Forms of vehicle
What legal form of vehicle is typically used for private equity funds formed in your jurisdiction? Does such a vehicle have a separate legal personality or existence under the law of your jurisdiction? In either case, what are the legal consequences for investors and the manager?
The Spanish Law on Venture Capital Entities (Law No. 22/2014 of 12 November 2014) contemplates three main different types of venture capital entities: private equity funds (FCRs), private equity companies (SCRs) and venture capital entities for small and medium-sized investments (ECRs-Pyme). The Law refers to FCRs, SCRs and ECRs-Pyme as venture capital entities (ECRs).
FCRs, SCRs and ECRs-Pyme must be registered with the Spanish Securities Exchange Commission (CNMV). ECRs are regulated and supervised by the CNMV.
Venture capital entities can be managed by management companies of closed-ended collective investment entities (SGEICs) or by management companies of collective investment schemes (SGIICs). Both management entities require authorisation by the CNMV and are subject to supervision and regulation by the CNMV.
An FCR is a pool of assets divided into units, without legal personality. An FCR must comply with the provisions contained in Law No. 22/2014 and with its own regulations as established in its incorporation documents.
Owing to its lack of legal personality, an FCR must be managed by an SGEIC or by an SGIIC.
SCRs are corporate entities that are subject to the provisions of Law No. 22/2014 and are therefore subject to a particular regulatory and tax regime. They are also subject to the provisions of the Spanish Corporate Law. An SCR may either be self-managed (through its board of directors), or managed by an SGEIC or an SGIIC. Self-managed SCRs require authorisation by the CNMV prior to their incorporation.
Investors in the FCR and shareholders in the SCR are liable respectively for the FCR’s and SCR’s liabilities, up to the amount contributed through the subscription of units (FCR) or shares (SCR).
Investors who wish to have a direct involvement in the management of their portfolio usually prefer to invest in SCRs. In addition, those investors looking for Spanish tax incentive schemes on reinvestments may prefer to invest in an SCR (as FCRs would not qualify for such tax incentives and SCRs, if certain requirements are met, may qualify for such purposes).
On the other hand, FCRs are not subject to legal requirements generally applicable to corporations that give shareholders substantial rights to participate in, or to control, the board of directors (as is the case in SCRs). The role of investors in FCRs is generally passive, which makes FCRs more appropriate for investment funds managed independently.
ECRs-Pyme are considered a special type of ECR, which may adopt the form of FCR or SCR.
ECRs-Pyme must comply with the investment restrictions established in Title I, Chapter II, section 3 of Law No. 22/2014. Particularly, they must invest at least 75 per cent of their assets in equity or equity-related instruments in small and medium-sized entities that meet with the following requirements:
- are not listed;
- have less than 250 employees;
- have annual assets not exceeding €43 million or turnover not exceeding €50 million;
- are not a financial or a real estate company;
- are not a collective investment scheme; and
- are established in an EU country or third party that is not designated as a ‘non-cooperative country or territory’ by the Financial Action Task Force on Money Laundering, or which has subscribed with Spain an agreement to avoid double taxation with an information exchange clause or an agreement to exchange tax information.
ECRs may have different classes of units or shares, which may help to set up a more tax-efficient carried interest structure for founders and promoters.
In addition to the above, the Spanish Law on Venture Capital Entities regulates two types of close-ended collective investment entities: close-ended collective investment companies (SICCs) and close-ended collective investment funds (FICCs). The Law refers to SICCs and FICCs as close-ended collective investment entities (EICCs).
Pursuant to article 38 of the Law, SICCs and FICCs are generally subject to the legal regime applicable to SCRs and FCRs, respectively, with the following main exceptions, which implies a more flexible regulatory regime for EICCs compared with ECRs:
- EICCs are not subject to the restrictions relating to ECRs’ main and complementary activities regulated in articles 9 and 10 of Law No. 22/2014, including but not limited to those investment restrictions referred to in question 8 applicable to ECRs;
- EICCs are not subject to the minimum capital requirements applicable to ECRs;
- EICCs may only invest in securitisations whose originator retain at least 5 per cent and will be subject to the limitations on the securitisation positions provided in the Delegated Regulation (EU) No. 231/2013 of the Commission, dated 19 December 2012.
Forming a private equity fund vehicle
What is the process for forming a private equity fund vehicle in your jurisdiction?
ECRs shall be formed in Spain by virtue of a public deed of incorporation granted by a public notary, and their incorporation should be registered with the Mercantile Registry. However, those requirements are not compulsory if the ECR takes the form of an FCR (in such a case, the FCR may be formed by virtue of a private agreement of incorporation that is not filed with the Mercantile Registry).
