployees and employers, general terms oflabor employment contracts, procedures fordismissal and collective bargaining rules.

In addition, there are specific regulations fordifferent industries and certain groups ofemployees such as commercialrepresentatives and senior managementpersonnel.

Another important source of labor law iscollective labor agreements, which may benegotiated at the company level (or morereduced scope) or by industries at the Statelevel or more reduced territorial scope.

Individual employment contracts also containnumerous mandatory provisions whichcondition labor relationships.

There are also detailed regulations affectingworking hours and occupational health andsafety in specific industries.

Also significant in this field is LegislativeRoyal Decree 5/2000, of August 4, approvingthe Revised Law on Labor Infringements andPenalties. The Legislative Royal Decreeimposes for the most serious cases fines ofup to g 90,151.82 (in the legislation onprevention of occupational risks, there arefines of up to g 601,012.10).

Law 12/2001, on Urgent Measures toReform the Labor Market to increase andimprove the quality of employment, whichamends various articles of the Workers’Statute and other labor provisions andregulates permanent employment promotioncontracts and part-time contracts shouldalso be noted.

Additionally, Law 39/1999 on theReconciliation of the Work and Family Livesof Female Employees was published onNovember 5, 1999, signaling a major advancein promoting equality between men andwomen and introducing a range of measuresdesigned to make family responsibilitiescompatible with the possibility of promotionand advancement at work. This Law hasbeen implemented in part by Royal Decree1251/2001 regulating Benefits under theSocial Security System for Maternity and forRisks during Pregnancy.

Law 29/1999 introduced changes (to Law14/1994) as regards temporary employmentagencies, in an attempt to have the terms ofemployment enjoyed by employees of clientcompanies also applied as far as possible tothe workers supplied to them to meet theirtemporary needs, so as to avoid biased anddiscriminatory practices.

I. Introduction

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224

The main general rules of Spanish labor laware summarized below:

1. Non-discriminationThe Spanish Workers’ Statute generallyprohibits discrimination in hiring or in theworkplace based on sex, marital status, age,race, social status, religion or politicalideology, joining a labor union or otherwise,or on the basis of the different officiallanguages in Spain.

This protection is also expressly extended toforeigners (i.e., those other than Spanish orEU nationals) under Organic Law 4/2000, ofJanuary 11, amended by Organic Law 8/2000and also by the recent Organic Law 14/2003on the Rights and Freedoms of Foreigners inSpain and their Social Integration.

It also prohibits discrimination because ofphysical or mental handicaps if the candidateis otherwise suitable for the job in question.

Directive 2002/73/EC of the EuropeanParliament and of the Council, of September23, 2002, was published in 2003, amendingDirective 76/207/EEC, on the application ofthe principle of equal access to work andworking conditions of men and women. Thisnew provision expressly defines the termsdirect discrimination, indirect discrimination,harassment and sexual harassment, all ofwhich are prohibited because they violatethe principle of equal treatment of men andwomen. The Member States are alsoencouraged to include in their respectivelaws the measures necessary to avoiddiscrimination at the workplace.

Law 33/2002, of July 5, and Law 62/2003, ofDecember 30, introduce the principle ofequal payment of men and women, thusamending article 28 of the Workers’ Statute,which only mentioned equal salary, andincluding the possibility of establishingcompensation measures in favor of somegroups.

2. Minimum age Persons under the age of 16 cannot work.There are also certain protective measuresfor persons under the age of 18, such as theprohibition against such persons workingovertime or at night, or in certain hazardousor unhealthy activities or jobs.

3. Form of contractIn general the contract may be made verballyor in writing. However, in certain cases thecontract should necessarily be made inwriting (for example, part-time andtemporary contracts and training contractswith a duration of more than four weeks).

If this requirement is not met, the contract isunderstood to be permanent and full time,unless otherwise evidenced.

II. General rules

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225

1. Types of contractAccording to the duration of theemployment relation, employment contractsmay be made for an indefinite term or for aspecific duration. In general, contracts aremade for an indefinite term and their unfairtermination entitles the worker to receivethe indemnifications established by law.

Temporary contracts are therefore generally“circumstance-driven”; i.e., except in certainspecific cases, there must be circumstancesjustifying such temporary hiring. If the typeof temporary contract does not conform toa cause established by law, the contract isdeemed to be permanent.

Set forth below are the main types ofcontracts and their principal features.Contracts for a specific duration should bedifferentiated from training contracts.

a) Contracts for a specific duration

The first group, according to the causeestablished by law, includes contracts for aspecific project or service, casual contractsdue to production overload or backlog andcontracts to substitute employees entitledto return to their job. All these contractsshould be made in writing and the causefor their temporary nature should beplaced on record. Otherwise, the contractwill be deemed to be made for anindefinite term, unless evidence of itstemporary nature is provided.

If the employment contract is made for aterm of more than one year, the partyintending to terminate the contract shouldserve notice at least fifteen days in advanceor, as the case may be, give the advancenotice established in the applicableCollective Labor Agreement.

III. Contracts

Type Cause Term Observations

Contract for aspecific projector service

Casual contractdue toproductionoverload orbacklog

Contract tosubstituteemployeesentitled toreturn to theirjob

In principle uncertain. Itwill depend on the time ofperformance of thespecific service or project.

Maximum of 6 monthswithin a period of 12months (may be extendedby a sectorial collectiveagreement for 18 monthsbut it may never exceed3/4 of that period, or themaximum term of 12months).

From the beginning of theperiod until the return ofthe replaced worker orexpiry of the termestablished for thesubstitution.

Performance of a specificindependent and self-contained service or project within thecompany’s business.

To meet market needs,production overload orbacklog.

To substitute workersentitled to return to theirjob by provision of law, ofa collective agreement orof an individual contract.

It should mention thework and project clearlyand precisely.Its termination entitles theemployee to receive anindemnification of 8 daysof salary per year worked.

It should mention thework and project clearlyand precisely.Its termination entitles theemployee to receive anindemnification of 8 daysof salary per year worked.

One of the formalities isthat it should contemplatethe name of the replacedworker and the cause forhis substitution.

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b) Training contracts

Set forth below are the main features oftraining contracts:

c) Contract to promote hiring for anindefinite period

Law 12/2001 contemplates a type ofcontract to promote hiring for an indefiniteperiod. It applies to the following groups:

a) Unemployed workers from any of thefollowing groups:

– Young people aged 16 through 30.

– Unemployed women, if hired for jobsor occupations in sectors with lowerproportion of female employees.

– The unemployed aged over 45.

– Unemployed workers who have beenregistered as job seekers at theNational Employment Institute (INEM)for at least six months.

– The disabled.

b)Workers who, on the date of signing anew contract to promote hiring for anindefinite period, were employed at thesame company under a temporarycontract, including trainee contracts,arranged before December 31, 2003.


226

Contract Purpose Duration To be noted

Workexperiencecontract

Traineecontract

Minimum of 6 months andmaximum of 2 years. Itmay be extended twice,always with the limit oftwo years.Once the term hasexpired, the same personmay not be hired againunder the same type ofcontract by the same or byanother company.

Minimum of 6 months andmaximum of 2 years (itmay be extended up to 3years under a collectivebargaining agreement).Once the term hasexpired, the same personmay not be hired againunder the same type ofcontract by the same oranother company.

Contracts with personswith a university degree orhigh or middle-levelprofessional qualificationsor an officially recognizedequivalent degreequalifying them to performtheir profession.

To acquire the necessarytheoretical and practicaltraining necessary for acertain post of work.

As a general rule, notmore than 4 years mayelapse from thecompletion of therespective studies. The minimum salary to bepaid will be between 60%and 75% of the salaryestablished in thecollective agreement for aworker holding the sameor an equivalent post (firstand second year of thecontract).

Made with workers from16 to 21 of age who donot have the qualificationsnecessary to obtain awork experience contract.According to the payroll, a maximum number oftrainee contracts isestablished.The employer undertakesto provide theoreticaltraining that will never beless than 15% of themaximum working hours.The contract will bedeemed ordinary if thetheoretical trainingobligations are breached.

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227

If a contract of this type is terminated onobjective grounds and its termination wasthen adjudged to be unjustified, theindemnity would be 33 days’ pay per yearworked, with periods of less than one yearbeing prorated by month, up to amaximum of 24 months’ pay.

A new employment promotion programfor the year 2004 has been approvedrecently. Under this Law, companies thatemploy on a permanent basis unemployedworkers included in any of the groupscontemplated in said provision or thattransform already existing temporarycontracts into permanent contracts areentitled to the discounts on the employercontribution to Social Security for ordinarycontingencies.

d) Part-time contract

Employment contracts may be made full-time or part-time. The part-timecontract, after Law 12/2001 came intoforce, is defined as the contract in whicha number of hours of work has beenagreed with the worker per week, monthor year, less than the working hours of a“comparable full-time worker” (this termmeans a full-time worker of the samecompany and workplace who performsidentical or similar work). This newceiling replaces the previous 77% of thefull-time working hours established by lawor collective agreement. A part-timecontract is also that made with areduction of from 25% to 85% of theworking hours and salary when theworker meets the conditions required tobe entitled to the contributive retirementpension of Social Security, except asregards his age, although this should be amaximum of five years less than thatrequired.

Part-time workers have the same rights asfull-time workers, considering the existenceof rights recognized proportionally,according to the time worked.

2. Trial periodCollective labor agreements may establishtime limits for trial periods, which shouldalways be stipulated in writing. Otherwise,trial periods cannot exceed:

– Six months for graduate technicians.

– Two months in all other cases.

In companies with fewer than 25 employees,the trial period for non-graduate employeescannot exceed three months.

Trainee contracts also have their specific trialperiods. The special employment relations(domestic workers, senior executives, etc.)have their own maximum periods.

3. Working hours– Working hours are as specified in collective

labor agreements or individual employmentcontracts.

– The maximum statutory working week is40 hours of time actually worked,calculated on an annualized average basis.The irregular distribution of the workinghours throughout the year may be agreedby a collective agreement or by agreementbetween the company and the workers’representatives

– Overtime can be compensated as time offwithin four months from the date onwhich the overtime was worked. Ifpayment for overtime is agreed upon in thecollective labor agreement or individualcontract, the hourly overtime rate cannotbe less than the normal hourly rate.

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228

– Other than in exceptional cases, overtime(i.e. hours worked in excess of themaximum statutory or agreed workinghours) is voluntary and, if paid, cannotexceed 80 hours per year.

– Overtime compensated with time off doesnot count towards the 80-hour annualceiling.

– A minimum one and a half days off perweek is mandatory (usually Saturdayafternoon and all day Sunday, or all daySunday and Monday morning) which maybe accumulated for periods of up tofourteen days. Workers under 18 areentitled to two uninterrupted days off perweek.

– Central Government, AutonomousCommunity authorities and the respectivemunicipal authorities cannot designatemore than 14 public holidays a year. TheGovernment can move national holidaysfalling on weekends to the followingMonday and all public holidays that fall on aSunday will be moved to the followingMonday.

– An annual paid vacation of 30 calendar daysis obligatory. The worker should know thecorresponding dates at least two months inadvance.

– Employees are entitled to paid leave ofabsence in certain circumstances such asmarriage (15 days), union duties,unavoidable public and personal duties,breastfeeding, childbirth, moving home,serious illness, hospitalization or death ofrelatives to the second degree ofconsanguinity, and so on.

– Directive 2003/88/EC of the EuropeanParliament and the Council, of November4, 2003, has recently been passed relating

to certain aspects of working time, whichestablishes new provisions for theprotection of working time, particularlyrelating to work on shifts and at night (thisdirective will come into force on August 2,2004). All the articles of the Directive aregoverned by the general principle ofconformance of the work to the worker.

This Directive establishes, as a new feature,the obligation for Member States to adoptthe measures necessary for the employerwho regularly uses night workers to reportthis to the competent authorities.

4. Wages and salariesThe official minimum wage is established bythe Government each year, and in 2004 itamounts to g 6,447.00 for persons over 18years of age (including 12 monthly and 2extra payroll payments).

However, the minimum wages for each jobcategory are usually negotiated in collectivelabor agreements.

Salaries cannot be paid at intervals of morethan one month.

At least two extra payroll payments must bepaid each year: one at Christmas and theother on the date stipulated in the relevantcollective labor agreement (generally beforethe summer vacation period). Thus, anemployee’s gross annual salary is usuallyapportioned in 14 payroll payments; however,payment in 12 monthly installments can beagreed on in a collective agreement.

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229

1. DismissalsAn employment contract may be terminatedfor certain reasons which normally do notgive rise to a dispute, such as mutualagreement, death, expiration of the contractterm, retirement, and so on.

In addition, the law regulates three principalgrounds for dismissal of an employee:

– Collective layoff

– Objective causes

– Disciplinary action

The following table shows the causes andmain features of the various types of dismissal:

IV. Termination of employment contracts

Dismissal Legal causes Observations

Collectivelayoff

Objectivecauses

Disciplinaryaction

Economic, technical, organization orproduction causes, whenever these affect, in a90-day period, at least:• The entire payroll, if the number of workers

affected is more than 5 and the business ofthe company ceases entirely;

• At least 10 workers in companies with lessthan 100 employees;

• 10% of the employees in companies withfrom 100 to 300 workers;

• More than 30 workers, in companies with300 or more employees.

• Supervening or known ineptitude of theworker.

• Inability of the worker to adapt to thechanges in his job.

• Objectively evidenced need to cancel postsof work due to economic, technical,organization or production reasons.

• Justified by intermittent absences from work,reaching certain percentages of working days.

• In indefinite-term contracts arranged directlyby public authorities or by non-profit-makingentities to implement certain public plansand programs, for want of the appropriateallocation to enable them to continue.

Serious and wilful breach of contract by theworker:• Repeated and unjustified absenteeism.• Insubordination or disobedience.• Physical or verbal abuse towards the

employer.• Breach of contractual good faith or abuse of

trust.• Wilful diminution in the ordinary job

productivity.• Habitual drug or alcohol abuse which

adversely affects job performance.

The termination is performed through anadministrative procedure. Dismissals will onlybe possible if the Labor Authorities approvethem by an administrative ruling.The procedure includes the obligation ofgranting a period of consultations with theworkers’ representatives and, if none, with theemployees directly.The consultations are intended to reach anagreement for the termination of thecontracts. Nevertheless, the Labor Authoritiesmay approve the dismissals even if noagreement is reached.The legal indemnification consists of 20 days ofsalary per year worked, up to a maximum of12 months of salary or more if so agreed.

The employer should serve at least 30 days ofadvance notice in writing.The advance notice may be replaced bypayment of the salaries for said period.The indemnification (20 days of salary per yearworked up to a maximum of 12 months ofsalary) should be made available to the workersimultaneously with the written notice ofdismissal.It may be appealed as it if were a disciplinarydismissal.

The employee must be given written notice ofdismissal, stating the causes and effective dateof dismissal.If a workers’ representative or labor uniondelegate is dismissed, an adversary procedureshould be instituted. If the worker is a laborunion member, the union delegates should begranted a hearing. These safeguards may beincreased by Collective Agreement.If these formalities are not met, a furtherdismissal may be performed in a term oftwenty days paying the employee the salariesthat accrue in the meanwhile, with effects asof the date of the new notice.

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2. Classification of thedismissalA worker dismissed for any objective causeor disciplinary action may appeal the decisionmade by the employer before the LaborCourts although a conciliation hearing must

first be held between the worker and theemployer to attempt to reach an agreement.This conciliation hearing is held before anadministrative body of conciliation andarbitration.

The dismissal will be classified in one of thethree categories set forth below:


230

Classification Events Effects

Fair

Unfair

Null

Conforming to law.

No legal cause exists for the dismissal or theprocedure adopted is incorrect.

• Its cause is a form of discrimination.• It implies a violation of fundamental rights• It affects pregnant workers during the period

of suspension of the contract due tomaternity, risk during pregnancy, adoption orfostering, reduction of working hour to carefor children or handicapped persons orreduction for breastfeeding.

• Failure to comply with the formalities forobjective dismissals (unless no advancenotice is served).

Disciplinary dismissal: Validation of thedismissal, the worker is not entitled toindemnification.

Objective dismissal: Payment of 20 days ofsalary per year worked, up to a limit of 12months.

The employer may either:• reinstate the worker,• or terminate his contract, paying

indemnification of 45 days of salary up to amaximum of 42 months of salary.

If the dismissed worker is a workers’representative, the choice will rest with him.

• Immediate reinstatement of the worker.• Payment of the unpaid salaries.

For cases of dismissals declared to beunjustified, the obligation to pay salariesduring the proceeding, with the option ofpaying compensation from the date ofdismissal until notification of judgment, oruntil the worker finds other employmentbefore judgment is passed, or until the dateof deposit of the compensation (and salariesduring the proceeding) at the Labor Court isalso applicable where the followingrequirements are met:

– The company recognizes the dismissal tobe unjustified.

– The worker is offered the legalcompensation and salaries during theproceeding.

– The respective amount is deposited atCourt at the worker’s disposal.

– The dismissed worker is so informed.

– He accepts the compensation orsubsequent declaration of unjustifieddismissal.

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231

However if the deposit is made at Courtwithin 48 hours after the dismissal, salariesduring the proceeding will not be payable.

Salaries during the proceeding will also bepayable if the dismissal is declared unjustifiedand reinstatement is the option taken.

However, if the worker has receivedunemployment benefit, the employer mustdeduct the benefit paid by the managemententity from the salaries during theproceeding, and refund its amount to thelatter.

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As mentioned earlier, special rules apply tocertain categories of employees, includingmost notably senior executives and theirspecial labor relationships, which aregoverned by Royal Decree 1382/1985, ofAugust 1.

A senior executive is an employee who hasbroad management authority in relation tothe company’s general objectives andexercises that authority independently andwith full responsibility, reporting only to thecompany’s governing body.

The terms of employment for suchexecutives are subject to fewer constraintsthan those for ordinary employees.

As a general rule, the parties (employer andsenior executive) have a wide margin ofmaneuver in defining their relationship bycontract.

Senior executives can be dismissed withoutcause (i.e., contractual withdrawal byemployer), serving notice at least 3 monthsin advance, in which case they are entitled toan indemnity of seven days’ pay per yearworked, up to a maximum of six months’pay, or such other indemnity as may havebeen agreed on.

The senior executive may freely cancel hiscontract serving at least three months ofadvance notice.

Certain causes for cancellation are classifiedwhich entitle the senior executive to theagreed indemnity and, failing an agreement,that established for the event of cancellationof the contract unilaterally by the employer.

Alternatively, a senior executive can bedismissed on any of the grounds stipulated ingeneral labor legislation (objective causes,disciplinary reasons).

If the dismissal is adjudged to be unjustified,the senior executive is entitled to 20 days’pay per year worked, up to a maximum of 12months’ pay, unless otherwise agreed to bycontract.

It should be noted that the statutoryminimum indemnity for senior executives islower than that for ordinary employees.However, in practice senior executivecontracts usually provide for indemnitypayments that are higher than the statutoryminimum.

V. Senior executive contracts

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In line with the general guidelines establishedby the European Union, Law 14/1994regulated for the first time in Spain theactivities of temporary employment agencies,which involve supplying manpower to theirclient companies to cover their temporaryneeds. Law 31/1995, on the Prevention ofOccupational Risks subsequently madechanges to Law 14/1994 as regards theliability of client companies.

The reform of the Law on TemporaryEmployment Agencies by Law 29/1999provides greater legal certainty to theworkers of companies of this kind, in theirlabor relationships with client companies andencourages job security and improves theirpay. Accordingly, the Spanish Parliament hasplaced workers from temporary employmentagencies on the same footing as employeesof client companies in terms of minimum pay.Disclosure obligations to employeerepresentatives are also extended.

Pursuant to Law 29/1999, a manpowersupply contract (statutorily defined as acontract between a temporary employmentagency and a client company under whichworkers are supplied to provide services atthe latter) can be concluded in the samecircumstances, subject to the sameconditions and requirements, and for thesame term as those relating to a fixed-termcontract entered into by the client companypursuant to the Workers’ Statute.

The latest reform introduced by Law12/2001 in the area of contracts withtemporary employment agencies permits a temporary employment agency to enterinto an employment contract with a workerto cover successive manpower supplycontracts with different client companies solong as the manpower supply contracts are

fully stipulated when the employmentcontract is signed and, in all cases, theyaddress one of the situations justifying thehiring of casual labor under Article 15.1.b) ofthe Workers’ Statute, with each supply ofmanpower having to be formalized in theemployment contract.

The Temporary Employment Agency Lawestablishes various events in whichcompanies are unable to enter intomanpower supply contracts:

– To replace workers on strike in the usercompany.

– To perform activities and work subject toregulations because of their particularhazard to health or safety.

– When the company has cancelled the postsof work that it intends to fill by unjustifieddismissal or for the causes contemplatedfor termination of the contract unilaterallyby the worker, collective dismissal ordismissal for economic causes in the twelvemonths immediately preceding the date ofthe manpower supply contract.

– To lend workers to other temporaryemployment agencies.

VI. Contracts with temporaryemployment agencies

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Labor unions collectively represent workers’interests territorially (nationwide and so on)and by industry. Various employers’associations also exist whether nationally orotherwise.

At company level, personnel are representedby personnel delegates or workers’committees (depending on the number ofemployees) that may, or may not, belong to alabor union. The right to elect personneldelegates applies in companies that havebetween six and ten employees, if all theemployees unanimously elect to berepresented. At companies with more thanten employees there is an automatic right toelect such representatives.

Furthermore, employees of Community-scaleenterprises or Community-scale groups ofenterprises are entitled, on prior request, toestablish a European workers’ committee ora procedure to inform and consult workers.This right is recognized under Law 10/1997(amended in some respects by Law 44/1999),on the Rights to Inform or Consult Workersat Community-scale Enterprises andCommunity-scale Groups of Enterprises.

1. Functions of workers’committeesThe functions of workers’ committees andpersonnel delegates are the same, andinclude the following:

– To receive quarterly information on theeconomic situation, output, sales and laborforce variations at the company.

