| Criteria | Score
(4-0) | Rationale |
| Laws on VC/PE fund formation and operation | 3 | Law 25/2005 simplifies the regulatory burden, allows acquisition of listed firms in order to de-list them, and permits the creation of private funds of VC funds, which are aimed at institutional investors. However, venture-capital firms may not invest more than 25% of their assets in a single company or more than 35% in companies belonging to the same group under Law 44/2002. This same law allowed venture-capital firms to retain stakes in listed companies if they were acquired before the firm went public, and to invest in companies forming part of their own group as long as certain transparency requirements are met. Non-financial companies that do not trade publicly and in which the venture-capital firms hold a stake are not considered to form part of their group. Companies that manage collective investment institutions are allowed to manage venture-capital funds or the assets of venture-capital corporations. Minimum capital of €1.2m is required for stand-alone firms and €1.5m for funds. (EIU, Country Finance 2006; Spanish Association of Venture Capital Entities website). |
| Tax treatment of VC/PE funds & investments | 3 | Capital gains obtained from sales of portfolio companies between the second and 15th year of the investment are tax-exempt, provided the venture capital firms are listed with the National Securities Markets Commission (CNMV). The period may be extended up to 20 years with prior CNMV authorization. This exemption remains in place up to three years after the company is listed on the stockmarket. Dividends are not taxed as long as the venture-capital firm owns at least 5% of a company and has held that stake continuously for a year before dividends are distributed. The law also provides a 100% deduction for double taxation of dividends for companies and shareholders, and it exempts management of venture-capital firms from value-added tax. Under Law 6/2000, gains or losses from the transfer of assets acquired more than one year earlier may be included in the special part of the tax base, thereby reducing the two-year period previously in force. For company tax, increases in capital asset value have no fiscal consequences. Where a tax treaty exists, withholding tax on interest, dividends, and royalty may be creditable against personal or corporation tax liability. There is full deductibility of dividends where the holder has at least a 5% stake and has held it for more than one year. Capital gains from the sale of fixed assets are not taxable if re-invested in similar equipment within three years. There is a low base corporate tax rate in the EU context of 35%, with a 30% rate for SMEs. Special incentives exist in the form of zero-interest, seven-year loans available for purchasing shares in high-tech ventures. (EIU, Country Finance 2006) |
| Protection of minority shareholder rights | 3 | A 5% minority can call an extraordinary meeting or demand an outside audit in a stock corporation. But the lack of board votes on executive appointments and compensation, or detailed information on compensation, raise continuing concerns. Spain ranks below the OECD average on shareholder ability to challenge board decisions (World Bank, Doing Business 2006), in part because board decisions must be challenged within 50 days and it takes 20% of shareholders to request issuance of a restraining injunction by a judge (EIU, Country Commerce 2006). |
| Restrictions on institutional investors (pension funds, insurance firms) investing in VC/PE | 2 | Insurance companies may invest only in listed securities, cash, government debt and other highly liquid assets to have them qualify as part of their technical provisions. They may not invest more than 10% of their assets in securities issued by a single company and no more than 20% in a single investment fund. For pension funds, 90% of a fund’s assets must be invested in four categories: mortgage loans, bank deposits, property assets and financial assets that are traded on organized markets; risk concentration regulations specify no more than 5% of fund assets invested in a single firm, no more than 10% in a VC/EQ fund. The minimum cash ratio is 1% of assets. This leads to light exposure to variable-income instruments and a conservative risk profile. However, a November 2005 law permitting the creation of "funds of funds" aims to stimulate institutional investors. (EIU, Country Finance 2006). |