Once the ECR has been duly incorporated, all relevant documentation and information shall be filed with the CNMV. The CNMV will proceed to the registration of the ECR with the relevant CNMV Registry once the CNMV has reviewed all relevant documentation and has considered such documentation complete. Notwithstanding the above, a self-managed SCR must be authorised by the CNMV prior to its incorporation.
If the promoters wish to promote an FCR, or an SCR managed by an SGEIC, the latter (the management company) would need to be incorporated and registered with the CNMV prior to filing the documentation related to the ECR. The SGEIC, once it has obtained the required approval by the CNMV, will have to be registered with the Mercantile Registry and with the CNMV. SGEICs and SCRs will also have to draft and file with the Executive Service of the Commission for the Prevention of Money Laundering and Monetary Offences (SEPBLAC), the Spanish Financial Intelligence Unit, their anti-money laundering procedures.
Pursuant to article 46 of Law No. 22/2014, the approval process of an SGEIC or a self-managed SCR should generally take three months from the date of the application for authorisation to the CNMV or the date in which all documentation requested by the CNMV has been submitted.
An FCR’s main required documentation shall include its agreement of constitution (which may be formalised by virtue of a public deed, or in a private document) the management regulations and its prospectus. The agreement of constitution shall include the name of the FCR, its purpose (as established in articles 9 and 10 of Law No. 22/2014), the amount of subscribed capital and the name and domicile of its management company. FCRs must have a minimum subscribed capital of €1.65 million of which, according to CNMV interpretation of Law No. 22/2014, at least €165,000 should be paid up on the date of constitution.
An SCR’s required documentation shall include the prospectus, its public deed of incorporation and company by-laws. The company by-laws shall include the SCR investment policy (as established in article 12 of Law No. 22/2014) and may contemplate the possibility of delegating the management of the SCR’s investments to a management company. SCRs must have a minimum subscribed capital of €1.2 million (€900,000 for ECRs-Pyme) on the date of their incorporation, 50 per cent of which must be paid up on such date.
SGEICs shall have a minimum capital of €125,000, which shall be subscribed and fully paid up on the date of incorporation. Such amount shall be increased if the portfolio under management exceeds €250 million, in accordance with article 47 of Law No. 22/2014.
Establishment costs of ECRs generally include legal advisers’ fees, notary fees and registrar fees. ECRs must be audited. Additionally, as described in question 17, no capital duty shall have to be paid on the incorporation or capital increase of ECRs. Management services rendered by SGEICs to their managed ECRs are VAT-exempt.
Is a private equity fund vehicle formed in your jurisdiction required to maintain locally a custodian or administrator, a registered office, books and records, or a corporate secretary, and how is that requirement typically satisfied?
As mentioned, FCRs must be managed either by an SGEIC or by an SGIIC. SCRs are corporations that may be self-managed, or may delegate their management to an SGEIC or an SGIIC. As any other corporation, an SCR will be required to maintain locally a registered office and books and records and, additionally, office space, IT equipment and human resources sufficient to properly carry out its regulated activity, as determined by the CNMV.
It is the SGEIC or the SGIIC who must ensure that the FCR, or the SCR managed by it, meets certain requirements in relation to human, technical and material resources, rather than the ECRs themselves. SGEICs and SGIICs must have a registered office (which will also be the registered office of the FCR), a board of directors and a minimum number of employees (which will vary depending on the number of ECRs managed by them, the assets under management and the number of foreseen investments). SGEICs and SGIICs must also keep their own books and records.
SGEICs shall appoint a depositary in relation to each of the ECRs managed by them if the assets under management exceed the limits established in article 72.1 of Law No. 22/2014 or if the SGEIC commercialises ECRs to non-professional investors.
SCRs shall be managed by a board of directors, which must have a chairperson and a secretary (who may be a board member or not).
Annual accounts of ECRs must be prepared by the board of directors of the SCR, the SGEIC or the SGIIC, within five months of the end of the financial year, and then submitted to the general shareholders meeting for approval within six months of the end of the financial year. The financial statements of ECRs and SGEICs, which have to be audited, must be filed with the CNMV and, in the case of SCRs and SGEICs, also before the Spanish Mercantile Registry within seven months of the end of the financial year.
Access to information
What access to information about a private equity fund formed in your jurisdiction is the public granted by law? How is it accessed? If applicable, what are the consequences of failing to make such information available?
The transparency requirements relating to ECRs are regulated in Title II, Chapter II, section 3 of Law No. 22/2014. In addition, in December 2013, the Spanish Congress approved the Law on Transparency, Access to Public Information and Good Governance (Law No. 19/2013). Pursuant to it, entities controlled by public administrations, corporations majority-owned by public administrations or companies that are recipients of government subsidies, will be subject to certain disclosure obligations.