– To be notified of the balance sheet, incomestatement and annual report of thecompany, on the same terms as theshareholders.

– To issue a report on certain labor issues,such as redundancy procedures andprofessional training plans of the company,before the employer implements itsdecision.

– To issue reports on mergers, absorptionsor changes in the legal form of thecompany, if they affect the number of jobs.

– To be informed of certain labor-relatedmatters (standard contracts, penalties forvery serious infringements, absenteeism,and so on).

– To monitor compliance with laborregulations.

There are also certain statutory safeguardsestablished regarding the dismissal of, orimposition of penalties on, employeerepresentatives.

2. Collective laboragreementsCollective labor agreements are negotiatedbetween employers or employers’associations and employee representatives,and are mandatorily binding on the parties.Collective labor agreements have a sectorialscope (governing a certain industry) and afunctional scope (they may be negotiated atthe State level or at a lower territorial leveland at the company level). Collectivebargaining has become a decisive factor inthe reform of Spanish labor legislation.

Such agreements are generally for one ortwo years, although they can be extendedfor longer periods.

VII. Employee representation

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Certain labor law provisions are particularlyrelevant when acquiring or selling an ongoingbusiness in Spain. For example, if a businessis transferred, both the seller and the buyerare jointly and severally liable for laborclaims which arose prior to the sale for aperiod of three years thereafter. When abusiness is transferred, the employees arealso transferred, and the new employer issubrogated in the former employer’s laborand social security rights and obligations,including pension commitments, as providedin the legislation specific thereto and, ingeneral, in as many employee welfare andsupplementary obligations as the formeremployer may have entered into.

The seller and buyer must previously informtheir respective employees of the transfer.

The information must at least comprise thefollowing:

– Proposed date of transfer.

– Reasons for the transfer.

– Legal, economic and social consequencesof the transfer for the employees.

– Measures envisaged for the employees.

If there are no elected representatives at theaffected companies, the information must besupplied directly to the employees affectedby the transfer.

There is also an obligation (applicable toboth the seller and the buyer) to arrange fora period of consultations with electedemployee representatives where, as a resultof the transfer, labor measures are adoptedfor the personnel affected.

The consultation period will address themeasures envisaged and their consequencesfor the employees and must be arrangedsufficiently in advance of the date on whichsuch measures are to be taken.

If the change in ownership results insignificant changes in business activities,philosophy or management, seniormanagement personnel may be entitled toterminate their employment within threemonths following the occurrence of thesechanges and to receive an indemnity equal toseven days’ pay per year worked, up to amaximum of six months’ pay, or suchindemnity as may have been agreed on witheach senior executive.

VIII. Acquisition of a Spanish business

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Law 45/1999, of November 29, hasintroduced several measures to monitor andprovide protection for relocations ofworkers under crossborder workingarrangements.

There are a number of minimum terms ofemployment that employers in the EuropeanUnion, and in the European Economic Area(the EU plus Norway, Switzerland, Icelandand Liechtenstein) must guarantee to theiremployees relocated temporarily to Spain,except for merchant navy firms in respect oftheir sailing personnel, irrespective of the lawapplicable to their employment contracts.

Nevertheless, it also can be applicable tothird countries if it is provided byInternational Treaties.

This Law applies to relocations for a limitedtime period in the following cases:

– Within the same company or within aGroup of companies.

– Under international services contracts.

– When the workers of a temporaryemployment agency are posted to a usercompany in another EU Member State.

The only exceptions to the above are in thecase of employee relocations during trainingperiods and those relocations that are notperformed by temporary employmentagencies for terms of less than eight days.

The minimum terms of employment to beguaranteed by employers in the abovecountries in accordance with Spanish laborlegislation are: working time, pay (whichmust be at least that provided for the samepost under the relevant legal provision,regulation or collective labor agreement),equality of treatment, the rules on underagework, prevention of occupational risks,nondiscrimination against temporary and

part-time workers, respect for privacy, fordignity, rights of strike and assembly, and thefreedom to join a labor union. If employeesrelocated to Spain enjoy more favorableterms, those terms apply.

The employers in such cases are alsorequired to disclose certain information, andperform certain obligations, to the laborauthorities for monitoring and coordinationpurposes.

Specifically, they should report the relocationto the Spanish Labor Authorities before theworker starts to work and regardless of theduration of the relocation.

The legislation on labor infringements andpenalties classifies a series of events in thisrespect. Formal defects in the reporting ofworker relocations to Spain constitute aminor infringement, while the reporting ofthe relocation after it has been performed isa serious infringement. Failure to report therelocation and misrepresentation orconcealment of the data contained in thereport are considered to be grossinfringements.

Failure to meet the minimum workingconditions mentioned above, which areclassified according to the penaltiesapplicable to Spanish employers, areconsidered to be administrativeinfringements.

IX. Relocation of workers under a crossborder working arrangement

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Organic Law 8/2000 (of December 22) onthe Rights and Freedoms of Foreigners inSpain and their Social Integration, togetherwith the recent Organic Law 14/2003, on thesame matter, clarify and even amend certainof the provisions introduced by the previousOrganic Law 4/2000 (of January 11), in anattempt to provide greater guarantees for apolicy to ensure the integration of nationalsfrom third countries who reside legally onSpanish soil, and encouragingnondiscrimination of this group in Spanisheconomic, social and cultural life.

Laws 8/2000 and 14/2003 introduce thefollowing main new features: they clarify thedefinition of “foreigner” (non-Spanishnational or non-Community national); theyextend to foreign nationals the constitutionalsafeguards in Article 13 of the SpanishConstitution on civil liberties; they introduceenforcement measures to combat illegalimmigration, as well as measures to combathuman trafficking, and enable certainactivities linked to this traffic to bemonitored.

With regard to residence, the new legislationdifferentiates between the followingsituations: visit (for a period shorter than 90days, albeit extendible in certain cases);temporary residence (a period longer than90 days but shorter than 5 years); andpermanent residence.

To be self-employed workers, foreignersrequire an administrative approval. Employerswho intend to engage a foreigner who is notauthorized to work in Spain shouldpreviously obtain an authorization from theMinistry of Labor and Social Affairs.Nevertheless, Organic Law 14/2003,establishes that, without prejudice to theresponsibilities of the employer, lack of awork permit will not render the employment

contract void with regard to the rights of theforeign worker and will not hinder hisobtaining of the benefits to which he may beentitled.

The Law on the Status of Foreigners in forcewas implemented by regulations approvedunder Royal Decree 864/2001.Nevertheless, a new regulation is pendingapproval.

The Cabinet of Ministers has recentlyapproved the 2004 contingent of non-Community foreign workers who may behired in Spain.

1. Nationals from non-EUcountriesUnder Spanish labor legislation, non-EUnationals intending to work in Spain mustobtain a special work visa and a work andresidence permit. The Spanish laborauthorities grant different types of workpermit depending on the type of work andits duration. The current types of workpermit are as follows:

X. Visas and work and residence permits

Employee work permits

Permit Type Scenario Duration

B (initial) Employee work permit granted for the first time, and restricted to a specific geographical area or type One of activity. year

B (renewal) Renewal of type B (initial) employee work permit. Any work may be performed throughout TwoSpanish territory. years

C Obtained when type B (renewal) employee work permit expires. Any work may be performed Two throughout Spanish territory. years

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Work permits are granted taking intoaccount the employment situation of Spanishnationals for the same kind of work.

However, there are certain preferredcategories such as foreigners who haveSpanish family ties, workers necessary to setup or repair imported machinery, or seniorexecutives.

Foreigners legally working in Spain generallyhave the same rights and obligations asSpanish citizens under Spanish laborlegislation.

2. Nationals from EUMember StatesNationals from other EU Member States arenot subject to the requirements applicable toother foreigners to obtain a work permit asan employee or a self-employed worker,because EU legislation on the free movementof workers applies fully. They are thereforeentitled to perform any activity both asemployees and as self-employed workers, inthe same terms as Spanish citizens.

Since Royal Decree 178/2003, of February14, came into force, self-employed workersor employees, students or beneficiaries ofthe right to permanent residence, providedthat they are citizens of the European UnionMember States or of other States signatoriesto the European Economic Area Agreement,and certain of their relatives may reside inSpain without need for a residence card. Itwill suffice for them to hold a valid nationalidentity card or passport.

Other foreign citizens included in theCommunity system should obtain aresidence card.

Special permits

Permit Type Scenario

F Employee or self-employed work permit for workers residing in the frontier area of a State to which they return each day.

G Temporary relocation of a foreign employee of an enterprise established in a non-EU or non-EEA country.

A Seasonal permit for activities such as the assembly and maintenance of installations or construction of electricity, gas, railroad, telephone or other infrastructures.

T Work permit for seasonal activities or services.

Duration

Five years atmost,

renewable onexpiry

The duration ofthe relocation,with a limit of

one year(renewal for afurther year)

The duration ofthe relocation,with a limit of

one year(renewable)

Nine months atmost within any

twelve-monthperiod

Self-employed work permits

Permit Type Scenario Duration

D (initial) It may be restricted to a specific Oneactivity and geographical area. year

D (renewal) Renewal of type D (initial) self-employed work permit. Any work may be performed throughout TwoSpanish territory. years

E Can be obtained when type D (renewal) permit expires. Any work may be performed Twothroughout Spain. years

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All employers, their employees, self-employed workers, members ofmanufacturing cooperatives, domesticpersonnel, military personnel, civil servantswho reside and/or perform their duties inSpain, and even unemployed persons (subjectto certain conditions) are required toregister with, and must pay contributions to,the Spanish social security system.

In the case of non-Spanish individuals, regardmust be had to the social security treatiesand regulations between Spain and othercountries, the provisions of which may affecttheir benefits and payment of social securitycontributions.

Since January 1, 1986, the date of Spain’saccession to the EU, EU social securitylegislation applies to Spain.

Two EU Regulations (Regulation Nos. 1408/71and 574/72, as amended by Regulation No.1249/92) ensure that the workers to whomthey are applicable are not adversely affectedfrom a social security standpoint by movingfrom one Member State to another (to theseeffects, Switzerland is included). The followingbasic rules apply in such cases:

– Workers are subject only to the socialsecurity legislation of one Member State.As a general rule, the applicable socialsecurity legislation will be that of thecountry in which the worker carries on hisactivity. There are some exceptions to thisgeneral rule.

– If certain requirements are met, the timeduring which a worker of one MemberState contributes to the social securitysystem of another Member State will countas a period of contribution to his or herown country’s social security system forthe purpose of determining his or herfuture benefits under his or her nationalsocial security system.

– If a worker of one EU Member State istemporarily relocated to another MemberState to work for his company in that otherMember State, the worker will remainsubject to the social security legislation ofthe first Member State, provided that theforeseeable duration of the work to bedone does not exceed 12 months and heor she is not sent to replace anotheremployee who has completed the period oftime for which he or she was relocated.This 12-month period can be extended foran additional period of the same durationand, where appropriate, subsequently asprovided in the bilateral treaties.

There are different contribution programsunder the Spanish social security system:

a) General social security program.

b)There are other situations within thegeneral social security program qualifyingfor special treatment, namely:

– Artists.

– Railroad workers.

– Sales representatives.

– Bullfighting professionals.

– Professional soccer players.

c) Special social security programs for:

– Agricultural workers.

– Seamen.

– Self-employed workers.

– Civil servants and military personnel.

– Domestic personnel.

– Coal miners.

– Students.

Classification under these programs dependson the nature, conditions and characteristicsof the activities carried on in Spain.

XI. Social security system

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Unless one of the special programs applies,an employer and its employees are subject tothe general social security program.

Under the general program, social securitycontributions are paid partly by the employerand partly by the employee. Personnel areclassified under a number of professional andjob categories for the purpose ofdetermining their social securitycontribution. Each category has maximumand minimum contribution bases, which aregenerally reviewed from year to year.Employees whose total compensationexceeds the maximum base, or does not

reach the minimum base, must bring theircontributions into line with the contributionbase for their respective category.

For 2004, the maximum contribution base isg 2,731.50 per month for all professionalcategories and groups. The minimum baseshave been increased according to theprofessional categories and contributiongroups, from January 1, 2004 in respect ofthose of 2003, in the same percentage asthe increase of the minimum inter-professional wage. Therefore the situationfor the general social security program in2004 is as follows:

Minimum Base Maximum Base Category (Euros/month) (Euros/month)

Engineers and graduates 799.80 2,731.50Technical engineers and assistants 663.60 2,731.50Clerical and workshop supervisors 576.90 2,731.50Unqualified assistants 537.30 2,731.50Clerical officers 537.30 2,731.50Messengers 537.30 2,731.50Clerical assistants 537.30 2,731.50

Minimum Base Maximum Base Category (Euros/day) (Euros/day)

Foremen classes 1 and 2 17.91 91.05Foremen class 3 and craftsmen 17.91 91.05Laborers 17.91 91.05Workers under 18 years of age 17.91 91.05

(1) It includes: indefinite-term contracts (including part-time indefinite-term contracts and indefinite-term contracts for seasonal work), and fixed-term contracts (in the form of training contracts, relief and substitute contracts, except for contracts under which reductions are receivedpursuant to Royal Decree-Law 11/1998), and any type of contract made with disabled workers who have been recognized a degree of disabilityof not less than 33% of their physical or mental capacity.

Employer (%) Employee (%) Total (%)

General contingencies 23.6 4.7 28.3Unemployment– General rule (1) 6.0 1.55 7.55– Full-time fixed-term contracts 6.7 1.6 8.3– Part-time fixed-term contracts 7.7 1.6 9.3Professional training 0.6 0.1 0.7Wage Guarantee Fund 0.4 – 0.4

Total contribution 30.6 / 31.3 / 32.3 6.35 / 6.4 / 6.4 36.95 / 37.7 / 38.7

The contribution rates applicable toemployers and employees in the general socialsecurity program in 2004 are the following:

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The total employer contribution rate isincreased by higher percentages foroccupational accident and occupationaldisease contingencies, depending on howhazardous the employee’s work is, inaccordance with the system of scalesestablished by Royal Decree 2930/1979, thepercentages of which will be reduced by10%.

The recent reform of legislation with regardto the social security system for self-employed workers should be noted. Theseworkers, unlike those classified in the generalsystem, were only covered for temporaryincapacity from the fifteenth day after thedate of the leave. Law 36/2003 of November11, on measures for economic reform, hasextended this protection to make itequivalent to that established for employees,so that the temporary incapacity benefitarises as from the fourth day of the sickleave. Under Royal Decree 1273/2003, ofOctober 10, self-employed workers may optin the term of two months after January 1,2004, to improve said protective measure, byincluding the protection for industrialaccident and occupational disease.

The maximum contribution basis for 2004 inthe special social security system for self-employed workers is, like that of the generalsystem, g 2,371.50 per month. The minimumcontribution basis for 2004 is g 755.40 permonth.

Lastly, for several years the classification ofmembers from the managing bodies ofcompanies under the social security systemhas been a contentious and confusing issue.The Law accompanying the 1999 GeneralState Budget Law (which came into force onJanuary 1, 1999) settled the debate byintroducing new legislation on the matter.Thus, under this Law, executive directors

who receive compensation and who do nothave actual control of the company shouldbe included under the general social securityprogram for employees as “comparable”workers (i.e., without entitlement tounemployment benefit or the WageGuarantee Fund).


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Under Law 31/1995, amended by Law54/2003, on the Prevention of OccupationalRisks and its implementing legislation,employers must ensure the health and safetyof their employees, which does not onlymean complying with the legislation andremedying situations of risk, but alsoplanning preventive action from the outset oftheir business activities and planning anongoing action to perfect the existingprotection levels. This includes the obligationto perform risk assessments, adopt measuresin emergency cases, provide protectiveequipment and to ensure the health ofemployees, which includes ensuring thatpregnant or breastfeeding women do notperform tasks which may put them or theirunborn children/babies at risk.

All employers must have a prevention serviceto provide advice and assistance inprevention tasks, for which the employershould nominate one or more workers. Incompanies with fewer than six workers, thisservice may be provided directly by theemployer, provided that it customarilyperforms its business at the workplace andhas the necessary capacity for the purpose.It is also possible for a prevention service tobe organized externally or outsourced.Prevention services are fully governed byRoyal Decree 392/1997, implementing Law31/1995.

The Prevention Delegates, as employeerepresentatives with specific risk preventionduties, supervise, monitor and advise on anymeasure in this area. Furthermore, atcompanies with more than 50 employees, aHealth and Safety Committee must beestablished and employers must consult thisCommittee regularly on employee health andsafety procedures.

A failure to comply with these obligationsmay give rise to liability at administrative,labor, criminal and civil law. The Ministry ofLabor and Social Affairs may imposesubstantial fines in the case of very seriousinfringements.

Increasingly stringent regulations on theprevention of occupational risks are beingimplemented in Spain and the EU to affordgreater protection to workers.

XII. Prevention of occupational risks

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L e g a l f r a m e w o r k a n d t a x i m p l i c a t i o n s o f e - c o m m e r c e i n S p a i n

245

Legalframework

and taximplicationsofe-commerceSpainin

I. Introduction 247

II. Defining regulatory principles 2481. Civil and commercial

legislation 248a) Civil and Commercial

Codes 248b) Distance sales 248c) Consumer protection 248

2. Telematic billing 2503. Electronic signature 2504. Personal data

protection 2515. Intellectual and

industrial propertyand domain names 252a) Intellectual property 252b) Industrial property 253c) Domain names 253

6. Law 34/2002, on E-Commerce and Information Society Services 255

III. Tax implications of e-commerce in Spain 2581. Problems, general

principles andinitiatives taken in relation to taxation 258

2. Direct taxation 258a) The permanent

establishment issue 259b) Legal characterization

of income 259

c) Determination of taxableincome and the transferpricing problem 260

d) Application of the place-of-effective-management rule 260

3. Indirect taxation 261a) Definition of “taxable

event” as a supply ofgoods or services forthe purpose ofdetermining the placeof supply 261

b) Determination of the VAT rates applicableto the various typesof e-commerce 263

c) Formal obligations andmanagement of taxes 263

Legal framework and tax implications of e-commerce in Spain

8

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E-commerce-related activities are now beingregulated more specifically by Spanishlegislation.

Therefore, in transactions involving e-commerce, regard should be had tolegislation on distance sales, advertising,standard contract terms, electronicsignatures, data protection, intellectual andindustrial property, and e-commerce andinformation society services. Apart fromthese specific laws, it is also necessary tolook to the general legislation on civil andcommercial contracts.

In any event, the Spanish legislature iscurrently making resolute headway inregulating transactions of this nature.Examples of its aim to legislate on mattersrelating to new information technologiesinclude the Law on E-Commerce andInformation Society Services, and the RoyalDecree-Law on Electronic Signatures, thereview of which is currently in full swing.

A fundamental point to bear in mind whenundertaking any initiative in the area ofelectronic transactions is that the applicablelegislation varies depending on the potentialrecipient of the related offer. Consequently,there is greater leeway for the parties toagree if the transaction takes place betweencompanies (business to business, B2B) than ifthe commercial dealings are between acompany and a private consumer as the finalrecipient (business to consumer, B2C), since,among others, consumer protectionlegislation will apply in the latter case.

E-commerce raises tax issues that can beaddressed with difficulty from a purelySpanish perspective. Perhaps for that reason,unlike other occasions, the Spanish taxauthorities have not seen fit to adoptunilateral measures, preferring to wait until aconsensus is reached on the measures to beadopted regionally and even worldwide. Aswill be explained below, the process ofreaching a consensus on the VAT treatmentof “online e-commerce” is fairly advanced, asis shown by the recent approval of the EUDirective on e-commerce and its consequenttransposition into Spanish law from July 1,2003 onwards.

As for the direct taxation issues (theexistence of permanent establishments, thelegal characterization of income, the transferpricing problem and the application of the“place-of-effective-management” rule) it isforeseeable that consensus will take the formof a coordinated, more uniforminterpretation of the various criteriadetermining the tax treatment of e-commerce, rather than a legislative change.As will be explained later, an example of thisgreater coordination is the amendment madeto the commentaries on the OECD ModelConvention.

I. Introduction

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1. Civil and commerciallegislationa) Civil and Commercial Codes

Electronic contracts are fully subject to therules established by the Spanish Civil Codeon obligations and contracts. In addition tothese rules, Spain also has specificlegislation regulating various aspects of e-commerce.

In this sense, both the Civil Code and theCommercial Code, by virtue of theamendments made by the Law on E-Commerce and Information Society,dispose that, in contracts concluded byautomatic devices, consent is granted sincethe declaration of acceptance.

b) Distance sales

Equally applicable to electronic sales isRetail Trade Law 7/1996 in its Chapter ondistance sales. This Law defines “distancesales” as sales concluded without thesimultaneous physical presence of thebuyer and the seller, where the seller’soffer and the buyer’s acceptance areconveyed by a means of distancecommunication of any nature. Therefore,sales made by telematic means would betreated as distance sales.

Under the Retail Trade Law, operators thatconclude distance sales must obtain therelevant authorization and be registered onthe Register of Distance-Sales Enterprises,which is located at the GeneralDirectorate for Domestic Trade of theMinistry of Economy.

This Law also establishes the requirementsfor the terms of distance sale offers, whichmust include:

– the seller’s identity;

– the special features of the product, theprice, and the shipping expenses;

– the payment method, and delivery ortypes of fulfillment of orders; and

– the period for which the offer remainsvalid.

In this type of sales, consumers are alsoafforded a number of rights, such as:

– the need for their express consent tothe distance transaction, so that thefailure to reply cannot be construed asacceptance of the offer;

– prohibition on unsolicited shipments,unless they are commercial samples;

– the right to withdraw (with exceptions incases such as the sale of securitiessubject to market fluctuations) withinseven days from the receipt of theproduct, the exercise of which is notsubject to any formality or penalty;

– the seller has the duty to provide thebuyer with written information in thelanguage of the offer on the address ofone of the seller’s establishments, creditor installment payment terms, and awithdrawal or revocation document thatincludes the name and address of theperson to whom it must be sent andparticulars identifying the contract andcontracting party.

c) Consumer protection

Whenever e-commerce activities aretargeted at consumers, it is necessary tocomply with consumer protectionlegislation, namely Consumer and UserProtection Law 26/1984.