| Protection of intellectual property rights | 3 | EIU Risk Briefing score. Patents, industrial designs, trademarks and copyrights are recognized in Spain. The country has ratified all the main international conventions, which allow non-Spanish nationals to protect their local rights. Spanish laws are in line with European Union legislation on intellectual property. Cases involving piracy can take up to two years to reach the courts, a delay that often lets pirate firms fold up their operations beforehand. Penalties for proven cases of piracy are primarily fines, which are set at the discretion of a judge and relate to the value of the pirated products. The ease with which pirate companies avoid prosecution has been checked by 1995 criminal legislation that made administrators personally responsible for some of the infractions their companies commit, and by Law 28/2002 that made enforcement proceedings faster and more effective. The government launched a major public-relations effort in 2004 to inform citizens of the illegality of violating intellectual-property laws. In December 2005 the government passed the Anti-piracy Plan, as part of an amendment to Law 1/1996, which seeks to speed up prosecutions, creates a special police unit dedicated to co-ordinating legal procedures against theft of intellectual property, and establishes a governmental unit dedicated to finding and removing illicit Internet content. |
| Bankruptcy procedures/creditors' rights/partner liability in cases of an invested company's bankruptcy | 3 | A 2004 law increases the penalties for firms that do not undertake a reorganization negotiation (concurso voluntario) with creditors when they face insolvency, by enabling creditors to hold owners materially and personally responsible for debts in the last instance. It is beginning to make bankruptcy reorganizations more common. In the most common corporate form (sociedad anónima), liability of shareholders is limited to the amount of capital contributed; limited liability companies (sociedades de responsabilidad limitada) also exist. Spain ranked moderately in de jure and de facto protection of creditor rights in an international IDB study in 2005. (EIU, Country Commerce 2006; El País 2005). |
| Capital markets development and feasibility of exits (ie, local IPOs) | 4 | Average of three EIU Risk Briefing scores. The stockmarket has developed rapidly over the past 15 years, aided by the introduction of electronic trading (which links the four stock exchanges in Madrid, Barcelona, Bilbao and Valencia), an intensive privatization program, the growing popularity of investment funds, and the emergence of a popular stockmarket culture during the second half of the 1990s. Companies also began to make greater use of the stockmarket to raise capital, and this is particularly true of family-owned operations, which have become far less conservative than in the past. The market is still dominated by the stocks of a small number of leading companies in the utility, energy, telecommunications and banking sectors, which are global players in their fields and dwarf the rest of the Spanish corporate sector. |
| Registration/reserve requirements on inward investments | 3 | Spain require only simple reporting of transactions to the Ministry of Industry or Bank of Spain for statistical purposes, depending on the nature and size of the transaction. There are no exchange regulations and no reserve requirements (EIU, Country Finance 2006). |
| Corporate governance requirements | 3 | A 2003 law raised corporate governance standards, requiring reporting on board composition and remuneration, ownership structure, ties to other firms, and compliance with corporate governance regulations, as well as notification and disclosure of shareholder agreements. But concerns remain about the legislation's effectiveness and some experts call for further reforms such as voting on executive appointments and compensation, itemized salary breakdowns, and external scrutiny of corporate governance reports before publication. Spain ranks below the OECD average in the World Bank's Doing Business 2006 rankings of disclosure and investor protection, but above average on director liability. (EIU, Country Briefing November 05; EIU, Country Commerce 2006) |
| Strength of the judicial system | 3 | EIU Risk Briefing score. The Spanish judicial system is slow moving, limiting the scope for redress for firms who have had contractual obligations breached. If planned reforms of the system, designed to improve the speed and efficiency of the system, do not make a significant impact, this will place firms at a growing disadvantage, particularly vis-à-vis competitors in new EU member states where advances in legal reform have continued apace. |
| Perceived corruption | 3 | EIU Risk Briefing score. Cases of corruption sometimes come to light in government operations and the property sector, but they do not generally affect businesses. |
| Quality of local accounting industry/use of international standards | 3 | Spain has been in transition to IAS since 1995, and by end-2005 international financial reporting standards were legally mandated for listed companies. In privately held firms, IFRS are permitted in consolidated statements, but prohibited in separate company statements. (IASPLUS). |