Generally, FCRs’ constitutional documents and modifications are available to the public, as they are filed with the CNMV’s registry, which is available to the public.
An SCR’s deeds of incorporation and their by-laws must also be registered with the Mercantile Registry, which is also available to the public.
Investors subscribing to units of an FCR on the date of its incorporation will appear in the constitutional documents, and therefore their identities and the amount of their investment will be available to the public. The same will apply to investors subscribing to shares of an SCR, not only on the incorporation of the SCR but also upon each subsequent capital increase.
An ECR’s annual accounts must be audited and are available to the public. The audit report and the audited annual accounts have to be filed with the CNMV. The same applies for SCRs, except that the filing should also be made with the Mercantile Registry.
The annual report of the SGEICs shall include information relating to the remuneration policy of the SGEIC. An SGEIC shall file its audit report and accounts with the CNMV within six months of the end of the financial year.
Failure to comply with these obligations may entail monetary sanctions and, in certain cases, may even result in the revocation of the CNMV’s authorisation and exclusion of the ECR from the relevant CNMV registry.
Limited liability for third-party investors
In what circumstances would the limited liability of third-party investors in a private equity fund formed in your jurisdiction not be respected as a matter of local law?
Generally, the liability of investors with respect to their investment in an ECR is limited to the share capital subscribed or to the units acquired, and such limited liability is respected under Spanish law. Under very exceptional circumstances, Spanish courts may approve the ‘piercing of the corporate veil’ of an SCR and agree that the shareholders of the SCR be held liable for the SCR’s liabilities.
Fund manager’s fiduciary duties
What are the fiduciary duties owed to a private equity fund formed in your jurisdiction and its third-party investors by that fund’s manager (or other similar control party or fiduciary) under the laws of your jurisdiction, and to what extent can those fiduciary duties be modified by agreement of the parties?
Article 84 of Law No. 22/2014 refers to the rules of conduct to which SGEICs, SGIICs that manage ECRs and self-managed SCRs are subject. SGEICs, SGIICs that manage ECRs and self-managed SCRs must prepare and approve a mandatory internal code of conduct that regulates the operation of their management bodies, directors and employees. This code of conduct shall develop the principles established in the consolidated version of the Spanish Securities Market Law (Law No. 24/1988).
Directors of an SGEIC or SGIIC and directors of SCRs are subject to the following obligations:
- to act with due diligence and transparency for the benefit of investors;
- to prevent and avoid risks derived from conflicts of interest, or to regulate appropriate procedures to ensure that if any conflict arises, priority is given to the interest of the investors;
- to undertake prudent management, and to take care of investors’ interests as if they were their own interests; and
- to ensure that all investors are treated fairly.
Generally, such duties cannot be modified by agreement between the parties.
Does your jurisdiction recognise a ‘gross negligence’ (as opposed to ‘ordinary negligence’) standard of liability applicable to the management of a private equity fund?
As described in question 6, directors and officers of ECRs and their management companies are required by law to undertake prudent management and to take care of the investors’ interests as if they were their own interests. Additionally, Spanish corporate law provides for a strict regime on directors’ liability under which directors of an ECR management company (or directors of an SCR) may be held liable towards the company, its shareholders or third parties if they do not act as a prudent business person or as a loyal representative.
Other special issues or requirements
Are there any other special issues or requirements particular to private equity fund vehicles formed in your jurisdiction? Is conversion or redomiciling to vehicles in your jurisdiction permitted? If so, in converting or redomiciling limited partnerships formed in other jurisdictions into limited partnerships in your jurisdiction, what are the most material terms that typically must be modified?
ECRs are required by Law No. 22/2014 to invest at least 60 per cent of their assets in equity or equity-related instruments (including, subject to certain limits, profit-sharing loans). Investments in certain real estate companies, financial entities or listed companies (other than public-to-private transactions) will not qualify within the mentioned 60 per cent.
The remaining assets may be invested in the share capital of other companies, profit-sharing loans, other types of financing to portfolio companies or certain other securities (although proceeds from such investments would not benefit from the special tax regime for ECRs as further described in question 17).
Additionally, ECRs are subject to certain diversification and borrowing limits.
As explained in question 1, ECRs-Pyme must invest at least 75 per cent of their assets in equity or equity-related instruments in small and medium-sized entities (ie, those entities that fulfil the requirements outlined in question 1).