Equally applicable is the Standard ContractTerms Law 7/1998, when predisposed clausesare incorporated to a plurality of contracts.

II. Defining regulatory principles

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In this connection, e-commerce isspecifically regulated in Royal Decree1906/1999, on telephone or electroniccontracts with standard terms, whichimplements Article 5.3 of the StandardContract Terms Law.

The Royal Decree establishes therequirements that must be met by distancecontracts concluded by telephone, or byelectronic or telematic means and whichcontain standard contract terms. “Standardcontract terms” means pre-formulatedterms the inclusion of which in a contracthas been imposed by one of the parties(regardless of who actually drafted them,or their external appearance, scope, orother circumstances) and which have beendrafted for inclusion in numerouscontracts.

This rule does not apply expressly tocertain types of contract such as, forexample, government contracts,employment contracts, contracts for theincorporation of companies, contracts forregulating family relations, and so on.

Conversely, the rules imposed by thisRoyal Decree apply to those contractswhich contain standard contract termsthat have been adhered or consented to inSpain, whatever the law applicable tothem.

To such effect, the Royal Decree imposesthe following obligations when contractingby telephone or by electronic or telematicmeans with standard contract terms:

– To provide the consumer with priorinformation on all the terms of thecontract at least 3 days before theconclusion of the contract, and to sendthe consumer the full wording of thestandard terms by any suitable means.

– To send to the adhering partyimmediately (or, at the latest, when thething is delivered or when performanceof the contract begins) a writtenreceipt or, at the adhering party’srequest, a receipt on any other lastingmedium fit for the means ofcommunication used and information, inthat party’s language or in that used tomake the offer, on all the terms of thecontract concluded.

– The adhering party can exercise the rightto withdraw from the contract, withoutincurring any penalty or expense, withinseven business days, according to theofficial calendar of the adhering party’splace of habitual residence. Time in theseven-day period will start running uponreceipt of the merchandise where thepurpose of the contract is the delivery ofgoods, or from the conclusion of thecontract where the contract is for theprovision of services. If the informationon the standard terms or thedocumentary confirmation is providedafter the delivery of the merchandise orthe conclusion of the contract, time inthe seven-day period will start runningfrom the performance of suchobligations.

– The pre-formulating party also has theburden of proving that it has performedthe duties imposed by the Royal Decree.Such duties include that of ensuring theexistence and content of priorinformation on the terms, the delivery ofthe standard terms of, and documentarysupport for, the contract and, ifapplicable, the express waiver of theadhering party to the right ofwithdrawal.

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2. Telematic billingThe noteworthy legislation in this area is theOrder of the Ministry of Finance, datedDecember 3, 2002, which re-implements thetelematic billing system envisaged in ValueAdded Tax Law 37/1992 and repeals theOrder of the Ministry of Economy andFinance dated March 22, 1996.

For these purposes, “electronic billing” isdefined as billing based on the use ofadvanced electronic signature systems or anyother electronic data exchange system whichpermits the authenticity of the source of theelectronically issued invoices and theintegrity of their contents to be guaranteed.

In addition, “electronic invoice” is defined asany electronic document, which meets theissue and content conditions imposed byRoyal Decree Law 1496/2003 regulating theduty of dispatch and delivery of invoices bytraders and professionals (please see 3.“Electronic signature”, and pp. 263-264).

3. Electronic signatureOne of the main concerns of operators usingnew information technologies for businessactivities is technical security and legalcertainty.

Electronic signatures are now regulated byElectronic Signature Law 59/2003, whichrepeals Royal Decree-Law 14/1999.

This new Law aims to promote morewidespread use of the electronic signaturesas an instrument that generates trust andsecurity in telematic communications,thereby contributing to the development ofe-commerce and of the “e-government.”

The Law includes new provisions thatcontribute to increasing the availability, use,

and accessibility of electronic signatures.Notable among the main amendments is theoverhaul of the terminology and systematicsof the wording with a view to making itmore reader-friendly.

Thus, “electronic signature” is defined by theLaw as a set of data, in electronic form,attached to or associated with otherelectronic data, which can be used as amethod for identifying the signatory.

A separate class of electronic signature is the“advanced electronic signature,” which isrecognized as a signature which permits thesignatory to be identified and the integrity ofthe data signed to be verified, since it islinked exclusively to the signatory and to thedata to which it relates and since it has beencreated by means that the signatory can keepunder his sole control.

The new concept of “recognized electronicsignature” has been introduced with a viewto making it possible to distinguish anelectronic signature that meets the technicaland legal requirements necessary to beconsidered equivalent to a handwrittensignature. Also defined are the concepts of“electronic date” and “statement ofcertification practices.”

The Electronic Signature Law also providesfor the possibility of legal entities acting assignatories with a view to encouraging theplacing of orders and issuing of invoices bytelematic means, while at the same timesafeguarding legal certainty for the entityholding the electronic signature and for thethird parties who have dealings with it. Inorder to establish this new element in thegeneral legal framework, the Law establishesthat electronic certificates of legal entities donot alter civil and commercial legislation asregards the concept of the hierarchical orvoluntary representative.

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Furthermore, the Electronic Signature Lawalso regulates the activity of certificationservice providers issuing certificates that linksignature verification data to a certainsignatory, but eliminates the CertificationService Providers Register established inRoyal Decree-Law 14/1999 with a view tospeeding up delivery of these services.However, the substitution of this formalregister is supplemented by the start-up bythe Government of a service to publicizeinformation on the certification serviceproviders operating in the market.

The Law promotes self-regulation of theindustry, modifying the concept of“certification” of certification serviceproviders in order to give the private sectorgreater freedom and a more active role. Thisreform makes it easier to obtain qualitystamps that bolster consumers’ and users’trust in electronic signature systems.

Given that it is not necessary to obtain priorauthorization in order to providecertification services, the Law reinforces thepowers of the Ministry of Science andTechnology to inspect and monitor thesematters. The Ministry may call on theassistance of independent and technicallyqualified entities to supervise and monitorcertification service providers.

Lastly, as regards the regime governingcertification service providers, the Lawmodifies the obligation to provide aneconomic guarantee where providers issuerecognized certificates. Thus, suchproviders must arrange liability insurance ofat least g 3 million to cover any risk ofliability for damage or loss, although theLaw makes this requirement flexible bypermitting providers to combine variousinsurance instruments.

4. Personal data protectionAnother aspect that may have e-commerceimplications is the possible processing of anypersonal data under transactions of thisnature.

Personal Data Protection Organic Law15/1999 regulates the processing of anindividual’s personal data obtained by publicand private entities in the course of theirduties. Under the Law, personal data cannotbe used indiscriminately and there arepenalties in the event of a breach of thestatutory obligations.

The Organic Law applies to “personal data,”meaning any information concerningidentified or unidentified individuals.Accordingly, it does not apply to dataconcerning legal entities.

Personal data protection legislation revolvesaround the following principles:

– The data subject must give prior consentto the processing of his or her personaldata, except for the exceptions envisagedby the Law.

– The processing of specially protected data(i.e., data referring to ideology, labor unionmembership, religion, beliefs, ethnicity,health, and sex life) require the datasubject’s express consent (in writing in thefirst four cases).

– The data subject must be informed of anumber of matters in relation to theenvisaged processing of his or her personaldata.

– Personal data may only be processedwhere they are adequate, relevant and notexcessive in relation to the purpose forwhich they have been obtained.

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– Personal data may only be communicatedto a third party if the data subject hasgiven his or her prior consent for suchpurpose, unless such communication ispermitted by Law.

– When the communication is addressed to athird party classified by the Law as a dataprocessor, which provides a serviceentailing access to such data, prior consentby the data subject is not required, but therelationship must be regulated in a contractfor services that includes a number ofprovisions established by the Law.

– Data subjects are afforded the rights ofaccess, rectification, cancellation, andopposition to and of the processing oftheir personal data.

– The creation of personal data filing systemsmust be previously notified to the DataProtection Agency, the agency in charge ofenforcing this legislation.

Royal Decree 994/1999, approving theRegulations on security measures forautomated filing systems containing personaldata, provides that technical andorganizational measures must be taken toensure the security of automated filingsystems. Such measures will vary dependingon the nature of the personal data beingprocessed.

It should also be noted that communicationsof data involving the international movementof personal data require the priorauthorization of the Director of the DataProtection Agency, where such data is to besent to countries without a level ofprotection comparable to that of Spain,except in a number of specific cases such as,for example, where the data subject gives hisor her unambiguous consent to the transferof his or her data. In this connection, it isassumed that EU Member States ensure an

adequate level of protection. In other cases,a declaration in this connection is requiredfrom the EU Commission or a ruling fromthe Data Protection Agency that the dataprotection offered by the country inquestion is appropriate.

5. Intellectual andindustrial property and domain namesa) Intellectual property

The legal protection of intellectualproperty is hugely important whenengaging in e-commerce in the“information society.” For this reason, it isessential to determine as clearly as possiblethe ownership of the rights which can flowfrom content and information based onnew technologies, the main hallmark ofwhich is to facilitate the transmission andbroad dissemination of such content andinformation. The key Spanish legislation inthis area is Legislative Royal Decree1/1996, approving the Revised IntellectualProperty Law.

Article 10 of the Revised Law establishesthat all original literary, artistic or scientificcreations expressed by any means or onany medium, whether tangible orintangible, currently known or invented inthe future, are intellectual property.Accordingly, any creations meeting theoriginality requirement are capable of beingprotected, including graphic designs andsource codes of, and information containedon, websites.

Website content will be afforded suchprotection as pertains to the specificcategory of the content (graphics, music,literary works, audiovisual, databases, etc.)and, therefore, the person in charge of the

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website must hold the related rights, eitheras the owner (of the collective work underhis management, developed by commissionor by employees) or as a licensee.

Intellectual property has two clearlydifferentiated facets: on the one hand, theauthor’s moral right to the work inquestion, which is nonwaivable andinalienable, that is to say, the right to thepaternity of the work, to demand that itsintegrity be respected, and to modify thework or withdraw it from the market; andon the other hand, the author’s economicright to the work, which is waivable andalienable even after death, and is composedof the rights of reproduction, distribution,and public communication.

In protecting intellectual property, theowner may seek both civil and criminalremedies. The Revised Law affords theholder of the rights of exploitation thepossibility of applying for the cessation ofunlawful activities (e.g., a website unlawfullydisseminating a protected work could beclosed down) and of seeking damages. Froma criminal law standpoint, the protection ofintellectual property on the Internet isbased on Article 270 of the Criminal Code,which defines crimes against intellectualproperty as the reproduction, plagiarism,distribution or public communication of aliterary, artistic or scientific work, in wholeor in part, or the transformation,interpretation or performance thereofaffixed on any type of medium orcommunicated by any means, without thepermission of the holders or assigns of therelevant intellectual property rights.

b) Industrial property

When engaging in e-commerce, regardshould also be had to industrial propertymatters. Inventions can be patented and,

with respect to e-commerce, patents onencryption and compression algorithmsmay be established. However, Article 4.c ofPatents and Utility Models Law 11/1986provides that plans, rules, and methods forconducting a business, as well as software,cannot be patented.

c) Domain names

Another essential issue for Internetoperators to take into account is theregistration and use of domain names,which was previously addressed by theOrder of the Ministry of Developmentdated March 21, 2000. However, inaccordance with the provisions ofAdditional Provision No. 6 of Law 34/2002on E-Commerce and Information SocietyServices, the Ministry of Science andTechnology has approved a National Planfor Internet Domain Names under thecountry code for Spain (“.es”), underOrder CTE/662/2003, which repeals theprevious Order dated March 21, 2000.

The new Plan is approved to tailor the“.es” domain name assignation system tothe specific needs of using domain names,thus serving as an effective instrument forthe development of the Internet and e-commerce.

In order to safeguard the rights acquiredunder the previous legislation, domainnames assigned prior to the entry intoforce of the National Plan will still be valid.

With the new system under the NationalPlan, Red.es, a public for-profit entity,continues to perform the function of thepublic authority assigning domain namesunder the “.es” code.

The National Plan aims to reduce therestrictions on the assignation of domainnames under the “.es” code by reducing

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the existing registration prohibitions,especially those which affect geographicalor generic terms, and increasing thelegitimacy and type of domain names thatcan be requested under the “.es” code.

Notwithstanding the above, evidence orlinkage between the domain name appliedfor and the individual interested inregistering it will still be required.Accordingly, in order to assign a second-level domain name under the “.es” codethe following requirements must befulfilled:

– The domain name must not have beenpreviously assigned.

– The domain name must fulfill the rules ofsyntax (the only valid characters areletters of the Spanish alphabet whichcoincide with the English alphabet,numbers and the hyphen, provided thatthe last-mentioned is not the first or thelast character, and the name must be aminimum of three and a maximum ofsixty-three characters long).

– The domain name must meet the rulesof derivation (in the case of a legal entity,the domain name must coincide with theorganization’s full name, with theabbreviated form of the full nameprovided that it can be identifiedunequivocally or by one or morecommercial names or trademarks ownedby the applicant; in the case of anindividual, the domain name mustcoincide with his or her first and lastnames, with the commercial names ortrademarks he or she owns, or with thename of the establishment where he orshe has a profession or trade).

– The domain name must not be includedamong the prohibitions contained in theNational Plan (coinciding with a top-leveldomain name, exclusively comprising aplace name or a family name, exclusivelycomprising a generic term, etc.)

Another new feature of the National Plan isthe possibility of assigning second- andthird-level domain names. Thus, five newthird-level domains are created: “com.es”,“nom.es”, “org.es”, “gob.es”, and “edu.es”,and these will enable parties registeringdomain names to locate them in a spacewhich is suitable for their activity or for thetype of entity that they are and will enableusers to intuitively distinguish the activitiesof the domain name owner. Third-leveldomain names will be assigned on a “first-come first-serve” basis, although thelegitimacy rules must also be followed,based on the identification of the third-leveldomain name applied for, as well as the rulesof syntax established by the National Plan.

Under the National Plan the right to use adomain name under the “.es” code is notassignable, although in cases of universalsuccession inter vivos or mortis causa andcases where a commercial name ortrademark is assigned, the successor orassignee may continue to use the domainname in question.

Under Additional Provision No. 1 of theNational Plan certain domain names withspecial market value (which exclusivelycomprise a generic term that coincideswith Internet protocols, applications orterminology, etc.) may be assigned after abidding process.

Lastly, the National Plan envisages thecreation by the assignation authority (Red.es)of a system for the extra judicial resolutionof disputes over the use of domain names.

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6. Law 34/2002, on E-Commerce andInformation SocietyServicesLaw 34/2002, of July 11, on E-Commerce andInformation Society Services (ECISSA), inforce since October 12, 2002, transposesDirective 2000/31/EC of the EuropeanParliament and of the Council of June 8relating to certain legal aspects of the servicesof the information society, particularly e-commerce on the domestic market.

The ECISSA defines as information societyservices any service provided for a valuableconsideration, long-distance, throughelectronic channels and upon individualrequest by the recipient, including also thosenot paid by the recipient, to the extent thatthey constitute an economic activity for theprovider. Specifically, the following aredeemed to be information society services:

– the contracting of goods and servicesthrough electronic means;

– the organization and management ofauctions using electronic means or ofvirtual shopping centers or markets;

– the management of purchases on thenetwork by groups of persons;

– the sending of commercialcommunications;

– the supply of information through telematicchannels; and

– video upon demand, as a service that theuser may select through the network and,in general, the distribution of contentsupon individual request.

The ECISSA will apply to informationsociety service providers established inSpain. In this respect, the provider is

considered to be established in Spain whenits place of residence or registered office islocated in Spanish territory, provided that itcoincides with the place where itsadministrative management and businessadministration are actually centralized.Otherwise, the place where suchmanagement or direction is performed willbe considered.

Likewise, the ECISSA will apply to servicesrendered by providers who are resident orhave a registered office in any other Statewhen the services are offered through apermanent establishment located in Spain.Therefore, the use of technological meanslocated in Spain to provide or access theservice will not alone determine that theprovider has an establishment in Spain.

The above notwithstanding, the requirementsof the ECISSA will apply to service providersestablished in another State of the EuropeanUnion or the European Economic Area whenthe recipient of the services is located inSpain and the services affect:

– intellectual or industrial property rights;

– advertising issued by collective investmentinstitutions;

– direct insurance activities;

– obligations arising from contracts withconsumers; or

– the lawfulness of non-requestedcommercial communications by e-mail.

In any case, the organization, transfer,amendment and extinguishment of rights inrem on real properties located in Spain willbe subject to the formal requirements ofvalidity and effectiveness established by thelaws of Spain.

The ECISSA includes important new featuresin respect of the information society service

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providers and e-mail activities, among whichwe may note:

– The principle of free provision of services notsubject to prior authorization is establishedto provide information society services,except as regards public policy, publichealth protection, public security orconsumer protection.

– The following obligations are imposed oninformation society service providers:

- To notify a domain name that it is usedfor their identification on the Internet,within one month, to the registry wherethey are entered to acquire legal statusor for the sole purposes of publicity.

- To put in place the means to permit therecipients of the services and theresponsible bodies to access easily,directly and free of charge, informationon the provider (corporate name,registered office, entries on registries,tax identity number...), on the price ofthe product (stating if it includesapplicable expenses and shippingexpenses) and on the codes of conductto which it has adhered.

- For providers of intermediation services,to cooperate with the responsibleauthorities in interrupting the provisionof information society services or inwithdrawing contents.

- In respect of network and e-mail serviceand network operators, access suppliersand data hosting service providers, towithhold the connection and traffic dataduring the provision of an informationsociety service for a maximum of 12months, upon the terms established by theimplementing legislation pending approval.

– A specific system of liabilities is establishedfor information society service providers,

without prejudice to the provisions of civil,criminal and administrative legislation:

- Network operators and access supplierswill not be liable for the informationtransmitted unless they have originatedthe transmission, changed the data orselected these or their recipients.

- Service providers that make a temporarycopy of the data requested by users arenot liable for the stored informationunless they change it, permit access byrecipients who fail to comply with theconditions established for the purpose,fail to observe the generally acceptedstandards for the update of theinformation, interfere in the lawful use ofthe technology, fail to withdraw thestored information or do not rendertheir access impossible when theybecome aware that a court orresponsible administrative authority hasordered that it be withdrawn or thataccess to it be impeded.

- Data storage or hosting service providerswill not be liable for stored information ifthey are unaware that such information isunlawful or, if they are so aware, if theyact diligently to withdraw or renderaccess to the data impossible.

- The providers of services providing linksor search instruments or contents willnot be liable if they are unaware of theunlawful nature of the activity or theinformation to which the refer or thatthey recommend or, if they are so aware,if they act diligently to omit or renderuseless the respective link.

– A specific system is established for commercialcommunications through electronic channels,without prejudice to the legislation in forceon commercial, publicity and personal dataprotection matters. Thus, commercial

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communications through electronicchannels must be clearly identifiable, statingthe individual or corporation for whomthey are performed, including at thebeginning of the message the word“publicidad” (advertisement) and statingclearly the conditions for access andparticipation, in the case of discounts,prizes, gifts, competitions or promotionalgames. Additionally, advertising orpromotional communications sent by e-mail or similar form of communicationthat have not been previously requested orexpressly authorized by the recipients areprohibited. In this connection, Law 32/2003introduced an exception to the previousobligation of obtaining express consentfrom the recipient of commercialcommunications. Thus, under the newexception, express consent will not benecessary when there is a pre-existingcontractual relationship, provided that theprovider had lawfully obtained therecipient’s contact data and that thecommercial communications refer to goodsor services of the provider’s own companywhich are similar to those for which therecipient initially made a contract.

– Contacts through electronic channels areregulated, recognizing the effectiveness ofthe agreements made through electronicchannels when consent has been grantedand other requirements necessary for theirvalidity are met. Additionally, the followingpolicies are established for contracts madethrough electronic channels:

- The requirement that a document shouldbe placed on record in writing isconsidered to be met when it iscontained on electronic support.

- Documents on electronic support areadmitted as documentary evidence inlawsuits.

- Determination of the legislationapplicable to the contract made throughelectronic channels will be governed bythe provisions of international privatelaw.

- A series of obligations is establishedprior to the commencement of thecontracting procedures relating to theinformation that should be furnished onthe formalities for the making of thecontract, the validity of offers orproposals of contracts and theavailability, if any, of general contractingconditions.

- The offeror is obliged to confirm receiptof the acceptance within 24 hours afterits receipt by an acknowledgement sentby e-mail or equivalent means to thatused in the contracting procedure,permitting the recipient to file suchconfirmation.

- Agreements made through electronicchannels in which the consumerparticipates will be assumed to have beenmade in the place where the consumerhas his customary place of residence.When these contracts are made betweenentrepreneurs or professionals, they willbe assumed to have been made, in theabsence of a provision on the matter, inthe place where the service provider isestablished.

– The recognition is made of a cause ofaction for cessation against conductcontravening the ECISSA that isdetrimental to collective or generalconsumers’ interests and the promotion ofthe out-of-court settlement of dispute.

– Minor, serious and gross infringements dueto failure to comply with the obligationsimposed in the ECISSA, with penalties ofup to g 600,000, are established.

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1. Problems, generalprinciples and initiativestaken in relation totaxationExcept for Spain’s commitments to theEuropean Union on value added tax(“VAT”), at present there is no tax regimein Spain which specifically regulates thetrading of goods and services on theInternet. Therefore, the same taxes and thesame rules as those for other forms ofcommerce apply. This approach is in tunewith the principles enunciated by theSpanish Tax Agency in the Report of theCommission analyzing the impact of e-commerce on the Spanish tax system,prepared by the Office of the Secretary ofState for Finance.

With respect to VAT and formal VATobligations, the three basic bodies oflegislation emanating from the EuropeanUnion are as follows:

– Council Directive 2002/38/EC of May 7,2002 amending temporarily Directive77/388/EEC (Sixth Directive on theuniform basis of assessment for VAT) asregards the VAT arrangements applicableto radio and television broadcastingservices and certain electronically suppliedservices, which was transposed intoSpanish law in 2003 through the relevantamendments to VAT Law 37/1992.