Generally, conversion or redomiciling of foreign private equity funds into ECRs would not be possible as such. An application to obtain the CNMV’s authorisation or approval for registration would have to be submitted under the form of an SCR or FCR. Documentation governing FCRs may include most of the standard market terms and conditions governing private equity funds, such as investment restrictions, investors’ governance rights, transfer restrictions, reporting provisions, distribution waterfall, etc. However, some difficulties may be found in implementing certain market terms in an SCR, as it is a corporate entity in which shareholders have substantial rights to interfere with the management. Also, there would be some difficulties in reflecting usual opt-out or exclusion provisions as, in principle, investors should participate in each of the ECR’s assets and liabilities, pro rata to their participation in the capital of the ECR.
Finally, Law No. 22/2014 regulates the European venture capital funds and the European social entrepreneurship funds, institutions formed under the European Parliament and Council Regulation No. 345/2013, dated 17 April 2013, and the European Parliament and Council Regulation No. 346/2013, dated 17 April 2013, respectively, and that now have to be registered with the CNMV.
Fund sponsor bankruptcy or change of control
With respect to institutional sponsors of private equity funds organised in your jurisdiction, what are some of the primary legal and regulatory consequences and other key issues for the private equity fund and its general partner and investment adviser arising out of a bankruptcy, insolvency, change of control, restructuring or similar transaction of the private equity fund’s sponsor?
In general terms, the bankruptcy, insolvency, change of control, restructuring or similar transaction affecting an ECR sponsor should not have, per se, direct legal or regulatory consequences for the ECR.
The bankruptcy or insolvency of the ECR’s management company may have relevant consequences for the ECR, which either should replace the management company or be liquidated itself (article 57 of Law No. 22/2014).
Finally, under article 53 of Law No. 22/2014, the ECR’s authorisation may be revoked, among other circumstances, when the ECR is declared bankrupt or insolvent or it can be reasonably considered by the CNMV that the influence exercised over the ECR by an investor holding a relevant stake in such ECR may be detrimental to the ECR’s proper and prudent management and could potentially result in severe damage of its financial situation.
Regulation, licensing and registration
Principal regulatory bodies
What are the principal regulatory bodies that would have authority over a private equity fund and its manager in your jurisdiction, and what are the regulators’ audit and inspection rights and managers’ regulatory reporting requirements to investors or regulators?
The CNMV is the main supervisory and regulatory body for ECRs, and has very wide inspection rights within its authority and functions.
The CNMV must be notified of changes in the documents submitted to the CNMV within the authorisation and constitution process, including changes related to directors and top executives of the ECR or its management company (some of these changes may require the CNMV’s prior approval). Also, the CNMV must be regularly provided with accounting information, which has to be submitted to the CNMV in the way of annual accounts after the end of the fiscal year to which they refer, as well as the managers having to provide the CNMV with different documents containing certain economic information related to the ECRs managed by them including the audited annual accounts.
Without prejudice to the above, when, as provided in article 72 of Law No. 22/2014, the management company or the assets of the ECRs managed by it exceed certain size limits (€100 million for leveraged funds and €500 million for unleveraged funds) or are marketed to non-professional investors, additional reporting requirements may apply, the following being the most relevant:
- annual report for investors and the CNMV to be provided no later than six months after the year end;
- audited annual accounts of the management company and the ECR no later than six months after the year end;
- any new measures to manage liquidity as well as any changes in the leverage and guarantees policy of the ECR;
- reports regarding the leverage of the ECR; and
- information regarding the acquisition of significant stakes in non-listed companies not considered small or medium-sized companies.
ECRs and their management companies are also supervised by the Executive Service of SEPBLAC.
What are the governmental approval, licensing or registration requirements applicable to a private equity fund in your jurisdiction? Does it make a difference whether there are significant investment activities in your jurisdiction?
As previously stated, ECRs must be registered with the CNMV, and only self-managed SCRs require the CNMV’s administrative approval prior to its registration. SCRs, prior to its registration with the CNMV, must be incorporated in a notarial public deed and registered with the Mercantile Registry. Incorporation in a notarial public deed and registration with the Mercantile Registry is not required for FCRs.
The level of investment activity ECRs may have in Spain would not directly make any difference in relation to its registration requirements, although, in order for a new ECR to obtain the regulatory registration (or authorisation in the case of a self-managed SCR), such level of investment activity will be taken into account by the CNMV in order to ascertain the minimum human and material resources that the SCR, SGEIC or SGIIC should reasonably have in order to perform proper management and administration.
Following the above, it must be noted that ECRs or management companies whose ECRs exceed certain size limits or are marketed to non-professional investors, are subject to a more complex and stringent regulatory regime and higher structure requirements, including, specific remuneration policies, conflict of interests procedures, risk management procedures and units, liquidity management systems, periodic asset valuation (by internal or external valuers), additional information requirements, etc.
Therefore, in order to authorise or register (as applicable) these types of ECRs and management companies, the CNMV will usually request more detailed information regarding such matters, as well as a higher degree of human and material resources.
Registration of investment adviser
Is a private equity fund’s manager, or any of its officers, directors or control persons, required to register as an investment adviser in your jurisdiction?
ECRs and their management companies are registered and supervised by the CNMV, and they are expressly authorised to provide advisory services to entities within the scope of their corporate activity. Consequently, they do not need, for these purposes, to begin a different procedure to register as investment advisers. Directors and officers of SGEICs, SGIICs and SCRs are also subject to regulatory supervision as part of an ECR management company and, therefore, for such purposes, do not need to be registered as investment advisers either.
Fund manager requirements
Are there any specific qualifications or other requirements imposed on a private equity fund’s manager, or any of its officers, directors or control persons, in your jurisdiction?
The board of directors of both SGEICs and SCRs must have a minimum of three directors. The directors and officers of SGEICs and of SCRs must meet certain requirements regarding integrity and reputation. In this respect, they must complete a specific form and questionnaire required by the CNMV. Additionally, the CNMV will require that the directors and officers of SGEICs or SCRs have appropriate knowledge and experience regarding financial or business management. In principle, such experience should include, as a minimum, three years of management or advisory services to financial entities or executive management posts in other public or private companies.
Describe any rules - or policies of public pension plans or other governmental entities - in your jurisdiction that restrict, or require disclosure of, political contributions by a private equity fund’s manager or investment adviser or their employees.
There are substantial restrictions under Spanish law in relation to political contributions by individuals or private entities to political parties. Political parties may not accept contributions from private businesses that provide services to public administrations or to companies majority owned by public administrations. Additionally, annual contributions to political parties by an individual or private entity cannot exceed certain very stringent thresholds.
Use of intermediaries and lobbyist registration
Describe any rules - or policies of public pension plans or other governmental entities - in your jurisdiction that restrict, or require disclosure by a private equity fund’s manager or investment adviser of, the engagement of placement agents, lobbyists or other intermediaries in the marketing of the fund to public pension plans and other governmental entities. Describe any rules that require a fund’s investment adviser or its employees and agents to register as lobbyists in the marketing of the fund to public pension plans and governmental entities.
Usually, the CNMV will request that the management company includes in the ECR’s prospectus the name, if any, of the intermediaries that are marketing the ECR. Likewise, the CNMV may ask or request additional information from the management company or the sponsors during the ECR approval procedure regarding the use of intermediaries or placement agents for the marketing of the relevant ECR. Finally, please note that, in general terms, intermediaries that wish to market or place an ECR among investors must be previously authorised to act as financial intermediaries in Spain pursuant to the applicable legislation.
At the moment, no legislation relating to any register of lobbyists has been approved in Spain.
Describe any legal or regulatory developments emerging from the recent global financial crisis that specifically affect banks with respect to investing in or sponsoring private equity funds.
With the exception of the potential implications deriving from the implementation of the Alternative Investment Fund Managers Directive (AIFMD), as well as potential implications that the Volcker Rule and Basel III may have on Spanish banks, no other regulations may have a material impact with respect to banks investing in or sponsoring private equity funds.
Would a private equity fund vehicle formed in your jurisdiction be subject to taxation there with respect to its income or gains? Would the fund be required to withhold taxes with respect to distributions to investors? Please describe what conditions, if any, apply to a private equity fund to qualify for applicable tax exemptions.
Spanish ECRs are non-transparent entities and, therefore, are subject to Spanish corporate income tax (CIT).
In general terms, pursuant to the CIT general tax regimen (article 21 of the CIT Act), entities subject to CIT will benefit from a full exemption on dividends and gains obtained from their participation in resident and non-resident companies (except tax haven companies), when the following requirements are met:
- that the participation is held for at least a year and represents at least 5 per cent of the investee company (or its acquisition value is over €20 million); and
- in the case of stakes in non-resident investee companies, that said companies be subject to a CIT that applies at least a 10 per cent tax rate (presumed to be the case if resident in a country that has a double tax treaty with Spain with an information exchange clause).
If the investee company receives dividends or gains from participating companies that represent more than 70 per cent of its income, in order to benefit from this exemption for the income received attributable to said indirectly participating company, the indirect participation in said entity must also comply with the above-mentioned requirements, in particular, if said dividend or gain was not subject to taxation in the directly participating company or came from a tax haven jurisdiction.