– Council Regulation (EC) No. 792/2002 ofMay 7, 2002 amending temporarilyRegulation (EEC) No. 218/92 onadministrative cooperation in the field ofindirect taxation (VAT) as regardsadditional measures regarding electroniccommerce.

– Council Directive 2001/115/EC ofDecember 20, 2001 amending Directive77/388/EEC with a view to simplifying,modernizing and harmonizing theconditions laid down for invoicing inrespect of VAT. The terms of this Directivehave been transposed into Spanishlegislation through Royal Decree1496/2003 regulating billing obligations.This Royal Decree takes effect fromJanuary 1, 2004.

The first two bodies of legislation referred toare temporary in scope since they must bereviewed by the EU Council before June 30,2006, which must either adopt the necessarymeasures on an adequate mechanism fortaxation in the place of consumption orextend the three-year period.

The provisions of these Directives and theirtransposition into Spanish law are examinedin 3. below on the indirect taxation of e-commerce.

2. Direct taxationDespite there being no differences in the taxtreatment of income obtained electronically,there are a number of issues that have beenaddressed by both the OECD and by theSpanish tax authorities themselves:

a) The permanent establishment issue.

b)Legal characterization of income generatedby the sale of goods and services on theInternet.

c) Determination of taxable income and thetransfer pricing problem.

d)Application of the place-of-effective-management rule to determine the taxresidence of taxpayers engaging in e-commerce.

III. Tax implications of e-commerce in Spain

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The most relevant considerations and theprogress made in analyzing those issues aresummarized below:

a) The permanent establishment issue

The issue specifically addressed is whetherone or more of the following elements canbe regarded as permanent establishmentsin the country where a company selling agood or supplying a service on the Internetis located:

– Server.

– Website on server.

– ISP (Internet Service Provider).

In January 2003, the OECD published newcommentaries on the Articles of the ModelTax Convention. Specifically, a newcommentary on Article 5 (in relation tothe definition of “permanentestablishment”) has been introduced so asto take account of the elements whichdefine new forms of commerce.

The main conclusions drawn from the newcommentary are as follows:

– A distinction must be made between acomputer or server (which canconstitute a permanent establishment)and the software used by that computer(which cannot constitute a permanentestablishment). This distinction isimportant because the entity thatoperates the server hosting the websiteis normally different from the entity thatcarries on business over the Internet(hosting agreements).

– A website does not in itself constitutetangible property and, therefore, cannotbe deemed a “place of business” if this isdefined as facilities, equipment, ormachinery capable of constituting apermanent establishment.

– In order for a server to constitute afixed place of business it must bepermanent, in that it must be located in acertain place for a sufficient length oftime. What counts is whether, in fact, itis moved from one place to anotherrather than whether or not it can bemoved. In this regard, a server used fore-commerce can be a permanentestablishment regardless of whether ornot there is personnel to operate thatserver, where no personnel are requiredfor the operation assigned to the server.

– When determining whether or not theserver installed by a given company in acountry constitutes a permanentestablishment of that company, it isparticularly important to analyze whetherthe company engages in businessactivities specific to its corporatepurpose through that server or whether,on the contrary, it only engages inactivities of a preparatory or auxiliarycharacter (such as advertising, marketresearch, data gathering, providing acommunications link between suppliersand customers, and making backupcopies).

– ISPs do not generally constitutepermanent establishments of companiesthat engage in e-commerce on websitessince ISPs are not normally agents of adependent status for those nonresidentcompanies.

b) Legal characterization of income

The second relevant issue in this areaconcerns the characterization of incomeand, in particular, the possibility thatcertain goods delivered online may, merelyby virtue of the fact that they areprotected by intellectual or industrialproperty laws (such as music, books and,

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in particular, software), be characterized asgenerators of royalties and, therefore, besubject to taxation in the country ofsource.

The recently introduced amendments tothe commentaries on the OECD ModelConvention characterize as business profits(instead of royalties) almost all paymentsmade for all intangible goods deliveredelectronically, on the ground that thesubject-matter of those transactions arecopies of images, sounds or text ratherthan the right to exploit themcommercially.

The Spanish tax authorities have yet tocomment on this amendment to thecommentaries on the Model Convention.

It should also be noted that under Article12 of Nonresidents’ Income Tax Law41/1998, amounts such as those paid forthe use or the granting of use of rights insoftware are characterized as royalties.

Also, in some tax treaties signed by Spain,income derived from the granting right touse software is expressly characterized as aroyalty.

c) Determination of taxable income andthe transfer pricing problem

The extensive use of intranets amongdifferent companies belonging tomultinational groups and the enormousmobility of transactions over computernetworks create highly complex problemswhen applying the traditional arm’s-lengthprinciple to valuing intercompanytransactions. This is because:

– E-commerce encourages the detachmentof activities from their location since ithugely multiplies the number oftransactions between companies withinthe same group;

– The special characteristics of online tradein content and services on the Internetmake it very difficult to ascertain themarket value of commercial transactions,above all bearing in mind that,sometimes, electronic content can bedownloaded and services can be receivedfree of charge.

Due to the above, tax authorities in OECDcountries (including Spain) are advocatingthe development of bilateral or multilateralsystems for advance pricing agreements,applying the OECD transfer pricingguidelines to e-commerce. Noteworthy inthis regard is the creation of an EU JointTransfer Pricing Forum in which, amongother matters, nonlegislative measures willbe proposed to enable a uniformapplication of the OECD guidelines in theEuropean Union.

d) Application of the place-of-effective-management rule

The special characteristics of e-commerce(which include easy detachability fromlocation, relative anonymity, and themobility of the parties involved) make thetraditional rules on determining whichcountry has the jurisdiction to tax theworldwide income obtained by oneenterprise (based on the principle ofresidence by reference to the place offormation, the place of the registeredoffice, or the place of effectivemanagement) more difficult to apply totaxpayers engaging in e-commerce.

Indeed, the parameters established in thetax treaties for the purpose of apportioningtax powers among States in case of conflict(most of them based on the “place-of-effective-management” principle) areoverridden in an area such as e-commerce,where the various managing bodies of the

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same enterprise can be located in differentjurisdictions and be totally mobile duringthe year. In this regard, it can be extremelydifficult to determine which place is theenterprise‘s place of effective management,and this can lead to double taxation or notaxation at all.

Although the international organizationsthat have examined this issue and theSpanish tax authorities themselves areaware of this problem, they have yet toarrive at clear conclusions on how toresolve it. Accordingly, a close watch mustbe kept on progress in the work beingdone in this area.

3. Indirect taxationIt is in the area of VAT where the mostrelevant coordinated legislative measureshave been adopted.

The indirect taxation implications for e-commerce mainly concern “online e-commerce,” a term that refers to productssupplied on the Internet in digitized form(books, software, photographs, movies,music, and so on) and downloaded by acustomer in real time onto his or hercomputer, having clicked on to the supplier’swebsite and paid for the products inquestion (in contrast to offline supplieswhere products sold on the Internet aresubsequently delivered by using conventionalmeans of transportation).

Offline e-commerce poses fewer technicaldifficulties in relation to the VAT treatmentof transactions because it still involves thephysical supply of a tangible good.Accordingly, the traditional VAT conceptsapply: domestic transactions, intra-Community acquisitions, and schemes fordistance sales or imports.

The main VAT issues arising in relation to e-commerce (especially online e-commerce)are in essence the following:

– The definition of “taxable event” as asupply of goods or services in online e-commerce transactions and theapplication of the relevant rules fordetermining the place of supply in order todetermine its VAT treatment.

– The determination of the VAT ratesapplicable to the different types of e-commerce.

– The adaptation of the formal obligationsand management of VAT to the realities ofe-commerce and, particularly, theobligations regarding invoices.

Each of these issues is briefly outlined below:

a) Definition of “taxable event” as a supply of goods or services for the purpose of determining the place of supply

Law 53/2003 of December 30, on Tax,Administrative, Labor and Social SecurityMeasures introduced certain changes to thecurrent VAT Law with a view to redressingthe damaging economic distortions nowsuffered by EU-based operators, and tobring the VAT Law into line with thechanges introduced by Directive2002/38/EC. This Directive is based on thepremise that all EU Member States willuniformly treat transactions performedelectronically as supplies of services:

– The services affected by the changes areelectronically supplied services includingtransactions for computer software, dataprocessing, and other similar servicesrelating to the use of computers and thesupply of information, provided that theyare supplied for consideration, wheretheir transmission is sent initially and

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received at destination by electronic dataprocessing equipment. The fact that thesupplier and recipient of a servicecommunicate by e-mail does not of itselfmean that the service is an electronicallysupplied service.

– The services are deemed to have beensupplied in the territory where SpanishVAT applies if:

- the recipient is a trader or professionaland his place of business is in Spain;

- the supplier is established in Spain andthe recipient is a nontrader residing inthe EU or having an unidentifiabledomicile;

- the services are supplied from outsidethe EU and the recipient is a nontraderdomiciled in Spain;

- the recipient is a trader orprofessional, the services are actuallyconsumed in Spain, and the serviceshave not been deemed suppliedpursuant to the above rules in the EU,Canary Islands, Ceuta or Melilla.

In this connection, the place of supply forelectronically supplied services can besummarized in accordance with thefollowing table:

– As regards determining who is thetaxable person, it has been decided tofully apply the current legislation (Article84 of the VAT Law) which establishesthat:

- In general, the supplier of services isthe taxable person, regardless of wherehe is established.

- In special circumstances, the recipient ofthe services (rather than the supplier) isthe taxable person and is obligated toreverse charge the VAT under the“reversal of VAT liability” mechanism(this applies only where the supplier is atrader not established for VAT purposesin Spain and the customer receiving theservices is a trader or professionalestablished in Spain).

- Finally, in cases where the supplier ofthe services is not established in theEU and the customer is a finalconsumer (in Business to Consumer,or “B2C,” transactions), the supplier ofthe services is the taxable person.However, with a view to simplifyingtheir obligations, suppliers only have toregister (electronically) for VAT in oneMember State, although they will haveto charge the VAT relating to each ofthe jurisdictions where their customersare located and pay it over (also bytelematic means) to the tax authoritiesof the Member State in which they areregistered. Subsequently, that MemberState will re-apportion the VATcollected among the other countries.

It should also be mentioned that therecipient will be jointly and severallyliable for VAT, and for any applicablepenalty in that connection, if by hisnegligent or wilful act or omission, heavoids being properly charged VAT.

Supplier Recipient Place of Supply

EU/Non-EU Trader established Spainin Spain

EU/Non-EU Non-EU trader and Spainactual consumption in Spain

Spain Nontrader resident Spain in the EU

EU Nontrader resident Country of in Spain origin

Non-EU Nontrader resident Spain or domiciled in Spain (Application

of special scheme)

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Non-established traders orprofessionals applying this specialscheme in Spain will be entitled to arefund of the VAT borne under therefund procedure for non-establishedtraders without the condition ofreciprocity of treatment (generallyimposed by the VAT Law) applying tothem in this case.

b) Determination of the VAT ratesapplicable to the various types of e-commerce

In line with the view held by the Spanishtax authorities, the standard VAT rate of16% will apply in all cases, since it is a typeof service for which the VAT Law makesno special provision.

c) Formal obligations and management oftaxes

As regards formal obligations and themanagement of taxes, both the EU and theSpanish tax authorities ascribe to theprinciple that this form of commerceshould not be hindered by the impositionof formal obligations that reduce the speedwith which transactions should beperformed.

Of particular relevance in this regard isthe Council Regulation (EEC) No. 218/92on administrative cooperation in the fieldof indirect taxation (VAT), which, amongother matters, provides that individualsand legal entities involved in intra-Community transactions can access thedatabases kept by the tax authorities ofeach Member State. This possibility ofidentifying reliably the status under whichthe recipient is acting (trader, professionalor final consumer) is absolutely decisivefor the proper tax treatment of eachtransaction.

Lastly, as noted above (see p. 258),Directive 2001/115/EC has beentransposed into Spanish Law by RoyalDecree 1496/2003, of November 28,regulating billing obligations, with effectfrom January 1, 2004.

The new Royal Decree on billingestablishes the legal rules applicable to thesending of invoices electronically,establishing that they may be sentelectronically if the recipient has given itsexpress consent and the electronic meansused in the transmission guarantee theauthenticity of the origin and the integrityof its contents.

For these purposes, the guarantee of theauthenticity of origin and the integrity ofthe contents of invoices sent electronicallycan be evidenced by an advancedelectronic signature, by an electronic datainterchange (EDI) or by other systemsproposed by the parties concerned,provided that they have been previouslyauthorized by the tax authorities.

Invoices can also be kept in an electronicformat provided that it ensures thelegibility of the invoices in the originalformat in which they have been received,as well as the data and mechanisms thatguarantee the authenticity of their originand the integrity of their contents.

The Royal Decree on billing keeps in forceOrder 3134/2002 of December 3, of theMinistry of Finance implementing theapplicable rules on electronic invoices, untila new Ministerial Order is made toregulate this matter.

The Order applies to persons resident inSpain or operating there through apermanent establishment and expresslyacknowledges that electronic invoices will

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be accepted for the purposes of chargingand deducting VAT and for supportingexpenses or credits taken for the purposesof other taxes. The contents of invoicesissued electronically must be the same asthose of invoices issued conventionally.

For such purpose, as in the case whereinvoices are sent electronically, theauthenticity of the origin of such invoicesand the integrity of their contents must beevidenced by using an advanced electronicsignature based on the use of an electroniccertificate and generated by a signaturecreation device approved by the SpanishState Tax Agency, in accordance withResolution 2/2003, of February 14, oncertain aspects relating to telematic billing(see p. 250).

In order to use an electronic billing system,a prior application must be submitted tothe Spanish State Tax Agency, and will beautomatically approved in cases where theprospective system has been recognizedpreviously in the Resolution mentioned inthe preceding paragraph.

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P r a c t i c a l g u i d e l i n e s

267

Practicalguidelines

I. Introduction 269

II. Exchange control regulations 2701. Freedom of action 2702. Safeguarding clauses

and exceptional measures 270

3. Statistical information 2704. Specific transactions

to be reported to the Bank of Spain 271

5. Import and export of certain means of payment 272

6. Types of bank accounts 272

7. Residence for exchange control purposes 273

III. Legislation on foreign investment 2741. Rules on foreign

investments 274a) Investors 274b) Investments regulated 275c) Party required to report

foreign investments 275d) Reporting rules 276

2. Monitoring of foreign investments 276

3. Safeguard clause 276a) Suspension of the

deregulation rules 276b) Investments in national

security-related activities 277

IV. Establishing a business presence in Spain 2781. Sole proprietorship

vs. joint venture 2782. Forms of business

cooperation 279a) Temporary Business

Associations (UTEs) 279b) Economic Interest

Groupings (EIGs) 279c) Participation Account

Agreement (Silent partnership) 280

d) Joint ventures through Spanish corporations orlimited liability companies 280

3. Distribution, agency, commission agency and franchising agreements 282a) Distribution agreements 282b) Agency agreements 282c) Commission agency

agreements 283d) Differences and

similarities between agency agreements and commission agency agreements 284

e) Franchising 284

V. Incorporation of a corporation 2871. Legal steps 2872. Costs 289

Practical guidelines

9

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Practicalguidelines


268

VI. Formation of a branch 2901. Legal steps and costs 2902. Branch vs. subsidiary 2903. Computation of

Spanish corporate income tax 291

VII. Acquisition of shares of an existing corporation 2921. Legal steps 2922. Costs 2923. Special considerations

for an acquisitions of shares of companies between nonresidents 292

VIII. Acquisition of Spanish real estate 2931. Legal steps 2932. Costs 294

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The previous chapters provide generalinformation about the Spanish legalframework, specifically covering those areasthat may be of interest to foreign investorsinvesting in Spain.

This chapter deals with, from a very practicalviewpoint, the main ways for a foreigninvestor to establish a business presence inSpain as well as the main steps to be taken inconnection with certain common forms ofinvestment.

The main aspects of the Spanish legislationon exchange control and foreign investmentsare also covered. Although these areas arefully liberalized, there are specific reportingobligations to be accomplished. As a generalrule, foreign investments are subject only tonotification after the investment has beenmade.

As regards the ways of establishing abusiness presence, the alternatives of soleownership of a business and joint venturesare analyzed, whether in the form ofeconomic interest groupings, temporarybusiness associations, participation accountagreements (silent partnerships), or wheretwo or more partners set up together aSpanish S.A. corporation or S.L. limitedliability company. There are also otherchannels for conducting a business withoutrequiring a physical presence, through thearrangement of distribution, agency,commission agency and franchisingagreements.

Lastly, the steps to be taken for the followingtypes of investment are analyzed:

– Setting-up of a Spanish corporation(Section V)

– Formation of a Spanish branch (Section VI)

– Acquisition of shares of an existing Spanishcorporation (Section VII)

– Acquisition of Spanish real estate (SectionVIII)

I. Introduction

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Exchange controls and capital movementsare fully liberalized and in all areas there iscomplete freedom of action.

The liberalization process reached its peakwith the approval in December 1991 ofRoyal Decree 1816/1991 on ForeignTransactions and of several implementingregulations which dramatically changed theprevious situation.

The new Law 19/2003, on Movement ofCapital and Foreign Transactions and for thePrevention of Money Laundering hasrepealed the previous legislation but hasmaintained the principle of liberalization ofmovements of capital. In fact, the repealedprovisions will continue to apply until saidLaw has been adequately implemented byregulations, which should have in principleoccurred in January 2004.

The main features of the Spanish exchangecontrol scenario can be summarized asfollows:

1. Freedom of actionAs a general rule, all acts, businesses,transactions and operations betweenresidents and nonresidents which involve ormay involve payments abroad or receiptsfrom abroad are completely deregulated.This deregulation includes payments orreceipts made either directly or by offset ofthe underlying transactions, as well astransfers to or from abroad and variations inaccounts or financial debtor or creditorpositions abroad. It also covers the importor export of means of payment.

2. Safeguarding clausesand exceptional measuresThe EU provisions will be able to prohibit orrestrict the performance of certaintransactions and the respective collections,payments, bank transfers or variations inaccounts or financial positions in respect ofthird countries. The Spanish Governmentshall also have these authorities in respect ofone or a group of States, a certain territoryor an extra-territorial center, to implementmeasures adopted by other internationalbodies of which Spain is a member.

Additionally, the Spanish Government isauthorized to adopt measures against a thirdcountry with regard to movements of capitaland payments, when such measures have notbeen adopted at the European level by theCouncil and only for serious and urgentreasons of policy.

Lastly, the system of liberalization may besuspended for those acts, businesses,transactions or operations that affect or mayaffect activities relating to the exercise of thepublic power or the public policy, securityand health.

3. Statistical informationIn order to calculate the Spanish balance ofpayments and to maintain statistical and taxcontrol of monetary flows, Law 19/2003contemplates the possibility of establishingcertain mechanisms for payments to andreceipts from abroad. However, the Lawdoes not regulate such mechanisms andleaves this to the regulations that should besubsequently passed to implement it.

II. Exchange control regulations

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Therefore, until such provisions have beenpassed, the previous legislation will continueto apply. These mechanisms are as follows:

– As a general rule, payments, receipts andtransfers between residents andnonresidents, denominated either in eurosor in foreign currency, should be madethrough deposit-taking entities (normallybanks) registered in the Bank of Spain’sOfficial Register. In these cases, theresident party must provide the registeredentity with certain data (e.g. names andaddresses of both parties) and specificallywith a description of the transaction givingrise to the payment, receipt or transfer.This information must be periodicallytransmitted by the registered entities tothe Ministry of Economy for tax andstatistical control purposes.

The debits and credits posted to bankaccounts held in Spain by nonresidents arealso subject to this regime.

– Payments and receipts between residentsand nonresidents can be made, in Spain orabroad, in coins, bank notes and bearerchecks, denominated either in euros or inforeign currency, and must be declared bythe resident party within 30 days if theyexceed g 6,000. This method of payment isalso subject, where appropriate, to therules mentioned below governing theimport and export of such means ofpayment (see p. 272).

Since residents are allowed to freely openand hold bank accounts abroad,denominated either in euros or in foreigncurrency, these bank accounts can becredited and debited for payments to andreceipts from nonresidents. These creditsand debits must be notified to the Bank of

Spain using specific forms if they exceed aspecified threshold. Credits and debitsunder this threshold only need to benotified if expressly requested by the Bankof Spain. As a general rule, no netting-off ispermitted in communicating these data,although certain exceptions are envisaged.

– Nonresidents intending to credit bankaccounts held in Spain by nonresidents bymeans of bank notes or bearer checks, ineuros or foreign currency, or to transferabroad such means of payment, are obligedto evidence the origin of such funds.Otherwise, the registered entities will notbe able to proceed with these transactions.

Exceptionally, the Spanish Ministry ofEconomy, may, by making the relevantregulations, require prior clearance ordeclaration for payments, receipts ortransfers to or from abroad arising fromcertain transactions yet to be specificallydefined, if such clearance or declarationwere advisable in order to have adequateknowledge of the transactions made and ofcompliance with tax obligations.

4. Specific transactions to be reported to the Bankof SpainLaw 19/2003 also establishes that, for purelystatistical and informative reasons, thosewho perform foreign acts, businesses, ortransactions should declare them. However,the manner and terms in which suchdeclaration should be made and the data itshould contain are not regulated by the Law,and this matter has been left to thesubsequent provisions to be passed toimplement Law 19/2003.

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Likewise, until such provisions have beenpassed, the previous legislation will continueto apply.

Therefore, the following transactions madeby Spanish residents must be reported to theBank of Spain under the conditions to bedefined by the latter:

– Financing and deferrals of payments andreceipts for more than one year betweenresidents and nonresidents deriving fromcommercial transactions or the provisionof services.

– Offsets of credits and debits betweenresidents and nonresidents deriving fromcommercial transactions or the provisionof services.

– Offsets of credits and debits deriving fromintermediation in financial markets byintermediary entities.

– Financial loans received by residents fromnonresidents or granted by residents tononresidents. Securities such as bonds,promissory notes, etc. not traded onSpanish stock exchanges issued by Spanishresidents and acquired by nonresidents areconsidered as financial loans fromnonresidents.

Additionally, the authorized banks andresident individuals or entities whichperform business transactions andoperations with nonresidents or have assetsor liabilities abroad are obliged to providethe Spanish authorities and the Bank of Spainwith any data that may be required in orderto monitor such transactions for statisticaland tax purposes.

5. Import and export ofcertain means of paymentThe main feature of the Spanish exchangecontrol system, as discussed above, is thecomplete freedom of action (subject tospecified information requirements). Thisprinciple also applies to the import andexport of certain means of payment.

Once again, until the provisionsimplementing Law 19/2003 have beenpassed, the previous legislation will continueto apply.

The export of coins, bank notes and bearerchecks, denominated either in euros or inforeign currency, is only subject to priordeclaration if the amount involved exceeds g 6,000 per individual per trip. If thedeclaration is not made, the Spanishcustoms officials will retain these means ofpayment.

The import of the above-mentioned meansof payment by nonresidents is subject incertain cases to prior declaration to theSpanish customs authorities if higher than g 6,000.

6. Types of bank accountsNonresident individuals and legal entities canhold bank accounts on the same conditionsas resident individuals and legal entities. Theonly requirement is to documentarilyevidence, on opening the bank account, thenonresident status of the holder of theaccount. Additionally, such status must beconfirmed to the authorized bank every twoyears. Other minor formalities arestipulated.

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Moreover, residents may, subject to certaindeclaration requirements, freely open andhold bank accounts abroad either in euros orin foreign currency. The opening of suchbank accounts by resident parties must bedeclared to the Bank of Spain within 30 daysand information must be provided on thedebits and credits posted to the account ifthey exceed a certain threshold.

Finally, Spanish residents are allowed tofreely open and hold bank accounts in Spaindenominated in foreign currencies atregistered entities, without subjection to anyinformation requirement.

7. Residence for exchangecontrol purposesFor exchange control purposes, individualsare deemed to be resident in Spain if theyhave their customary place of residence inSpain. Legal entities with registered offices inSpain, and the establishments and branchesin Spain of legal entities or of individualsresident abroad, are likewise resident inSpain for exchange control purposes.

Nonresidents for exchange control purposesare individuals with their customary place ofresidence abroad, legal entities withregistered offices abroad, and the permanentestablishments and branches abroad ofSpanish resident individuals or entities.

Individuals or entities are deemed to havetheir customary residence in Spain if theycomply with the requisites set forth in thetax legislation to be considered as residentsin Spain for tax purposes (see Chapter 4),but with the specifications established byregulations (currently there are noregulations on this matter).

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Royal Decree 664/1999 modified the formerrules by deregulating practically alltransactions of this kind (with the provisosand exceptions set forth below) andeliminating the requirement for “priorverification”. The new rules are designed toadapt Spanish domestic law to the rules onthe freedom of movement of capitalcontained in Articles 73 B et seq. of theTreaty on European Union.

The most noteworthy aspects of theapplicable rules are as follows:

– Practically identical rules are establishedfor foreign investment in Spain and Spanishinvestments abroad.

– “Prior verification”, as a mechanism forcontrolling foreign investments, disappearscompletely. Foreign investments are, as ageneral rule, subject only to notificationafter the investment has been made. Theonly exceptions are: (i) investments fromtax havens, which in general must benotified beforehand, and (ii) foreigninvestments in activities directly related tonational security, and real estate investmentsfor diplomatic missions by States that arenot members of the European Union andrequire “prior verification” from the SpanishCouncil of Ministers.

– There is no longer any obligation forforeign investments to be formalized in thepresence of a Spanish public notary (unlessspecific legislation provides otherwise),doing away with the latter’s role innotifying investments to the ForeignInvestments Register.

– The Royal Decree does not apply tocertain foreign investments in Spain belowg 3,005,060 (unless the investmentoriginates from a tax haven) and they donot, therefore, need to be reported.

– The former categorization of investmentsas direct investments, portfolioinvestments, real estate investments andother investments, disappears.

– Regulation of foreign investments inspecific industries falls outside the scope ofapplication of this Royal Decree. Thefollowing investments will be subject to therequirements imposed by the competentbody established by industry-specificlegislation: investments in the airtransportation and radio industries, inindustries relating to minerals, rawmaterials of strategic interest and miningrights, in the television, gaming,telecommunications and private securityindustries, in industries concerned with themanufacturing, marketing or distributing ofarms and explosives, and in nationalsecurity-related activities (these latteractivities are subject to the clearance rulescontained in the Royal Decree). However,once those requirements are met, theprovisions of the Royal Decree will then beapplicable.

1. Rules on foreigninvestmentsa) Investors

Investors can be nonresident individuals(that is, Spanish nationals or foreignersdomiciled abroad, or who have theirprincipal place of residence there), legalentities whose registered offices arelocated abroad, and public agencies offoreign States.

A change of registered office of legalentities or a change of residence ofindividuals is enough to change theclassification of an investment as a Spanishinvestment abroad or a foreign investment

III. Legislation on foreign investment

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in Spain, the reporting requirements forwhich are regulated by the regulationsimplementing the Royal Decree.

However, under the Royal Decree aSpanish company in which foreignshareholders have a majority holding isnot deemed to be an investor, whichmeans that investments made by suchcompanies in other Spanish companies arenot now deemed to be foreigninvestments in Spain.

b) Investments regulated

The various types of investment coveredby the rules established by the RoyalDecree are as follows:

– Participation in Spanish companies,including their incorporation andsubscription and acquisition of shares incorporations or the subscription ofshares in limited liability companies, andany legal transaction under which votingand other nonfinancial rights areacquired.

– Establishment of, and increase of capitalallocated to, branches.

– The subscription and acquisition ofmarketable debt securities issued byresidents (debentures, bonds, promissorynotes).

– Participation in mutual funds recorded inthe Registers of the Spanish NationalSecurities Market Commission.

– The acquisition by nonresidents of realestate in Spain valued at more than g 3,005,060, or where the investmentoriginates from a tax haven, whatever itsamount.

– The formation, formalization orparticipation in joint ventures,

foundations, economic interest groupings,cooperatives and joint-property entities,with the same characteristics as in theprevious paragraph.

Foreign investments not included in theabove list are not subject to the rules ofthe new Royal Decree. Specifically,investments in real estate and jointventures, foundations etc. of less than g 3,005,060 are excluded unless theyoriginate from tax havens.

The Royal Decree also does not apply toparticipating loans, which were deemedformerly to be investments subject to thereporting/verification rules when theweighted average time to maturityexceeded 5 years.

Foreign investments to which the RoyalDecree does not apply are totallyderegulated, and no notice is required(although they may be subject to industry-specific regulations). Nevertheless, therules on exchange control and notificationof monetary flows to or from othercountries remain in force.

c) Party required to report foreigninvestments

As a general rule, the nonresident ownerof the investment and, in addition, anySpanish public notary acting in thetransaction, are obliged to report theinvestment to the authorities.

However, depending on the type of assetinvested in (mutual funds and securities),credit, financial, deposit-taking ormanagement entities for the assetsinvolved in the transaction may be obligedto report the investment. In the case ofregistered shares, the Spanish companyreceiving the investment will be obliged toreport it.

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d) Reporting rules

As a general rule, all foreign investmentsand the liquidation thereof that are subjectto the rules of Royal Decree 664/1999must be reported after the event to theInvestments Register at the Ministry ofEconomy. Only investments from taxhavens must also be reported beforehandto the Foreign Investments Register, exceptin the following cases:

– Investments in marketable debt securitiesissued or offered publicly, whether ornot they are traded on an officialsecondary market, and units in mutualfunds recorded in the Registers of theSpanish National Securities MarketCommission.

– Where the foreign interest does notexceed 50% of the capital stock of theSpanish company in which the investmentis made.

It is important to stress that this priorreporting obligation is not equivalent tothe former prior verification requirement,and, once the investment has beenreported, the investor may make hisinvestment without having to wait for anyreply from the authorities.

2. Monitoring of foreigninvestments The General Directorate for Trade andInvestment of the Ministry of Economy is incharge of monitoring compliance with theprovisions of the Royal Decree.

In this connection, Spanish companieswhich have foreign shareholders andSpanish branches of nonresident persons,

and residents owning investments abroadcan be required specifically or generally tofile an annual report with the GeneralDirectorate on the status of their foreigninvestments.

Owners of investments, Spanish companieswith nonresident shareholders, publicauthenticating officials, companies providingservices, or investment companies and creditentities and other finance entities that havetaken part in investment transactions mayalso be required by the General Directorateto provide the information necessary in eachparticular case.

3. Safeguard clausea) Suspension of the deregulation rules

The Spanish Council of Ministers cansuspend the application of the deregulationrules established in the Royal Decree toinvestments that, because of their nature,form or conditions to which they aresubject, affect or may, even if onlyoccasionally, affect activities relating to theexercise of governmental power oractivities that affect, or could affect, publicorder, security or health.

The effect of the suspension is that theinvestments concerned must undergo aprior procedure to obtain administrativeclearance from the Council of Ministers. Insuch cases, the application is filed with theGeneral Directorate for Trade andInvestment, and the decision is taken at theproposal of the Minister of Economy orthe head of the Department withjurisdiction over the particular matter, aftera report from the Foreign InvestmentsBoard.

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b) Investments in national security-relatedactivities

Under the Royal Decree itself, the Councilof Ministers may exercise the powers ofsuspension described above (suspendingthe deregulation rules) in respect of foreigninvestments in Spain in activities directlyrelated to national security, such as theproduction or marketing of arms,munitions, explosives and otherarmaments.

Telecommunications, which under theformer rules were deemed to be anactivity directly related to national security,disappear from this category, although anylimitations established bytelecommunications industry regulationsstill apply.

However, in the case of listed companiesengaging in national security-relatedactivities, only acquisitions by nonresidentsof more than 5% of their capital stock, oracquisitions of less than 5% that enablesuch investors to form, directly orindirectly, part of their managing bodies,will require clearance.

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1. Sole proprietorship vs.joint ventureA distinction may be drawn between variousalternatives once the foreign investor hasdecided to invest in Spain:

– Incorporation of a Spanish company (anS.A. or any other of the forms of businessenterprise described in Chapter 3) orformation of a branch.

As previously mentioned, various kinds ofmercantile entities envisaged by Spanishlaw can be used by foreign investors toinvest in Spain. Traditionally, thecorporation (S.A.) has been the mostcommonly used form, although the limitedliability company (S.L.) has gainedpopularity in recent years.

The following sections of this Chapterexplain the legal steps and costs ofincorporating a Spanish corporation andsetting up a branch (the main steps andcosts of the acquisition of shares of anexisting Spanish company are alsoexplained in this Chapter).

– Association with other entrepreneursalready established in Spain.

Foreign investors may find a joint venturewith a Spanish company to be the mostappropriate form of presence in Spain,since it allows the parties to share risksand combine resources and expertise.

There are different vehicles which can beused to set up a joint venture underSpanish law as explained below:

- An Economic Interest Grouping(“Agrupación de Interés Económico”,EIG) or a European EIG (EEIG).

- A Temporary Business Association(“Unión Temporal de Empresas” or UTE).

- Another possibility is to execute a formof Spanish partnership agreement knownas a Participation Account Agreement(silent partnership), “contrato de cuentaen participación”, with a Spanishcompany.

- Joint ventures through Spanishcorporations or limited liabilitycompanies.

However, not every investor wishing tooperate and/or distribute his goods orservices in Spain needs necessarily to set upa new entity or enter into an associationwith other existing entities. Penetration inthe Spanish market and a satisfactoryresponse to existing demand can beachieved through the various forms ofdistribution agreements available in Spain,without having to physically establish acenter of operations in Spain. The variousalternatives include:

– Signing a distribution agreement.

– Operating through an agent.

– Operating through commission agents.

– Franchising.

Each of these forms of doing business inSpain offers various advantages that shouldbe balanced against the possible problemsthat each one may raise and that need to beconsidered from the tax and legal points ofview.

IV. Establishing a business presence in Spain

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2. Forms of businesscooperationOne of the most common forms of businesscooperation between companies is the jointventure (JV). Different forms of joint ventureare provided by Spanish legislation forcarrying on a business between one or morepartners.

a) Temporary Business Associations(UTEs)

Under Spanish law, UTEs are temporarybusiness cooperation vehicles set up for aspecified or unspecified period of time, forthe purpose of carrying out a specificproject or service. UTEs allow severalcompanies to operate together in onecommon project. This form of associationis very common for engineering andconstruction projects but can be used inother sectors as well.

UTEs are not corporations and have nolegal personality. They are formed bynotarial deed and are registered in theSpanish Ministry of Finance’s SpecialRegister of UTEs. Furthermore, they maybe also registered at the CommercialRegistry. However, UTEs must complywith bookkeeping and accountingrequirements similar to those ofcorporations.

UTEs are governed by Law 18/1982, on theTax Regime of Groupings and TemporaryBusiness Associations and RegionalIndustrial Development Companies,amended, inter alia, by Law 12/1991 andLaw 43/1995. See Chapter 4, p. 109.

b) Economic Interest Groupings (EIGs)

One of the main differences betweenUTEs and EIGs is that the latter areentities of a mercantile nature which havetheir own legal personality as separatelegal entities.

Additionally, the EIG must be founded as anot-for-profit entity and may only becreated in order to help its membersachieve their objectives. They may not acton behalf of their members nor may theysubstitute for them in their operations.Consequently, the EIG is most commonlyused to provide centralized services withinthe context of a wider association orgroup of companies, such as centralizedpurchasing, sales, information managementor administrative services.

Spanish law lays down certain requirementsfor EIGs:

– They may not interfere with theirpartners’ decisions on personnel, financeor investment matters, and may notmanage or control their activities.

– They may not hold, directly or indirectly,a portfolio of investments in othercompanies unless shares or holdingsneed to be acquired in order to achievethe EIG’s purpose. If this is the case, theshares or holdings must be immediatelytransferred to its partners.

– They must be formed by notarial deed.

EIG’s members are considered personallyand severally liable for the entity’s debts,although secondarily to the EIG. Theirmain obligation is to contribute to theEIG’s capital, as agreed, and to share in itsexpenses.

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There are two main governing bodies in anEIG: its members’ meetings and itsmanagers. The managers are jointly liablewith the EIG for all tax obligations accruedand for any damage caused unless they canprove that they acted with due diligence.They are governed mainly by Law 12/1991,of April 29, on Economic InterestGroupings.

The European EIG (EEIG) also has its ownlegal personality and EEIGs incorporated inSpain share the main featurescontemplated under EU Regulation2137/85, which provides the basicgoverning rules for EEIGs.

c) Participation Account Agreement(Silent partnership)

The nature of this form of businesscooperation, which is close to anunincorporated partnership agreement,consists of the financial collaboration byvirtue of which one or moreentrepreneurs (nonmanaging investor-participant) provide with monetary or inkind contributions another entrepreneur(managing participant) in order to share aninterest in the performance of certainactivities carried out by the managingparticipant. Such an interest refers to boththe positive and negative results of thatparticular business (i.e. income or lossesarising from the activity in question).

The contributions, whether monetary or inkind, do not qualify as capital contributionsas such, but rather this agreement onlycreates a right in favor of the nonmanaginginvestors to share in the results of theactivity concerned. Therefore,nonmanaging investors are notshareholders in the managing company.

As indicated in the Commercial Code, thistype of agreement does not require anylegal formality (public deed or filing withthe Mercantile Register), although, inpractice, both parties usually reflect it in apublic deed, to be used, if necessary, as aproof before third parties.

Under current legislation, theremuneration obtained by the nonmanaginginvestors must be recorded as an expensein the accounts of the managing participant.This expense qualifies as a tax-deductibleitem, at 35%, for corporate income taxpurposes.

Lastly, the execution of this agreement in apublic instrument is regarded as a taxableevent under the “Corporate Transactions”heading of the Transfer Tax Law.

d) Joint ventures through Spanishcorporations or limited liabilitycompanies

Notwithstanding the comments made inother sections on the formation, basiccharacteristics and features of thegoverning bodies of corporations(“Sociedad Anónima”, S.A.) and limitedliability companies (“Sociedad deResponsibilidad Limitada”, S.L.), we outlinebelow the legal or bylaw requirements forthe adoption of resolutions at theshareholders’ and board meetings of bothtypes of company (as well as other generalmatters), since such companies arefrequently used as the vehicle for jointventures.

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Spanish Corporations Law Limited Liability Companies Law

Minimum Minimum Article stake required Minority Shareholders Rights in a Spanish S.A. and S.L. stake required Article

a) General matters:

Art. 114.1 1% Right to request the presence of a notary public at the 5% Art. 55Shareholders’ Meeting.

Art. 100 5% Right to request the calling of a Shareholders’ Meeting 5% Art. 45at any time.

(*) 1% or 5% Right to request the suspension of a resolution of the 5% Art. 56Shareholders’ Meeting when such resolution has been contested at Court.

Art. 134.2 5% Right to oppose an extrajudicial settlement of an action 5% Art. 69for liability filed by the Company against directors.

Art. 134.4 5% Right to file an action for liability of directors if such 5% Art. 69claim has not been filed by the company itself.

Art. 143 5% Right to contest any resolution adopted by the Board 5% Art. 70of Directors.

Art. 205.2 5% Right to request the Mercantile Registrar to appoint 5% Art. 84an auditor.

Art. 269 5% Right to request the Court to appoint a receiver to Not Regulatedmonitor the liquidation process should the company be dissolved for any reason.

Art. 206 5% Right to request the Court to revoke the appointment 5% Art. 84of an auditor.

Art. 112.2 25% Right to request any kind of information regarding the 25% Art. 51Company to be disclosed at a Shareholders’ Meeting.

b) Quorums of attendance and majorities required to adopt resolutions at Shareholders’ and Board Meetings of S.A. Corporations:

Art. 102 25% Quorum at first call for Shareholders’ Meeting. No quorum is required at second call. In any case, a simple majority is required for the adoption of resolutions.

Art. 103.2 25% Quorum at second call for meetings where special resolutions, such as issuance of debentures,or reduction of capital, re-registration, merger, spin-off or any other amendment of the bylaws, are adopted. If at such meetings shareholders representing less than 50% of the voting stock are present, a 2/3 majority is required for the adoption of resolutions.

Art. 103.1 50% Quorum at first call for meetings where special resolutions, such as issuance of debentures, increase or reduction of capital, re-registration, merger, spin-off or any other amendment of the bylaws, are adopted.

Art. 140 50% Required majority of votes cast by members present or represented for the adoption of resolutions by the Board of Directors.

Art. 141.2 66% Required majority of votes cast by members of the Board of Directors present or represented for the permanent delegation of authority to the Executive Committee or in the managing director.

c) Quorums and majority of votes required for the adoption of resolutions at Shareholders’ and Board Meetings of S.L. limited liabilitycompanies:

Art. 53.1 33% Quorum for meetings the agenda of which includes resolutions not listed in articles 53.2 a) nor 53.2 b). In any case, a simple majority of the votes cast is required.

Art. 53.2 a) 50% Required majority of votes for resolutions to increase or reduce capital or to amend the bylaws in any way.

Art. 53.2 b) 66% Required majority of votes for resolutions such as re-registration, merger, spin-off, disapplication of the preemptive right in capital increases, removal of shareholders, etc.

Art. 57 50% Required majority of votes cast by members present or represented for the adoption of resolutions by the Board of Directors.

Art. 57 66% Required majority of votes cast by members of the Board of Directors present or represented for the delegation of authority to the Executive Committee or the managing director.

(*) According to Art. 727 of Law 1/2000, on Civil Procedure.

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3. Distribution, agency,commission agency andfranchising agreementsa) Distribution agreements

The different channels through which thesupply of goods and services is routed tothe consumers have been substantiallydeveloped, providing investors with variousforms of distribution agreements. Theseagreements offer foreign investors a veryinteresting alternative to the organizationof a company or branch or the enteringinto commercial cooperation agreementswith previously existing entrepreneurs, forcarrying out their operations in Spain,since the initial investment required isconsiderably low.

Several types of distribution agreementhave emerged in practice. Please note thatthey are unregulated agreements that allowthe parties broad discretion to decide onthe contents of the contract, since there isno current specific legislation on this area.

Under a distribution agreement, one of theparties undertakes to achieve the mostwidespread distribution of a good orservice belonging to the other party.

Distributors are legal entities that form anintrinsic, albeit not truly integrated, part ofthe commercial network of the ventureand are united by a business relationshipand by the desire to boost sales.

Agreements in the Spanish distributionnetworks or system can be divided intothe following broad categories:

– Commercial concession or exclusivedistribution agreements

The supplier not only undertakes not toprovide his products to more than onedistributor within a specified territory

but also not to sell those productshimself within the territory of theexclusive distributor.

– Sole distribution agreements

The only difference from theaforementioned agreement is that, in thecase of sole distribution agreements, thesupplier reserves the right to supply theagreed products to users in the territoryof the concession.

– Authorized distribution agreements underthe selective distribution system

There are certain products which,because of their nature, require specialtreatment by distributors and sellers.The form of distribution used in bothcases is called “selective distribution”because the distributors are carefullyselected according to their capacity forhandling technically complex productsand for preserving a certain image orbrand name.

As for the tax treatment of distributionagreements, nonresident manufacturers notestablished in Spain will record businessincome in Spain on the sale of their goodsto distributors, and this income is typicallynot taxable in Spain (for more information,see the comments on taxation in Chapter4). As for the taxation of individual orcorporate distributors resident in Spain,see the comments on taxation in Chapter 4.

b) Agency agreements

Spanish Law 12/1992, on AgencyAgreements, implemented Directive86/653/EEC.