Notwithstanding the above, pursuant to article 50 of the CIT Act, ECRs do enjoy an even more privileged tax regime on dividends and gains derived from ‘typical’ or ‘qualified investments’ (as set out by Law No. 22/2014 regulating ECRs), and also with respect to distributions made to Spanish corporate investors and non-resident investors (except tax haven investors).
The main features of the special CIT regime applicable to ECRs can be summarised as follows.
ECR special tax regime under Spanish corporate income tax
Dividends and gains obtained by an ECR from ‘typical investments’ in accordance with Law No. 22/2014 regulating ECRs (generally, investments in non-listed companies - other than public to private transactions - either Spanish or non-Spanish that do not qualify as financial or real estate entities) will be subject to the ECR special tax regime pursuant to Chapter IV of Title VII of the Spanish CIT Act, which states the following:
- gains that do not qualify for the article 21 CIT Act full exemption that are obtained by the ECR from the transfer of securities representing a participation in the share capital of the investee company (considered as an ECR typical investment) will benefit from a 99 per cent CIT exemption at the level of the ECR, provided that the investment holding period is longer than one year and does not exceed 15 years (subject to the approval of the Spanish Tax Authorities, this term may be extended to up to 20 years in certain cases), except in the event that said participation does not meet the criteria set out in article 21 of the CIT Act and the following is true:
- the acquirer is resident in a tax haven jurisdiction or the gain is obtained through a tax haven;
- the acquirer is to be considered related to the ECR pursuant to the CIT Act (unless it is another ECR); or
- the participation was acquired by the ECR to a related person or entity pursuant to the CIT Act; and
- dividends obtained from said Spanish resident or non-resident investee companies (except if obtained through a tax haven) will benefit at the recipient ECR level from the full tax exemption contained in article 21.1 of the CIT Act, regardless of the investment holding period and the percentage stake held in the company paying out the dividend.
When the investments executed by the ECR are not considered as ECR typical investments, the gains and dividends obtained from them will be taxed at the level of the ECR in accordance with the general tax regime established in the CIT Act. Therefore, although the ECR will not benefit regarding these investments from the above-mentioned ECR privileged tax regime, the ECR may be able to benefit from the general tax credits and exemptions applicable pursuant to the CIT Act (eg, article 21 of the CIT Act). Likewise, interest, royalties and any other income that does not qualify as dividends, distribution of profits or gains from ECR typical investments will be subject to the CIT general regime at the ECR level.
Local taxation of non-resident investors
Would non-resident investors in a private equity fund be subject to taxation or return-filing requirements in your jurisdiction?
Income obtained by non-resident entities or individuals without a permanent establishment in Spain, deriving from their participation in the ECR (ie, dividends, distribution of benefits or capital gains from the reimbursement or transfer of their stake in the ECR, but excluding interests or other types of income) will not be considered to have been obtained in Spain for Spanish tax purposes and, consequently, will not be subject to taxation in Spain (articles 50.3 and 50.4 of the CIT Act). Notwithstanding the above, if the income or gains received by the non-resident investor are attributable to income obtained by the ECR through a tax haven jurisdiction, this special tax regime may not be applicable and the relevant domestic and international tax treaties shall apply. Likewise, if the non-resident receives income from the ECR through a tax haven jurisdiction or when the acquirer is a tax haven resident, this special tax treatment shall not apply (article 50.5 of the CIT Act). Pursuant to the above, non-resident investors may have to provide the ECR with a tax residence certificate to ascertain their proper non-resident status.
Local tax authority ruling
Is it necessary or desirable to obtain a ruling from local tax authorities with respect to the tax treatment of a private equity fund vehicle formed in your jurisdiction? Are there any special tax rules relating to investors that are residents of your jurisdiction?
The ECRs’ special tax regime is expressly regulated by the Spanish tax law and applies to all ECRs duly registered in the Spanish CNMV; therefore, its application is not subject to a tax ruling. However, an investor may request from the Spanish tax authorities the issuance of a ruling to confirm or clarify any doubt or question regarding the application of the Spanish ECRs’ regime or any other Spanish tax laws or regulations.
Tax treatment of companies resident in Spain, investing in ECRs
Spanish resident companies subject to CIT investing in ECRs will benefit from the ECR special tax regime (articles 50.3 and 50.4 of the CIT Act) as follows:
- for gains obtained from the transfer or redemption of ECRs’ shares or units - the Spanish CIT investor will benefit from the tax exemption contained in article 21.3 of the CIT Act regardless of the holding period and the percentage stake held in the ECR (article 50.4 of the CIT Act); and
- for dividends and benefits distribution, the Spanish CIT investor will benefit from the tax exemption contained in article 21.1 of the CIT Act, regardless of the holding period and the percentage stake held in the ECR (article 50.3 of the CIT Act).