Through an agency agreement, anindividual or company, called an agent,undertakes, vis-à-vis another, to negotiatecommercial acts or operations on behalf of

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another, as an independent intermediary,on a continuous or regular andremunerated basis without assuming therisk and hazard of said aforementionedoperations, unless otherwise agreed.

The essential components of theagreement are as follows:

– The agent is an independentintermediary.

– The agent’s duties vis-à-vis his principalmust be continuous and regular.

– A commercial agent does not act in hisown name and on his own behalf, butrather in the name and on behalf of oneor more principals.

– Remuneration is essential, and thereforeexcludes unpaid agents from the scope ofthe law.

The agent must, of his own accord orthrough his employees, negotiate and, ifrequired by contract, conclude thecommercial acts or operations he isinstructed to handle. Among other specificregulations it is provided that:

– It is the agent’s general duty to actdiligently and in good faith safeguardingthe interests of his principal.

– An agent cannot subcontract his activitiesunless expressly authorized to do so byhis principal.

– An agent is authorized to negotiate theacts or operations detailed in the agencyagreement but can only conclude themon behalf of the principal when he isexpressly authorized to do so.

– The agent may act on behalf of differentprincipals, unless the related goods orservices are identical or similar, in whichcase the consent of the existingprincipals is required.

There are three types of remuneration foran agent: a fixed sum, a commission, andany combination of the two. In the absenceof any agreement, the remuneration (typeand amount of percentage) is fixed inaccordance with the commercial practicesin the place where the agent carries on hisactivities. Where no such practice exists,the remuneration will be fixed taking intoaccount all aspects of the operation.

The restraint of trade clause –restricting orlimiting the activities that can be carried outby the agent once the agency agreement hasbeen terminated– can never be valid formore than two years after termination ofthe agency agreement, as a general rule.

Regarding its tax treatment, the key issueis determining whether a commercial agentcan be considered as a permanentestablishment in Spain of the principal, andthis will depend on whether or not thereis a relationship of dependence betweenthem. In connection with the taxation ofresidents and nonresidents in Spain, seeour comments in Chapter 4.

c) Commission agency agreements

This is the mandate under which theauthorized agent (commission agent)undertakes to perform or participate in acommercial act or agreement for theaccount of another (the principal).Commission agents may act:

– in their own name, i.e. they are notdirect representatives and they acquirerights against the contracting thirdparties and vice versa, and

– on behalf of their principal. This givesrise to the effects of directrepresentation and, accordingly, theprincipal acquires rights against thirdparties and vice versa.

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The obligations of commission agents areas follows:

– To defend the interests of their principalsas if such interests were their own andto perform their engagement personally.Commission agents may delegate theirduties if they have authority to do so andmay use employees under theirresponsibility.

– To account for amounts that they havereceived as commission and to reimburseany excess amount. They are required toreturn any unsold merchandise.

– In general, commission agents are notliable to their principal for theperformance by third parties of therelated agreements, although this risk issecured by a commission del credereunder which commission agents are heldpersonally liable for the performance bythird parties of their obligations.

– Unless their principal consents,commission agents are barred frombuying for their own account or for theaccount of another the goods that theyhave been instructed to sell, and fromselling the goods that they have beeninstructed to buy.

The types of consideration which theprincipal undertakes to provide are, firstly,a commission and, secondly, lien andpreference rights in favor of thecommission agent as security for his claimsagainst his principal.

As for the tax treatment of transactionsunder this type of agreement, anonresident principal not established inSpain will record business income in Spainon the sale of his goods and this income istypically not taxable in Spain (for moreinformation, see the comments on taxation

in Chapter 4). As for the tax treatment ofindividual or corporate commission agentsresident in Spain, see the comments ontaxation in Chapter 4.

d) Differences and similarities between agency agreements andcommission agency agreements

The main similarity between the two typesof agreement is that, in both cases, anindividual or legal entity undertakes to payanother compensation for arranging anopportunity for the former to conclude alegal transaction with a third party or foracting as the former’s intermediary inconcluding that transaction.

The main difference between them is thatagency agreements involves an engagementwithout interruption, whereas commissionagency agreements involve occasionalengagements.

e) Franchising

Franchising is a system for marketinggoods, services and/or technology. It isbased on close, ongoing cooperationbetween enterprises that are legally andfinancially distinct and independent (thefranchisor and its individual franchisees)and, under this system, the franchisorgrants a right to, and imposes an obligationon, its individual franchisees to do businessusing the franchisor’s concept.

In return for a direct or indirect financialconsideration, this right entitles, andobliges, individual franchisees to use thebrand name and/or trade or service markfor the goods or services, the know-how,the technical and business methods, theprocedures and other intellectualproperty rights of the franchisor, backedby the ongoing provision of commercialand technical assistance under, and during

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the term of, the relevant writtenfranchising agreement between theparties.

With regards to any express rulesgoverning these business dealings, RoyalDecree 378/2003 only mentions thatfranchising agreements are authorizedunder the Antitrust Law if they meet therequirements stipulated in Regulation(EC) No. 2790/1999, of December 22,1999, relating to application of article81.2 of the Treaty to certain categories ofvertical agreements and concertedpractices and in Regulation (EC) No.1400/2002, of July 31, 2002, for themotor vehicles sector.

The current system of franchises wasamended by Royal Decree 2485/1998, ofApril 13, which was designed to establishthe basic conditions for carrying onfranchise activity. The Royal Decreeestablishes, firstly, what is described ascommercial activity under a franchise,stipulating that it is a contract wherebyone enterprise (the franchisor) assigns toanother (the franchisee), in exchange for adirect or indirect financial consideration,the right to operate a franchise to marketcertain types of products or services,including a series of actions such as thefollowing:

– Use of a common business name or signand uniform presentation of the premisesor means of transport forming thesubject-matter of the contract.

– Transfer by the franchisor to thefranchisee of know-how.

– Continued provision by the franchisor tothe franchisee of commercial or technicalassistance during the term of theagreement.

Secondly, a public administrative Registerof Franchisors has been established, whichis hierarchically subordinate to the GeneralDirectorate for Internal Trade of theMinistry of Economy. Individuals and legalentities must register with this Registerbefore commencement of the activity tobe assigned.

The main functions of the Register are asfollows:

– To register franchisors with the Register.

– To update periodically the list offranchisors registered with the Register.

– To register the cancellations offranchisors agreed by the AutonomousCommunities.

– To issue certificates of accreditation ofthe franchisors registered.

– To provide access to the information onthe Register to the administrative bodiesof the Autonomous Communities.

– To supply public information tointerested persons.

With regard to the various types ofagreement, the following can bementioned: industrial franchisingagreements (for the manufacture of goods),distribution franchising agreements (for thesale of goods) and service franchisingagreements (relating to the provision ofservices).

The advantages offered by a franchisingagreement include the fact that afranchising agreement is a form of productand/or service distribution that enables auniform distribution network to be swiftlycreated with limited investment.Franchising also enables independenttraders to set up installations more rapidlyand with greater chances of success than if

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they did so themselves without the know-how and assistance of the franchisor,thereby increasing their competitiveness.The uniform nature of a franchiseddistribution network and the ongoingcooperation between franchisor andfranchisee ensure constant product andservice quality.

The requirements of the previous EURegulation to be met by franchisingagreements in order to avoid violatingantitrust law may be used to define theessence of the franchise agreement, whichwill permit it to be differentiated from“false” or “void” franchises. Theserequirements are:

– The use of a common mark or otherdistinctive sign and the uniformpresentation of premises, in order topreserve the unity of the network.

– The communication by the franchisor tothe franchisee of secret, substantial andidentified know-how.

– Ongoing provision of assistance by thefranchisor.

Lastly, as regards the tax treatment offranchising agreements, the nature of theconsideration paid by the franchisee to thefranchisor should be analyzed since it couldbe considered as a royalty and as businessincome, or only as a royalty, depending onthe different services rendered and rightsgranted (if royalties, they are taxed in Spainat 25% or at the reduced tax treaty rate, ifany). For the tax treatment of thefranchisee, see our comments on thetaxation of resident entities (Chapter 4).

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The most common form of legal entityunder Spanish mercantile law is thecorporation (“Sociedad Anónima” - S.A.),and the second most common is the limitedliability company (“S.L.”). However, it shouldbe noted that similar steps and expenses areinvolved for both legal structures.

1. Legal stepsThe example given here is of theincorporation of an S.A. by means of cashcontributions.

The formal act of incorporation takes placein the presence of a notary public, whoexecutes the related public deed ofincorporation (articles of incorporation). Thecapital stock must be fully subscribed and atleast 25% paid in at the time ofincorporation; the remaining 75% must bepaid in within the period stipulated in thebylaws. The minimum capital stock requiredis g 60,101 (compared with the much lowerfigure of g 3,005 for an S.L., which must befully paid in on formation).

The basic requirements for forming acorporation are as follows:

– Issuance by the Spanish Central MercantileRegister of a certificate of clearance foruse of the name of the new company. Thisstep should precede all others, so as tohave assurance that the proposed namecan in fact be used.

– Subsequent declaration of the investmentto the General Directorate for Trade andInvestment (DGCI) of the Ministry ofEconomy. In certain cases, mainly limited tocases of foreign investment originatingfrom territories or countries deemed tobe tax havens, prior declaration is required(see Section III of this Chapter for moredetailed information).

– Execution of the notarized public deed ofincorporation.

– Evidence of the identity of the foundershareholders.

The notary will require the persons whoappear before him for this purpose toexhibit: evidence of their identity; thepower of attorney (if applicable) torepresent a third party on whose behalfany of them appears; evidence of paymentand method of contribution (if applicable);the name clearance certificate from theMercantile Register (see above); and theform (for signature by the notary, ifapplicable) to declare subsequently theforeign investment to the DGCI’s ForeignInvestment Register (see previoussections). It is also necessary to providethe notary with the bylaws of thecompany.

If a shareholder is represented at the act ofincorporation, the power of attorney to beused must be sufficient and, if issuedabroad, must be duly legalized. There aretwo main procedures for such legalization:

- Execution of the power of attorney in thepresence of the Spanish consul in the foreigninvestor’s country. The foreign investorwould have to appear before the Spanishconsul, giving evidence of his identity andgranting the related power of attorney. Ifa company, rather than an individual, isthe foreign shareholder, apart from hisidentity, the person appearing before theconsul must evidence his power toexecute, in the name and on behalf ofthe shareholder, the power of attorneyto the person designated. The Spanishconsul will demand presentation ofwhatever documentation he considersnecessary, and will proceed to execute apublic deed of power of attorney, in

V. Incorporation of a corporation

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Spanish, to the person designated. Thispower of attorney can be used directly inSpain.

- The second procedure for legalization issimilar to the first one, but is applicablewhen a foreign public authenticating officeris involved. Thus, the foreign investorwould appear before the authenticatingofficer, giving evidence of his identity andgranting the related power of attorney. Ifthe foreign investor is a company, itsrepresentative would execute the powerof attorney in the presence of the publicauthenticating officer, who would certifythe document, and who would have tosatisfy himself as to the identity andcapacity of the representative of theforeign investor to grant the power ofattorney. The signature of the foreignauthenticating officer would also have tobe subsequently legalized (either by the“apostille” procedure approved by TheHague Convention of October 5, 1961,when applicable, or by a Spanish consulabroad). Under this second procedure,the power would normally be executedin the language of the authenticatingofficer who attests to the act. For thisreason, it would be necessary tosubsequently prepare an officialtranslation into Spanish.

– Evidence of payment can be provided in theform of appropriate bank documentationfor delivery to the notary attesting to theact of incorporation of the company.

– Assignment of a tax identification numberto the new company.

This is a necessary step for registration ofthe company in the Mercantile Register.This step (which involves no cost) consistsof filing a special form (also used for VAT

purposes) with the competent taxauthorities. A provisional number isgranted automatically. Once the companyhas been registered in the MercantileRegister, it must obtain the definitive taxidentification number within a maximumperiod of six months from the issuance ofthe provisional number.

– Payment of transfer tax (see 2. below).

A special form must be filed within amaximum period of 30 days from the actof incorporation. Again, this is a necessaryrequirement for registration of thecompany in the Mercantile Register.

– Registration in the Mercantile Register.

Once the above-mentioned steps havebeen completed, the public deed ofincorporation of the company is deliveredto the Mercantile Register for formalregistration of the company.

– Registration of the company for thepurposes of the business activities tax.

Newly incorporated companies must usethe same special form used to request atax identification number, to describe theirbusiness activity, and specify the article ofthe Law by virtue of which they areexempt from this tax (as explained inChapter 4, newly incorporated companiesor companies starting a new businessactivity are exempt from this tax duringthe two first tax periods in which theycarry out said activity). This step must becompleted before the company starts itsactivities.

– Registration of the company for VATpurposes.

– Payment of opening license tax (see 2.below).

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– Registration of the company for Spanishsocial security and occupational accidentinsurance purposes, and registration of theemployees for social security purposes.

– Compliance with certain proceduralformalities at the local office of theMinistry of Labor and Social Affairs.

2. Costs– Transfer tax at 1% on the capital amount.

– Fees of the notary public handling theincorporation, which are charged on asliding scale based on the capital amount.For guidance purposes, the official ratesamount to g 90 for the first g 6,010,applying afterwards a range from 0.45%down to 0.03% for capital in excess of g 601,012, and up to g 6,010,121. For theamount exceeding g 6,010,121, the Notarywill receive the amount that is freelyagreed upon by the granting parties.

– Fees for registering the company in thelocal Mercantile Register, following itsincorporation in the presence of thenotary. Here, too, there is a sliding scale ofofficially approved charges ranging from0.2% down to 0.005% for capital amountsin excess of g 6,010,121. In any case thetotal amount of the fee cannot exceed g 2,181.

– Opening license tax (see above): A one-time municipal levy, ordinarily of arelatively small amount.

– Other expenses (e.g. professional fees),which are not readily quantifiable.

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In general terms, the requirements,procedural formalities and costs of forming abranch are very similar to those for theincorporation of a subsidiary. The main legalsteps and costs of forming a branch aresummarized below, highlighting thedifferences with respect to the incorporationof a subsidiary.

1. Legal steps and costs– Subsequent declaration to the DGCI in

certain cases (see sections III and V formore detailed information). In some cases,prior declaration is required.

– Execution of the notarized public deed offormation in the presence of a Spanishnotary public. This formality consists ofnotarizing the resolution to form thebranch adopted previously by the parentcompany’s competent body.

In addition, the notary public will requirenot only documentation similar to thatrequired in the case of a subsidiary (i.e.evidence of the identity of the person whoappears before him; his power of attorneyto represent the parent company; evidenceof the payment and method of contribution(if applicable); and the form, whereapplicable, to declare the foreigninvestment to the DGCI’s ForeignInvestment Register), but also evidence ofthe existence of the parent company, itsbylaws, the names and personal data of itsdirectors, as well as the resolution adoptedby the competent body of the parentcompany to form a branch.

– Assignment of a tax identification number (*).

– Payment of transfer tax (exempt if certainrequisites are met) (*).

– Registration in the Mercantile Register (*).

– Registration of the branch for businessactivities tax purposes (*).

– Registration of the branch for VATpurposes (*).

– Payment of opening license tax (*).

– Registration for social security purposes (*).

– Compliance with the labor formalities (*).

2. Branch vs. subsidiarySummarized below are the main differencesbetween the two types of entity that shouldbe taken into consideration. It should benoted that most of the differences arise fromthe matters discussed in previous chapters.

From a Spanish legal standpoint, the maindifferences between a branch and asubsidiary are as follows:

– Minimum capital: An S.A. must have aminimum capital of g 60,101 (g 3,005 forS.L.’s, g 60,101 for mixed partnerships, andno legal minimum for generalpartnerships). A branch does not requireany minimum assigned capital.

– A subsidiary is a separate legal entity,whereas a branch is not a legal entity and hasthe same legal identity as its parent company.

– The liability of the shareholders of asubsidiary incorporated as an S.A. (or S.L.)for the debts of the subsidiary is limited tothe amount of the capital contributionsthey make or undertake to make, with theexceptions analyzed in Chapter 3. In thecase of a branch, there is no limit to theparent company’s liability.

VI. Formation of a branch

(*) As in the case of a subsidiary.

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From a tax standpoint, as stated earlier, boththe branch and the subsidiary are, in generalterms, taxed under Spanish corporateincome tax at 35% on their net income, butthere are some other aspects that should bementioned, among others:

– Remittance of profits: The remittance ofbranch profits and the distribution of asubsidiary’s dividend to a non-EU parentcompany resident in a non-treaty countryare taxable in Spain at the rate of 15%; ifthe parent company is EU-resident, theremittance or distribution is normally tax-exempt.

If the parent company is resident in a non-EU country with which Spain does have atax treaty, the dividends would be taxableat the reduced treaty rate and theremittance of branch profits would, undermost of the treaties, not be taxable inSpain.

– Share in parent company overheads: Inpractice, it is normally easier for theseexpenses (if any are imputed) to qualify asdeductible in the case of a branch than inthe case of a subsidiary.

– Interest on loans from a foreign parentcompany to its Spanish branch is not tax-deductible for the branch. By contrast, theinterest on loans from the shareholders ofa subsidiary is normally tax-deductible forthe subsidiary, provided that the transactionis valued on an arm’s-length basis.

3. Computation of Spanishcorporate income taxBelow is a very simple example of thecomputation of Spanish corporate incometax on the profit obtained by a Spanishsubsidiary or by the branch in Spain of aforeign company.

Parent company in

EU country (1) Treaty country Non-treaty country

Subsidiary:Profit of Spanish subsidiary 100 100 100Spanish income tax (35%) (2) 35 35 35Dividends 65 65 65Withholding tax on dividends – (4) 6.5 (5) 9.75 (3)

Total tax in Spain 35 41.5 44.75Branch:

Profit of Spanish branch 100 100 100Spanish income tax (35%) 35 35 35Profit remitted to the parent company 65 65 65Withholding tax – (4) – (6) 9.75 (7)

Total tax in Spain (8) 35 35 44.75(1) Spain has tax treaties in force with all EU countries.(2) See special tax rate for small and medium-sized companies in Chapter 4.(3) Withholding tax rate = 15%.(4) Exempt, provided certain conditions are met.(5) The withholding tax rate on dividends used in this example is 10% (the most common rate in the tax treaties entered into by Spain).(6) The branch profit tax will apply if provided for in the corresponding tax treaty (e.g. the U.S., Canada and Brazil).(7) Branch profit =15%.(8) Subject to the provisions of the corresponding tax treaty.

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1. Legal steps– Subsequent declaration of the acquisition

to the DGCI is required (see section III ofthis Chapter).

– Transfers of shares in a limited liabilitycompany must, in all cases, be attested toby an authenticating officer; transfers ofshares in Spanish corporations must beattested to by an authenticating officerwhere so required by Spanish legislation orif so agreed on by the parties. Theauthenticating officer will require evidenceof the following: identity of the partiesinvolved and, if applicable, the relatedpowers of attorney (if one or both of themact on behalf of another individual orentity); the seller’s title to the shares andthe appropriate forms, if applicable, todeclare the foreign investment to theDGCI’s Foreign Investment Register.

– Payment of transfer tax, if applicable: Asdescribed in the transfer tax section,transfers of shares of companies whoseassets consist mainly of Spanish real estateare, in certain cases, subject to transfer taxat 7% (certain Autonomous Communitieshave not enforced their own legislation andare still applying a 6% rate).

2. Costs– Fees of the authenticating officer attesting

to the transaction: In the case of a notarypublic, the scale applicable for theincorporation of a subsidiary or theformation of a branch is also applicablehere.

– In the case of a Spanish consul abroad, asimilar sliding scale tied to the price fixedis applicable. For guidance purposes, thereis a minimum fee for amounts below g 1,202 and then rates that range from0.75% and 0.05% for amounts in excess ofg 300,506.

– No transfer tax arises on this transaction,except in the cases mentioned above.

3. Special considerationsfor an acquisition of sharesof companies betweennonresidentsAcquisitions of shares of Spanish companiesbetween nonresidents that have alreadytaken place abroad may be formalized beforea Spanish authenticating officer.

The documents to be delivered to theSpanish authenticating officer formalizing thetransaction for Spanish purposes in certaincases include the special forms on which theinvestments and corresponding divestmentare declared to the DGCI’s ForeignInvestment Register.

VII. Acquisition of shares of an existing corporation

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1. Legal steps– General

- Subsequent declaration is required whenthe amount exceeds g 3,005,060 (priordeclaration to the DGCI in certaincases).

- Execution of the notarized public deed ofpurchase.

The acquisition must be attested to by aSpanish notary public or by a Spanishconsul abroad, to whom it is necessaryto show evidence of: the identity of theparties and, if applicable, the relatedpowers of attorney; the seller’s title tothe property; the special form (for hissignature) to declare the investment tothe DGCI’s Foreign Investment Register;and the effective payment of theinvestment.

- Payment of transfer tax or VAT andstamp tax.

If the vendor is a private individual whois not deemed to be a propertydeveloper, generally transfer tax at 7%would be applicable regardless of thenature of the real estate to be sold(certain Autonomous Communities havenot enforced their own legislation andare still applying a 6% rate).

If the vendor is a company or anindividual developer, the following casescan arise:

* Transfers of buildable land and firstdelivery of buildings: VAT at 16% (7% ifthe building is for housing) plus stamptax, in general, at 1%. The stamp taxrate can be modified by theAutonomous Communities.

* Transfers of rural (unbuildable) landand second or subsequent delivery ofbuildings: Transfer tax or VAT. VAT isapplicable if the acquiror is anentrepreneur or professional, who isentitled to deduct 100% of the inputVAT and the vendor chooses to payVAT rather than transfer tax1.

– If the real estate is located in the CanaryIslands (where VAT is not applicable), thefollowing would be applicable:

- If the vendor is a developer (individual orcompany) the following cases can arise:

* Transfer of buildable land and firstdelivery of buildings: Canary IslandsIndirect General Tax (CIIGT) at 5%plus stamp tax at 0.5% (regardless ofthe nature of the real estate).

* Transfer of rural (unbuildable) land andsecond or subsequent delivery ofbuildings: Transfer tax or CIIGT. CIIGTis applicable if the acquiror is anentrepreneur or professional, and thevendor chooses to pay CIIGT ratherthan transfer tax.

- If the vendor (individual) is not adeveloper: Transfer tax (regardless of thenature of the real estate).

– Registration of the property in the OfficialProperty Register.

This step should be completed as soon asthe public deed of purchase is notarized, inorder to ensure that the acquirer’sproperty rights are duly protected.

VIII. Acquisition of Spanish real estate

(1) The stamp tax rate generally applicable to public deedsdocumenting transfers of real estate where the vendor waivesthe VAT exemption and chooses to pay transfer tax, is 1.5%.Nevertheless, some Autonomous Communities apply a differentrate (i.e. Cataluña: 2%).

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2. Costs– Notary public fees (as in previous

sections).

– Transfer tax or VAT and stamp tax (seeabove).

– Property Register fees. Here, again, asliding scale is applicable, ranging from 0.4%(only for the first g 6,010) down to 0.02%for amounts exceeding g 601,012.

– Municipal tax on the increase in urban landvalue. This tax is optional for municipalitiesand is based on the deemed increase in thevalue of urban land from the date of thelast sale to the date of the current sale.Although this tax is payable by the seller,the authorities claim it from the purchaser.The amount of this tax depends (amongother circumstances) on where the land islocated.

– Property tax. An annual tax (“Impuestosobre Bienes Inmuebles”) is levied on thecadastral value of the real estate from thedate of acquisition.

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U s e f u l a d d r e s s e s

297

addressesUseful

I. Relevant institutions 299

II. Other institutions 302

III. Stock exchanges andNational Securities Market Commission 303

IV. Banks 304

V. Autonomous Community and Autonomous Citydevelopment companies 305

VI. Principal Spanish economic and trade offices abroad 309

Useful addresses

10

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SECRETARÍA DE ESTADO DE COMERCIOY TURISMO (SECRETARIAT OF STATE FOR TRADEAND TOURISM)Paseo de la Castellana, 16228071 MadridPh: 00 34 (91) 349.35.00Fax: 00 34 (91) 583.00.20E-Mail: [email protected]: www.mcx.es

INSTITUTO ESPAÑOL DE COMERCIOEXTERIOR (ICEX) (SPANISH INSTITUTE FOR FOREIGNTRADE)Paseo de la Castellana, 14-1628046 MadridPh: 00 34 (91) 349.61.00Fax: 00 34 (91) 577.07.50E-Mail: [email protected]: www.icex.es

DIRECCIÓN GENERAL DE COMERCIO E INVERSIONES (GENERAL DIRECTORATE FOR TRADEAND INVESTMENTS)Paseo de la Castellana, 16228071 MadridPh: 00 34 (91) 349.36.56Fax: 00 34 (91) 349.60.08E-mail: [email protected]: www.mcx.es

SUBDIRECCIÓN GENERAL DEINVERSIONES EXTERIORES (GENERAL SUBDIRECTORATE FORFOREIGN INVESTMENT)C/ Trafalgar 27 (2nd fl.)28010 MadridPh: 00 34 (91) 591.45.31Fax: 00 34 (91) 591.45.49 Web: www.mcx.es

SUBDIRECCIÓN GENERAL DEINCENTIVOS REGIONALES (GENERAL SUBDIRECTORATE OFREGIONAL INCENTIVES)C/ Castelló 117 (2nd fl.)28006 MadridPh: 00 34 (91) 545.08.09Fax: 00 34 (91) 545.09.80E-mail: [email protected]

DIRECCIÓN GENERAL DE TRIBUTOS (GENERAL DIRECTORATE OF TAXES)C/ Alcalá, 528014 MadridPh: 00 34 (91) 595.80.00Fax: 00 34 (91) 595.84.54Web: www.minhac.es

DIRECCIÓN GENERAL DEL TESORO Y POLÍTICA FINANCIERA (GENERAL DIRECTORATE OF THETREASURY AND FINANCIAL POLICY)Paseo del Prado, 628014 MadridPh: 00 34 (91) 209.95.00Fax: 00 34 (91) 209.97.45E-mail: [email protected]: www.tesoro.es

CENTRO DE DESARROLLOTECNOLÓGICO INDUSTRIAL (CDTI) (TECHNOLOGICAL AND INDUSTRIALDEVELOPMENT CENTER)C/ Cid, 428001 MadridPh: 00 34 (91) 581.55.00Fax: 00 34 (91) 581.55.84E-Mail: [email protected]: www.cdti.es

I. Relevant institutions

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DIRECCIÓN GENERAL DE POLÍTICA DE LA PEQUEÑA Y MEDIANA EMPRESA (GENERAL DIRECTORATE OF SMALLBUSINESS POLICY)C/ María de Molina, 50, (2nd fl.)28071 MadridPh: 00 34 (91) 545.08.20Fax: 00 34 (91) 545.08.90E-Mail: [email protected]: www.ipyme.orgPh. info: 900 190 092

DIRECCIÓN GENERAL DE TRABAJO (GENERAL DIRECTORATE OF LABOR)C/ Pío Baroja, 628009 MadridPh: 00 34 (91) 363.18.00Fax: 00 34 (91) 363.20.38Ph. info: 00 34 (91) 363.18.85Web: www.mtas.es

DIRECCIÓN GENERAL DE ORDENACIÓNDE LAS MIGRACIONES (GENERAL DIRECTORATE OFMIGRATION)Paseo del Pintor Rosales, 44-4628008 MadridPh: 00 34 (91) 363.73.23Fax: 00 34 (91) 542.24.88E-mail: dgomareacoordinacion/sscc1/[email protected]: www.mtas.es

DIRECCIÓN GENERAL DE ASUNTOSCONSULARES Y PROTECCIÓN DE LOSESPAÑOLES EN EL EXTRANJERO (GENERAL DIRECTORATE OF CONSULARAFFAIRS)C/ General Pardiñas, 5528006 MadridPh: 00 34 (91) 379.17.00/379.16.10Fax: 00 34 (91) 577.70.34Web: www.mae.es

AGENCIA ESTATAL DE ADMINISTRACIÓNTRIBUTARIA: DPTO. DE ADUANAS EIMPUESTOS ESPECIALES (STATE TAX ADMINISTRATION AGENCY:CUSTOMS AND TARIFFS DEPARTMENT)Avda. Llano Castellano, 1728034 MadridPh: 00 34 (91) 728.94.50Fax: 00 34 (91) 358.18.52Web: www.aeat.es

MINISTERIO DE AGRICULTURA, PESCA Y ALIMENTACIÓN(MINISTRY OF AGRICULTURE, FISHINGAND FOOD)Paseo de la Infanta Isabel, 128071 MadridPh: 00 34 (91) 347.50.00Fax: 00 34 (91) 347.54.95E-Mail: [email protected]: www.mapya.es

DIRECCIÓN GENERAL DEINVESTIGACIÓN(GENERAL DIRECTORATE OF RESEARCH)Paseo de la Castellana, 16028071 MadridPh: 00 34 (91) 349.40.00Fax: 00 34 (91) 457.80.66E-Mail: [email protected]: www.mcyt.es

INSTITUTO NACIONAL DE EMPLEO(NATIONAL EMPLOYMENT INSTITUTE-INEM)C/ Condesa de Venadito, 928027 MadridPh: 00 34 (91) 585.98.88Fax: 00 34 (91) 377.58.81Web: www.inem.es

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COMPAÑÍA ESPAÑOLA DEFINANCIACIÓN DEL DESARROLLO(COFIDES)C/ Príncipe de Vergara, 13228002 MadridPh: 00 34 (91) 745.44.80/562.60.08Fax: 00 34 (91) 561.00.15E-Mail: [email protected]: www.cofides.es

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CONSEJO SUPERIOR DE CÁMARAS DECOMERCIO INDUSTRIA Y NAVEGACIÓNDE ESPAÑA (CSC) (SUPREME COUNCIL OF CHAMBERS OF COMMERCE, INDUSTRY ANDNAVIGATION OF SPAIN)C/ Velázquez, 15728002 MadridPh: 00 34 (91) 590.69.00Fax: 00 34 (91) 590.69.08/10E-Mail: [email protected] Web: www.camaras.org

CEOE (THE SPANISH EMPLOYERSCONFEDERATION)C/ Diego de León, 5028006 MadridPh: 00 34 (91) 566.34.00Fax: 00 34 (91) 562.80.23E-Mail: [email protected] Web: www.ceoe.es

CEPYME (THE SPANISH SMALL BUSINESSCONFEDERATION)C/ Diego de León, 5028006 MadridPh: 00 34 (91) 411.61.61Fax: 00 34 (91) 564.52.69E-Mail: [email protected] Web: www.cepyme.es

AGENCIA ESPAÑOLA DE COOPERACIONINTERNACIONAL (AECI) (SPANISH AGENCY FORINTERNATIONAL COOPERATION)Avda. Reyes Católicos, 428040 MadridPh: 00 34 (91) 583.81.00Fax: 00 34 (91) 583.83.11/583.83.10E-Mail: [email protected] Web: www.aeci.es

II. Other institutions

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BOLSA DE MADRID (MADRID STOCK EXCHANGE)Plaza de la Lealtad, 128014 MadridPh: 00 34 (91) 589.26.00Fax: 00 34 (91) 589.12.52E-Mail: [email protected]: www.bolsamadrid.es

BOLSA DE BARCELONA (BARCELONA STOCK EXCHANGE)Paseo de Gracia, 1908007 BarcelonaPh: 00 34 (93) 401.35.55Fax: 00 34 (93) 401.36.25E-Mail: [email protected]: www.borsabcn.es

BOLSA DE BILBAO (BILBAO STOCK EXCHANGE)C/ José María Olábarri, 148001 BilbaoPh: 00 34 (94) 403.44.00Fax: 00 34 (94) 403.44.30E-Mail: [email protected]: www.bolsabilbao.es

BOLSA DE VALENCIA (VALENCIA STOCK EXCHANGE)C/ Libreros, 2-446002 ValenciaPh: 00 34 (96) 387.01.00Fax: 00 34 (96) 387.01.33/60E-Mail: [email protected]: www.bolsavalencia.es

COMISIÓN NACIONAL DEL MERCADODE VALORES (CNMV) (SPANISH NATIONAL SECURITIES MARKET COMMISSION)P° de la Castellana, 1928046 MadridPh: 00 34 (91) 585.15.00Fax: 00 34 (91) 319.33.73E-Mail: [email protected]: www.cnmv.es

III. Stock exchanges and National Securities Market Commission

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BANCO DE ESPAÑA (BANK OF SPAIN)C/ Alcalá, 5028014 MadridPh: 00 34 (91) 338.50.00Fax: 00 34 (91) 531.00.59E-Mail: [email protected] Web: www.bde.es

INSTITUTO DE CRÉDITO OFICIAL (ICO)(OFFICIAL CREDIT INSTITUTE)Paseo del Prado, 428014 MadridPh: 00 34 (91) 592.16.00Fax: 00 34 (91) 592.17.00E-Mail: www.ico.es

IV. Banks

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ANDALUCÍA

INSTITUTO DE FOMENTO DE ANDALUCÍA (IFA)D. Juan Carlos Moreno MuruveE-Mail: [email protected]/ Torneo, 2641002 SevillaPh: 00 34 (95) 503.07.00Fax: 00 34 (95) 503.07.75/80Web: www.ifa.es

ARAGÓN

INSTITUTO ARAGONÉS DE FOMENTO (IAF)D. Javier MartínezC/ Teniente Coronel Valenzuela, 950004 ZaragozaPh: 00 34 (976) 70.21.01/00Fax: 00 34 (976) 70.21.03E-Mail: [email protected]: www.iaf.es

ASTURIAS

INSTITUTO DE DESARROLLOECONÓMICO DEL PRINCIPADO DE ASTURIAS (IDEPA)Dª Mª José Suárez PuenteDesarrollo Industrial de Nuevas TecnologíasE-Mail: [email protected] Tecnológico de Asturias, s/n33420 Llanera (Asturias)Ph: 00 34 (985) 98.00.20Fax: 00 34 (985) 26.44.55E-Mail: [email protected]: www.ifrasturias.com

BALEARIC ISLANDS

OFICINA DE PROMOCIÓN INDUSTRIALD. Ángel Gallego FernándezE-Mail: [email protected]/ Reina Constanza, nº 407006 Palma de MallorcaPh: 00 34 (971) 17.65.07Fax: 00 34 (971) 17.61.54E-Mail.: [email protected]: www.idi.es

BASQUE COUNTRY

SOCIEDAD PARA LA PROMOCIÓN YRECONVERSIÓN INDUSTRIAL, S.A. (SPRI)D. Fernando GonzálezE-Mail: [email protected]/ Gran Vía, 35-3º48009 BilbaoPh: 00 34 (94) 403.70.00Fax: 00 34 (94) 403.70.22Web: www.spri.es

CANARY ISLANDS

SOCIEDAD CANARIA DE FOMENTOECONÓMICO, S.A. (SOFESA) CONSEJERÍA DE ECONOMÍA, HACIENDAY COMERCIOD. José Ramón JiménezE-Mail: jramon. [email protected]/ Nicolás Estévanez, nº 30-2º35008 Las Palmas de Gran CanariaPh: 00 34 (928) 30.74.56Fax: 00 34 (928) 30.74.67Web: www.invertirencanarias.com

V. Autonomous Community andAutonomous City development companies

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ZEC TENERIFEDª Teresa MirallesE-Mail: [email protected] José Antonio, 3 - 5ºEdificio Mapfre38003 - Santa Cruz de TenerifePh: 00 34 (922) 29.80.10Fax: 00 34 (922) 27.80.63Web: www.zec.org

CANTABRIA

SOCIEDAD PARA EL DESARROLLOREGIONAL DE CANTABRIA, S.A.(SODERCAN)D. Aurelio Rodríguez ZubelzuE-Mail: [email protected]/ Eduardo Benot, 5-1º-C39003 SantanderPh: 00 34 (942) 31.21.00Fax: 00 34 (942) 21.70.11/27.32.40Web: www.sodercan.com

CASTILLA LA MANCHA

D.G. PROMOCIÓN Y DESARROLLOEMPRESARIALD. Álvaro Gutiérrez PrietoAvd. Río Estenilla, s/n45071 ToledoPh: 00 34 (925) 26.98.00/02Fax: 00 34 (942) 26.78.72Web: www.jccm.es

CASTILLA – LEÓN

CONSEJERÍA DE INDUSTRIA.AGENCIA DE DESARROLLOECONÓMICO (ADE) D. Santiago Mora PovedaE-Mail: [email protected]/ Duque de la Victoria, 16-2º47001 ValladolidPh: 00 34 (983) 36.12.33Fax: 00 34 (983) 36.12.44Web: www.jcyl.es/ade

CATALUÑA

CENTRO DE INNOVACIÓN YDESARROLLO EMPRESARIAL (CIDEM)D. Ramón GuardiaE-Mail: [email protected] de Gracia, 12908008 BarcelonaPh: 00 34 (93) 476.72.84/00Fax: 00 34 (93) 476.73.03/00Web: www.cidem.com

CEUTA

SOCIEDAD DE PROMOCIÓN YDESARROLLO DE CEUTA (PROCESA)C/ Padilla, s/nEdificio Ceuta Center, 2ª Plta.51001 CeutaPh: 00 34 (95) 652.82.72Fax: 00 34 (95) 652.82.73Web: www.procesa.es

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EXTREMADURA

SOCIEDAD DE FOMENTO INDUSTRIAL(SOFIEX)D. Rafael NovoaE-Mail: [email protected]. José Fernández López nº 406800 Mérida (Badajoz)Ph: 00 34 (924) 31.91.59/79Fax: 00 34 (924) 31.92.12Web: www.sofiex.es

GALICIA

INSTITUTO GALLEGO DE PROMOCIÓNECONÓMICA (IGAPE)Dª Cristina QuintelaE-Mail: [email protected] Promoción Económica e InversionesComplejo Administrativo San Lázaro, s/n15703 Santiago de Compostela (La Coruña)Ph: 00 34 (981) 54.11.80Fax: 00 34 (981) 55.11.90E-Mail: [email protected]: www.igape.es

LA RIOJA

CONSEJERÍA DE HACIENDA Y PROMOCIÓN ECONÓMICA.AGENCIA DE DESARROLLOECONÓMICO DE LA RIOJAD. Carlos García DomínguezE-Mail: [email protected]/ Muro de la Mata, 13-1426071 LogroñoPh: 00 34 (941) 29.15.00Fax: 00 34 (941) 29.15.44/43/37E-Mail: [email protected]: www.ader.es

MADRID

INSTITUTO MADRILEÑO DEDESARROLLO ECONÓMICO (IMADE)Dª Camila SharpE-Mail: [email protected]é Abascal, 57-2º28003 MadridPh: 00 34 (91) 399.74.00Fax: 00 34 (91) 399.74.59Web: www.investinmadrid.com Web: www.madrid.org/imade

MELILLA

PROYECTO MELILLA, S.A.Polígono Industrial de SEPESC/La Dalia, s/n52005 MelillaPh: 00 34 (95) 267.98.04/54Fax: 00 34 (95) 267.98.10E-mail: [email protected]: www.promesa.net

MURCIA

INSTITUTO DE FOMENTO DE LA REGIÓN DE MURCIAD. Fernando Ballesta SánchezE-Mail: [email protected]. de la Fama, 330003 MurciaPh: 00 34 (968) 36.22.07Fax: 00 34 (968) 36.61.63Web: www.murcia-inversiones.com

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NAVARRA

SOCIEDAD DE DESARROLLO DE NAVARRA (SODENA)D. Carlos Amat FernándezE-Mail: [email protected]. Carlos III, 36, 1º Dcha.31003 PamplonaPh: 00 34 (848) 42.19.42Fax: 00 34 (848) 42.19.43Web: www.sodena.com

VALENCIA

INSTITUTO VALENCIANO DE EXPORTACIÓN (IVEX)D. Francisco Carbonell ArmengodE-Mail: [email protected] América, 2, 7º46004 ValenciaPh: 00 34 (96) 197.15.00Fax: 00 34 (96) 197.15.40Web: www.ivex.es.

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ABIDJAN (Ivory Coast, Liberia, Sierra Leone,Guinea-Conakry, Niger, Burkina Faso)Immeuble Alliance, Porte A 3ème étageAv. Terrason de Fougères 04 P. O. Box 957Abidjan 04 (Ivory Coast)Ph: 00 (225) 20 21.32.92/22.25.29Fax: 00 (225) 20 21.28.48E-Mail: [email protected]

AMMAN (Jordan)Abed El Hamid Sharaf St.Ahmed Abbas and Sons BuildingP. O. Box 927148AMMAN - 11110 (Jordan)Ph: 00 (962-6) 560.12.81/568.92.05Fax: 00 (962-6) 560.31.61E-Mail: [email protected]

ANKARA (Turkey)And Sokak, 8/1406680 CankayaANKARA (Turkey)Ph: 00 (90-312) 468.70.47/468.70.48/

468.70.49/468.69.74Fax: 00 (90-312) 468.69.75E-Mail: [email protected]

ALGIERS (Algeria)46, Rue Mohamed Chabane16030 EL-Biar Algiers (Algeria)Ph: 00 (213-21) 92.26.97/92.27.11/26.95Fax: 00 (213-21) 92.26.90E-Mail: [email protected]

ASUNCIÓN (Paraguay)Presid. Franco Esq. AyolasAYFRA Building, Tower B, 8th fl.Asunción (Paraguay)Ph: 00 (595-21) 498.441/442Fax: 00 (595-21) 498.443E-Mail: [email protected]

ATHENS (Greece)Vasileos Konstantinou, 44Athens 116-35 (Greece)Ph: 00 (30-1) 210.724.71.95/724.73.90Fax: 00 (30-1) 210.729.17.36E-Mail: [email protected]

BAGHDAD (Irak)Hay BabilArea 929 Street 5, House nº 38Bagdad (Irak)Ph: 00 (964-1) 718.57.13/718.62.11/

(873) 762.243.463 (satellite)(8821) 650.100.172

Fax: 00 (873) 600.053.771 (satellite)00 (964-1) 718.73.99

E-Mail: [email protected]

BANGKOK (Thailand, Laos, Cambodia,Myanmar)26 th Floor, Serm-Mit Tower159 Sukhumvit 21 Road 10110 Bangkok (Thailand)Ph: 00 (66-2) 258.90.20/258.90.21/258.97.45/

258. 97.93/260.84.00Fax: 00 (66-2) 258.99.90E-Mail: [email protected]

BEIJING (Mongolia, China and North Korea)14, Liang Ma He Nanlu, 2-2-2Tayuan Of. Building 100600 Beijing (China)Ph: 00 (86-10) 65.32.20.72/31.03/32.35.04Fax: 00 (86-10) 65.32.11.28E-Mail: [email protected]

BEIRUT (Lebanon)Tabaris, Gebrantueini SquareAshada Bldg. 4th FloorBeirut (Lebanon)Ph: 00 (961-1) 325.633/325.622/327.500Fax: 00 (961-1) 333.203E-Mail: [email protected]

VI. Principal Spanish economicand trade offices abroad

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BELGRADE (Serbia, Montenegro, FederalYugoslavian Republic)Zarka Zrenjanina, 4011118 Belgrade (Federal Yugoslavian Republic)Ph: 00 (38-111) 380.68.32Fax: 00 (38-111) 380.74.67E-Mail: [email protected]

BERLIN (Germany)Dorotheenstr., 97 - IID-10117 Berlin (Germany)Ph: 00 (49-30) 229.21.34/229.92.31/23.94Fax: 00 (49-30) 229.30.95E-Mail: [email protected]

BERNE (Switzerland)Effingerstrasse, 4CH 3011 Berne (Switzerland)Ph: 00 (41-31) 381.21.71/72Fax: 00 (41-31) 382.18.45E-Mail: [email protected]

BOGOTÁ (Colombia)Carrera 9, nº 70 A-35 Edificio “Andes” - pisos8 y 9Apdo. aéreo 91707 Bogotá (Colombia)Ph: 00 (57-1) 212.33.00/345.68.69/312.53.36/