Notwithstanding the above, if the income or gains received by the Spanish resident company are attributable to income obtained by the ECR through a tax haven jurisdiction, this special tax regime may not be applicable and the CIT general regime may apply.
Tax treatment of individuals resident in Spain, investing in ECRs
No particular tax regime applies with respect to individuals resident in Spain investing in ECRs, who will be subject to the general Spanish personal income tax regime.
Must any significant organisational taxes be paid with respect to private equity funds organised in your jurisdiction?
At present, there is no capital duty applicable on the establishment or capital increase of ECRs or any other Spanish company. However, capital duty may be due in the case of a share capital reduction or winding-up of a private equity company that results in distributions to its investors (generally, 1 per cent over the amount obtained by investors).
Notwithstanding the above, the use of adequate tax planning may help to reduce said capital duty. Finally, the registration of the ECRs in the CNMV registries is currently subject to registration fees.
Special tax considerations
Please describe briefly what special tax considerations, if any, apply with respect to a private equity fund’s sponsor.
Regarding an ECR management company, management fees obtained by it from the management service provided to an ECR are exempt from VAT. Therefore, generally, VAT borne by an ECR management company will not be deductible (or may be partially deductible only), depending on the VAT pro rata applicable to the ECR management company, taking into account the services provided to other parties subject to VAT.
If, apart from the ECR management company, there are other sponsors or third parties that provide administration or advisory services to the ECR, such services may be subject to VAT depending on the nature of the services provided, which may result in tax inefficiencies.
Apart from the above and regarding CIT, the ECR management company is subject to the general CIT regime and therefore its annual benefits are taxed under Spanish CIT regular tax rates (25 per cent being the standard tax rate).
With regard to carried interest, depending on the circumstances, it may be structured either as a success fee payable to the ECR management company (and by the latter to its employees), or as a return from the investment made by the management company or sponsors or promoters, in the ECR.
Should the carried interest be structured as a return from an investment made by the founding sponsors or promoters of the ECR, if properly structured and with a very strong economic and legal justification (among others, the subscription as founder partners of a relevant contribution to the ECR), the returns received by the founding sponsors from their participation in the ECR may benefit from the capital gains or dividends tax treatment described above; however, please note that even in such cases, following recent rulings such consideration may still be contested by the Spanish Tax Authorities.
If carried interest was paid as a salary compensation to an employee of the SCR or of the ECR’s management company, it may be treated, depending on the circumstances, either as a regular salary income (paying around 43-48 per cent under personal income tax rules, depending on the region where the Spanish manager is tax-resident) or, up to an annual maximum of €300,000, as an irregular salary income that may benefit from a 30 per cent reduction on the basic tax.
Please list any relevant tax treaties to which your jurisdiction is a party and how such treaties apply to the fund vehicle.
Spain has a wide tax treaty network with third countries. In particular, Spain currently has double tax treaties in force with the following countries: Albania, Algeria, Andorra, Argentina, Armenia, Australia, Austria, Barbados, Belgium, Bolivia, Bosnia and Herzegovina, Brazil, Bulgaria, Canada, Chile, China, Colombia, Costa Rica, Croatia, Cuba, Cyprus, the Czech Republic, Denmark, the Dominican Republic, Ecuador, Egypt, El Salvador, Estonia, Finland, states of the former USSR (except Russia), France, Georgia, Germany, Greece, Hungary, Iceland, India, Indonesia, Iran, Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Korea, Kuwait, Latvia, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Mexico, Moldova, Morocco, New Zealand, the Netherlands, Nigeria, Norway, Oman, Pakistan, Panama, Philippines, Poland, Portugal, Romania, Russia, Saudi Arabia, Senegal, Serbia, Singapore, Slovakia, Slovenia, South Africa, Sweden, Switzerland, Thailand, Trinidad and Tobago, Tunisia, Turkey, the United Arab Emirates, the United Kingdom, the United States, Uruguay, Uzbekistan, Venezuela and Vietnam.
This extensive tax treaty network provides the ECR with a significant advantage when structuring investments in foreign companies in a tax-efficient manner.
As described above, income obtained by non-resident investors (other than tax haven investors) from an ECR (ie, dividends, distribution of benefits or gains, but excluding interests or other types of income) is, generally, considered not to have been obtained in Spain for tax purposes and, consequently, not subject to taxation in Spain, whether or not there is a tax treaty in force with Spain.
Other significant tax issues
Are there any other significant tax issues relating to private equity funds organised in your jurisdiction?