345.68.69/212.32.99Fax: 00 (57-1) 211.40.55/345.68.75E-Mail: [email protected]

BRASILIA (Brazil)Avenida das Naçoes, lote 4470429-900 Brasilia D.F. (Brazil)Ph: 00 (5561) 242.93.94/244.49.66Fax: 00 (5561) 242.08.99E-Mail: [email protected]

BRATISLAVA (Slovak Republic)Prepóstska, 10811 01 Bratislava (Slovak Republic)Ph: (00-4212) 5441.57.30Fax: (00-4212) 5441.75.65E-Mail: [email protected]

BRUSSELS (Belgium and Luxembourg)Rue Montoyer, 10, 1ºB-1000 Brussels (Belgium)Ph: 00 (32-2) 551.10.40Fax: 00 (32-2) 551.10.69E-Mail: [email protected]

BRUSSELS (EU)Boulevard du Règente, 521000 Brussels (Belgium)Ph: 00-32-2-551.10.40Fax: 00-32-2-511.10.69E-Mail: [email protected]

BUCHAREST (Romania, Moldavia)Bd. Dacia, 42 (16 antiguo)79403 Bucharest (Romania)Ph: 00 (42-1) 210.07.40/210.07.41Fax: 00 (42-1) 210.04.97E-Mail: [email protected]

BUDAPEST (Hungary)Nádor Utca, n 23 II 21051 Budapest (Hungary)Ph: 00 (36-1) 302.00.74/75Fax: 00 (36-1) 302.00.70E-Mail: [email protected]

BUENOS AIRES (Argentina)Avda. Leandro N. Alem, 690-6 1001 Buenos Aires (Argentina)Ph: 00 (54-11) 43.11.49.44/5/6 - 43.12.07.79Fax: 00 (54-11) 43.12.66.19E-Mail: [email protected]

CAIRO (Egypt, Sudan, Ethiopia, Djibouti)19 Boulos Hanna St.Midan Finney / DokkiCairo (Egypt)Ph: 00 (20-2) 336.15.88/336.53.74Fax: 00 (20-2) 336.15.77E-Mail: [email protected]

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CARACAS (Venezuela, Netherlands Antilles,Barbados, Antigua, Bahamas, Suriname,Bermudas, Dominica, Grenada, Saint Kitts & Nevis, Saint Vincent & The Grenadines, St. Lucia, Guyana, Trinidad and Tobago, and Aruba)Avda. Francisco de MirandaLos Palos GrandesP. O. Box. 61394 (1060-A)1062 Caracas (Venezuela)Ph: 00 (58212) 284.92.77/ 285.58.48/

285.79.26/285.29.13Fax: 00 (58-212) 284.99.64E-Mail: [email protected]

CASABLANCA (Morocco)31 Rue Faïdi Califa (Ed. Lafayette)Casablanca 21000 (Morocco) Ph: 00 (212-22) 31.31.18/54.33.06Fax: 00 (212-22) 31.32.70E-Mail: [email protected]

CHICAGO (USA) (Illinois, Indiana, Iowa,Minnessota, Missouri, Nebraska, NorthDakota, South Dakota, Ohio, Wisconsin,Kentucky, Kansas, Michigan)500 N. Michigan Av. 15th Fl. (Room 1500)Chicago, Illinois 60611 (USA)Ph: 00 (1-312) 644.11.54/55Fax: 00 (1-312) 527.55.31E-Mail: [email protected]

COPENHAGEN (Denmark, Lithuania)Vesterbrogade, 10-3°1620 Copenhaguen V (Denmark)Ph: 00 (45-33) 21.33.88/21.94.98/21.97.56Fax: 00 (45-33) 21.33.90E-Mail: [email protected]

DAKAR (Senegal, Mauritania, Gambia, Mali,Guinea Bissau, Cape Verde)3-5 Avenue Carde, 2 ème étage droiteDakar (Senegal)Ph: 00 (221) 821.03.68/821.86.93Fax: 00 (221) 821.49.66E-Mail: [email protected]

DAMASCUS (Syria, Cyprus)61 Al Hidjaz Al Jadid St.Damascus (Syria)P. O. Box 2738Ph: 00 (963-11) 333.00.15/333.36.19Fax: 00 (963-11) 333.73.68E-Mail: [email protected]

DUBAI (United Arab Emirates, Qatar)Emirates Towers Offices, 26th Floor, of. 3 Sehikn Zayed Rd.P. O. Box 504929Dubai (United Arab Emirates)Ph: 00 (971-4) 330.01.10/331.35.65Fax: 00 (971-4) 330.01.12E-Mail: [email protected]

DUBLIN (Ireland)35, Molesworth St. Dublin - 2 (Ireland)Ph: 00 (353-1) 661.63.13Fax: 00 (353-1) 661.01.11E-Mail: [email protected]

DÜSSELDORF (Germany)Jägerhofstrasse, 3240479 Düsseldorf (Germany)Ph: 00 (49-211) 49.36.60Fax: 00 (49-211) 49.97.11/49.96.11E-Mail: [email protected]

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GUATEMALA CITY (Guatemala, Nicaragua,Belize) Edificio Géminis 10, Torre SurOficina nº 170112 calle 1-25, zona 1001010 Guatemala C.A. (Guatemala)Ph: 00 (502) 335.30.11/12/13/14Fax: 00 (502) 335.30.16E-Mail: [email protected]

HAVANA (Cuba)Calle nº 22, 516, entre 5ª y 7ªMiramar 11300La Habana (Cuba)Ph: 00 (53-7) 204.81.00/204.81.98Fax: 00 (53-7) 204.80.17E-Mail: [email protected]

HELSINKI (Finland, Estonia)Simonkatu, 12 B 2300100 Helsinki (Finland)Ph: 00 (358-9) 685.05.30Fax: 00 (358-9) 685.05.353E-Mail: [email protected]

HO CHI MINH CITY (Vietnam)Pham Ngoc Thach Guest house25, Phung Khac-KhoanDistrict 1, Ho Chi Minh City (Vietnam)Ph: 00 (848) 825.01.73Fax: 00 (848) 825.01.74E-Mail: [email protected]

HONG KONG (Macao, Hong Kong)2004, Tower One, Lippo Tower89 Queensway Hong KongPh: 00 (852) 25.21.74.33/25.22.75.12/

25.23.25.73Fax: 00 (852) 28.45.34.48E-Mail: [email protected]

ISLAMABAD (Pakistan)Street 6, Ramna 5. Diplomatic Enclave 1P. O. Box: 1140Islamabad (Pakistan)Ph: 00 (9251) 227.94.80/4Fax: 00 (9251) 227.94.89E-Mail: [email protected]

ISTAMBUL (Turkey)Cumhuriyet Cad., 18 k5 Dörtler Apt. ElmadagIstambul (Turkey)Ph: 00-90-212-196.61.61/83.00/83.76Fax: 00-90-212-296.88.30E-Mail: [email protected]

JAKARTA (Indonesia)JL. H. Agus Salim, 61P. O. Box 41 KosgoroYakarta 10350 (Indonesia)Ph: 00 (62-21) 310.74.90Fax: 00 (62-21) 319.301.64E-Mail: [email protected]

JOHANNESBURG (South African Republic,Lesotho, Swaziland, Botswana, Mozambiqueand Zimbabwe)8th floor, Fedsure Life TowersCr. Fredman Drive & Bute LaneP. O. Box: 781050Sandton 2146, Johannesburg (South AfricanRepublic)Ph: 00 (27-11) 883.21.02/03/04/05Fax: 00 (27-11) 883.26.24E-Mail: [email protected]

KIEV (Ukraine)Dejtiarevskaya, 38/44, 7th Floor 01901 Kiev (Ukraine)Ph: 00 (38044) 241.39.33/40.41/40.11Fax: 00 (38044) 241.39.33E-Mail: [email protected]

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KUALA LUMPUR (Malaysia, Brunei)20th floor, Menara Boustead69, Jalan Raja Chulan50200 Kuala Lumpur (Malaysia)Ph: 00 (60-3) 21.48.73.00Fax: 00 (60-3) 21.41.50.06E-Mail: [email protected]

LAGOS (Nigeria, Ghana, Benin, Togo, Chad,Cameroon, Gabon, Equatorial Guinea,Central African Rep.)Plot 933 Idejo St.P. O. Box 50495 IkoyiVictoria Island-Lagos (Nigeria)Ph: 00 (234-1) 261.58.32/262.16.25Fax: 00 (234-1) 261.74.27E-Mail: [email protected]

LIMA (Peru, Bolivia)Avda. Jorge Basadre, 405 Apartado de Correos 270067San Isidro-Lima, 27 (Peru)Ph: 00 (511) 442.17.88/89Fax: 00 (511) 442.17.90E-Mail: [email protected]

LISBON (Portugal)Campo Grande, 28 - (2 A - E)1700 Lisbon (Portugal)Ph: 00 (351-21) 793.00.19Fax: 00 (351-21) 796.69.95E-Mail: [email protected]

LONDON (United Kingdom)66, Chiltern Street 2nd and 3rd. fl.London W1 M2 LS (UK)Ph: 00 (44-20) 74.67.23.30Fax: 00 (44-20) 7487.55.86/7224.64.09E-Mail: [email protected]

LOS ÁNGELES (California, Alaska, Arizona,Hawai, Idaho, Montana, Nevada, New Mexico, Washington, Wyoming,Colorado, Oregon, Utah)Home Savings Tower, Suite 1050660 South Figueroa StreetLos Angeles, CA 90017 (USA)Ph: 00 (1-213) 627.52.84/35.87/22.85/21.90Fax: 00 (1-213) 627.08.83E-Mail: [email protected]

LUANDA (Angola, Republic of the Congo,Democratic Republic of the Congo, Santo Tomé and Principe, Zambia andNamibia)Rua Jaime Cortesão, 16Luanda (Angola)Ph: 00 (244-2) 35.01.21/02.27/19.38Fax: 00 (2442) 35.01.42E-Mail: [email protected]

MANAGUA (Nicaragua)Rte. Marsellesa 1/2 cuadra arribaManagua (Nicaragua)Ph: 00 (505) 278.99.71/99.63Fax: 00 (505) 278.91.02E-Mail: [email protected]

MANILA (Philippines)27th Floor, Yuchengco Tower RCBC Plaza Sen. Gil Puyat J. Puyat AvenueMakati City, Metro Manila (Philippines)Ph: 00 (63-2) 843.37.74/37.75/37.83Fax: 00 (63-2) 843.37.90E-Mail: [email protected]

MEXICO CITY (Mexico)Av. Presidente Mazaryk, nº 473Esq. MolièreColonia Los Morales - Polanco11510 Mexico D.F. (Mexico)Ph: 00 (52-555) 281.23.50Fax: 00 (52-555) 281.21.30/24.51E-Mail: [email protected]

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MIAMI (Florida, Alabama, Arkansas, Georgia,Louisiana, Mississippi, Oklahoma, Tennesseeand Texas)2655 Le Jeune Road, Suite 1114Coral GablesMiami FL 33134, Florida (USA)Ph: 00 (1-305) 446.43.87Fax: 00 (1-305) 446.26.02E-Mail: [email protected]

MILAN (Italy)Via del Vecchio/Politecnico, 3-16ºMilan 20121 (Italy)Ph: 00 (39-02) 78.14.00Fax: 00 (39-02) 78.14.14E-Mail: [email protected]

MONTERREY (Mexico)Av. Fundidora 501 - Col. Obrera. Edif. Cintermex 21 - Nivel C/OBancomextC.P. 64010 Monterrey, N.L. (Mexico)Ph: 00 (5281) 83.69.21.47Fax: 00 (5281) 83.69.21.50E-Mail: [email protected]

MONTEVIDEO (Uruguay)Plaza Cagancha 1335Piso 10, Of. 1001Montevideo 11100 (Uruguay)Ph: 00 (598-2) 900.03.37/900.83.26/900.74.77Fax: 00 (598-2) 902.16.00E-Mail: [email protected]

MOSCOW (Armenia, Belarus, Georgia,Kazakhstan, Kyrgyzstan, Russian Federation,Turkmenistan, Tajikistan, Uzbekistan).Ulitsa Bolshaya Nikiskaya, 50/8119034 Moscow (Russian Federation)Ph: 00 (7095) 783.92.81/2/4/5/202.61.81/

202.77.72Fax: 00 (7095) 783.92.91/956.63.47E-Mail: [email protected]

NEW DELHI (India, Nepal, Sri Lanka,Bangladesh and Maldives)2 Palam Marg. Vasant Vihar110057 New Delhi (India)Ph: 00 (91-11) 2614.64.77/614.51.96/52.05/

52.06Fax: 00 (91-11) 2614.59.56/32.17E-Mail: [email protected]

NEW YORK (New York, Connecticut,Maine, Massachusetts, New Hampshire, New Jersey, Pennsylvania, Rhode Island,Vermont)405 Lexington Av. (Floor 44)New York 10174-0331 (USA)Ph: 00 (1-212) 661.49.59/60/61/62Fax: 00 (1-212) 972.24.94/867.60.55E-Mail: [email protected]

OSLO (Norway, Iceland)Karl Johansgate, 18C0159 Oslo (Norway)Ph: 00 (47) 23.31.06.80/83Fax: 00 (47) 23.31.06.86E-Mail: [email protected]

OTTAWA (Canada)151 Slater St., Suite 801Ottawa-Ontario K1P 5H3 (Canada)Ph: 00 (1-613) 236.04.00/09Fax: 00 (1-613) 563.28.49E-Mail: [email protected]

PANAMA CITY (Panama, Costa Rica)Edif. Banco de Iberoamérica, Planta 8ªApartado 8028Panama 7 (Panama)Ph: 00 (507) 269.41.82/269.40.18Fax: 00 (507) 264.34.58E-Mail: [email protected]

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PARIS (France)49-51, Avenue George V, 3ª 75008 Paris (France)Ph: 00 (33-1) 53.57.95.50Fax: 00 (33-1) 47.20.97.22E-Mail: [email protected]

PARIS (OECD)22, Avenue Marceau75008 PARIS (France)Ph: 00 (33-1) 44.43.30.31/32/34Fax: 00 (33-1) 40.70.06.54E-Mail: [email protected]

PRAGUE (Czech Rep.)Stepánská, 10120 00 Prague-2 (Czech Republic)Ph: 00 (420-2) 2494.12.55/56/57/58/59/60Fax: 00 (420-2) 2494.11.15/12.26E-Mail: [email protected]

QUITO (Ecuador)Edif. Forum 300, (10th floor)Avda. República y AlmagroQuito (Ecuador)Ph: 00 (593-2) 254.47.16/61.74/255.57.02/75.04Fax: 00 (593-2) 256.41.74E-Mail: [email protected]

RABAT (Morocco)78, Av. du ChellahRabat (Morocco)Ph: 00 (212-3-7) 76.07.41/17.07/61.36Fax: 00 (212-3-7) 76.81.82E-Mail: [email protected]

RÍO DE JANEIRO (Brazil)Praia de Botafogo, 142 / 50122250-040 Rio de Janeiro, R.J. (Brazil)Ph: 00 (5521) 2553.50.09/53.14Fax: 00 (5521) 2551.71.71E-Mail: [email protected]

RIYADH (Saudi Arabia, Oman, Yemen, Bahrainand Kuwait)P. O. Box 94.32711693 Al Riyadh (Saudi Arabia)Ph: 00 (966-1) 464.51.25/464.47.94/461.21.53Fax: 00 (966-1) 465.04.09/462.13.03E-Mail: [email protected]

ROME (Italy, Albania, San Marino and Malta)Viale delle Milizie, 1200192 Rome (Italy)Ph: 00 (39-06) 372.82.06/372.81.27/372.82.23Fax: 00 (39-06) 372.83.65E-Mail: [email protected]

SAN JUAN DE PUERTO RICO (Puerto Rico,North American Virgin Islands)Capital Center Building South Tower 2nd Floor239 Av. Arterial HostosHato Rey - Puerto Rico 00918Ph: 00 (1-787) 758.63.45Fax: 00 (1-787) 758.69.48E-Mail: [email protected]

SAN SALVADOR (El Salvador)Boulevard del HipódromoEdificio Gran Plaza2º P. Local 206Colonia San BenitoSan Salvador (El Salvador)Ph: 00 (503) 275.78.21/22Fax: 00 (503) 275.78.23E-Mail: [email protected]

SANTIAGO DE CHILE (Chile)Av. 11 de Septiembre 1901Esq. C/ Marchant Pereira, 8th fl.Santiago de Chile (Chile)P. O. Box: 4099Ph: 00 (56-2) 204.97.86Fax: 00 (56-2) 204.58.14E-Mail: [email protected]

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SANTO DOMINGO (Dominican Republic,Jamaica, Haiti)Avda. W. ChurchillEsq. Luis F. ThoménEdif. Torre BHD, 4th Floor P. O. Box: 21421Santo Domingo (Dominican Republic)Ph: 00 (1809) 567.56.82Fax: 00 (1809) 542.60.26E-Mail:[email protected]

SAO PAULO (Brazil)World Trade CenterAv. Das Naçoes Unidas 12551 (Conj. 1603)04578-903São Paulo S.P. (Brazil)Ph: 00 (5511) 30.43.79.77Fax: 00 (5511)30.43.79.73E-Mail: [email protected]

SEOUL (Korea)Suite 1607, Kyobo BldgKwanghwamun1-1, Chongro, 1-ka - Chongro-KuSeoul 100-714 (Korea, Rep.)Ph: 00 (82-2) 736.84.54/5/86Fax: 00 (82-2) 736.84.56E-Mail: [email protected]

SHANGHAI (China)25 Floor, Westgate Mall1038 Nanjing XI Road200041 SHANGHAI (China)Ph: 00 (86-21) 62.17.26.20/26.10Fax: 00 (86-21) 62.67.77.50E-Mail: [email protected]

SINGAPORE (Singapore)7 Temasek Boulevard, 19-03 Suntec Tower OneSingapore 038987Ph: 00 (65) 6 732.97.88/732.97.89Fax: 00 (65) 6 732.97.80E-Mail: [email protected]

SOFIA (Bulgaria, FYR of Macedonia)Dragan Tzankov, 361040 Sofia P. O. Box 849Sofia 1000 (Bulgaria)Ph: 00 (3592) 971.20.01/71.46.31.85Fax: 00 (3592) 971.20.63E-Mail: [email protected]

STOCKHOLM (Sweden, Latvia)Sergels Torg, 12SE-11157 Stockholm (Sweden)Ph: 00 (46-8) 24.66.10Fax: 00 (46-8) 20.88.92E-Mail:[email protected]

SYDNEY (Australia, New Zealand, Papua New Guinea, Fidji, Solomon Islands,Tonga)Edgecliff Centre, Suite 408203 New South Head Road,Edgecliff NSW 2027 Sydney (Australia)Ph: 00 (61-2) 9362.42.12/3/4Fax: 00 (61-2) 9362.40.57E-Mail: [email protected]

TEGUCIGALPA (Honduras)Ave. República de Panamá 1720, 2º pisoEdificio Ciicsa - Col PalmiraTegucigalpa (Honduras)Ph: 00 (504) 235.57.50Fax: 00 (504) 235.57.51E-Mail: [email protected]

TEHERAN (Iran, Afghanistan)26 Golgasht St. Africa Ave.Teheran (Iran)Ph: 00 (98-21) 201.61.18Fax: 00 (98-21) 204.90.23E-Mail: [email protected]

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TEL-AVIV (Israel)2,Ibn Gavirol St., 4th Fl.64077 Tel-Aviv (Israel)Ph: 00 (972) 3695.56.91/3695.57.04Fax: 00 (972) 3695.29.94E-Mail: [email protected]

THE HAGUE (Netherlands)Spaanse AmbassadeBurg Patijnlaan, 672585 B.J. The Hague (The Netherlands)Ph: 00 (31-70) 364.31.66/345.13.13/363.55.09Fax: 00 (31-70) 360.82.74E-Mail: [email protected]

TOKYO (Japan)Sanbancho Ks Bldg., 3 Fl.2 Sanbancho, Chiyoda- KuTokyo 102 (Japan)Ph: 00 (81-3) 32.22.35.55Fax: 00 (81-3) 32.22.35.50E-Mail: [email protected]

TORONTO (Canada)55, Bloor St. West, Suite 1204M4W 1A5 Toronto-Ontario (Canada)Ph: 00 (1-416) 967.04.88Fax: 00 (1-416) 968.95.47E-Mail: [email protected]

TRIPOLI (Libya)36, Shiara Abdelkader Al Yazairi P. O. Box 3572Tripoli (Libya)Ph: 00 (218-21) 333.54.63/444.23.18Fax: 00 (218-21) 333.18.09E-Mail: [email protected]

TUNIS (Tunisia)130, Av. Jugurtha1082 Tunis (Tunisia)Ph: 00 (216-71) 78.81.03Fax: 00 (216-71) 78.76.02E-Mail: [email protected]

VIENNA (Austria, Slovenia)Stubenring 16 - 1P. O. Box 604A-1011 Viena (Austria)Ph: 00 (43-1) 513.39.33/34Fax: 00 (43-1) 513.81.47E-Mail: [email protected]

WARSAW (Poland)Genewska, 16P. O. Box 11103-996 Warsaw (Poland)Ph: 00 (48-22) 617.94.08/63.68/616.09.54Fax: 00 (48-22) 617.29.11E-Mail: [email protected]

WASHINGTON (North Carolina, South Carolina, Delaware, Maryland, Virginia,West Virginia, District of Columbia)2375 Pennsilvanya Av. N.W.Washington, D.C. 20037-1736 (USA)Ph: 00 (1-202) 728.23.68Fax: 00 (1-202) 466.73.85E-Mail: [email protected]

ZAGREB (Croacia, Bosnia and Herzegovina)Savska 41/1 (Zagrepcanka Building)1000 Zagreb (Croacia)Ph: 00 (385-1) 617.69.01/66.62/3Fax: 00 (385-1) 617.66.69E-Mail: [email protected]

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