The Spanish special tax regime applicable to ECRs contains a number of anti-abuse rules applicable to transactions made by ECRs with related entities, and to transfers to tax-haven residents, which may result in the non-application of the ECRs’ special tax regime to certain transactions. Said rules must be considered when planning a deal with related parties or involving tax haven residents, parties or accounts.
Finally, ECRs may also be entitled, if they meet the corresponding requirements, to other tax regimes, deductions, exemptions and incentives generally applicable to Spanish CIT payers - or even to Spanish individual investors.
In summary, all of the above makes the ECR regime a very competitive one for setting up private equity funds, to raise money and to invest in Spain and abroad (as the ECRs privileged tax regime applies with respect to both Spanish and non-Spanish investments), and it is also very favourable for Spanish corporate investors and foreign investors in ECRs.
Selling restrictions and investors generally
Legal and regulatory restrictions
Describe the principal legal and regulatory restrictions on offers and sales of interests in private equity funds formed in your jurisdiction, including the type of investors to whom such funds (or private equity funds formed in other jurisdictions) may be offered without registration under applicable securities laws in your jurisdiction.
ECR marketing rules and requirements are regulated under Law No. 22/2014.
ECR interests may only be marketed to the following persons or companies:
- professional investors as defined in article 205 of the consolidated version of the Spanish Securities Market Law (Law No. 24/1988);
- non-professional investors who commit to invest at least €100,000 and declare in writing that they are aware of the risks related to such investment;
- directors, executives or employees of its management company or the ECR itself; and
- investors who can prove experience in the investment, management or advisory capacity in ECRs similar to the ones they wish to invest in.
When the ECR is marketed to non-professional investors, the investor must receive, prior to investment, an information prospectus that shall include, among other information, the by-laws or management regulations of the ECR, the KID, the management company agreement and the ECR annual report. These documents will be filed before the CNMV and included in the CNMV registries. Likewise, the management company of ECRs that are marketed to non-professional investors will have to comply with the additional regulatory requirements set out in Title II of Law No. 22/2014 for management companies that exceed certain ECR assets under management thresholds (€100 million for leveraged ECRs and €500 million for non-leveraged ECRs), even if they do not exceed them.
The marketing of foreign private equity funds in Spain is also regulated under Law No. 22/2014 by different rules depending on the place of incorporation of the foreign private equity fund and its management company and their legal status pursuant to Directive 2011/61/EU. In general terms, the marketing of EU private equity funds managed by an EU management company to professional investors that have requested to avail from the passport regime in Spain shall require: a previous notification by the corresponding EU country supervisor to the CNMV, including the main documents and information of said EU private equity fund; and the payment to the CNMV of fees to process the passport file and an annual supervisory fee. The marketing to non-professional investors or of any other type of private equity funds will require the compliance of additional requirements and their previous registration and authorisation by the CNMV.
Finally, all foreign private equity funds and their management companies marketed in Spain shall comply with the marketing and publicity regulations applicable in Spain for this type of investment.
Types of investor
Describe any restrictions on the types of investors that may participate in private equity funds formed in your jurisdiction (other than those imposed by applicable securities laws described above).
Apart from the restrictions established above, it must be noted that certain Spanish institutional investors, because of their own regulatory restrictions, may not be able to invest in non-listed ECRs or may find such investment subject to stringent investment restrictions or limitations (for example, Spanish pension funds and certain Spanish collective investment schemes).
Additionally, the unfavourable tax treatment applicable to tax haven residents investing in ECRs has discouraged their direct investment in ECRs.
Identity of investors
Does your jurisdiction require any ongoing filings with, or notifications to, regulators regarding the identity of investors in private equity funds (including by virtue of transfers of fund interests) or regarding the change in the composition of ownership, management or control of the fund or the manager?
The CNMV requires the previous notification of the identity of all direct or indirect shareholders of ECR management companies or self-managed ECRs and any subsequent ownership changes. Regarding ECR investors, although a specific obligation is not expressly provided by law, given its broad supervisory powers, the CNMV can request any ECR management company to provide information about its direct or indirect investors.
Additionally, the appointment or dismissal of managers and directors of an ECR management company or of an SCR must be notified to the CNMV as well as the appointment, removal or replacement of the ECR management company itself, and any other material change in relation to the documents approved by the CNMV in the process of approval of the ECR or of its management company.
Finally, as a consequence of the recent implementation under Spanish Law of FATCA and CRS (OECD Common Reporting Standard) regulations, the management company may have to disclose the identity of foreign investors who meet the relevant FATCA and CRS criteria to the Spanish authorities.
Licences and registrations
Does your jurisdiction require that the person offering interests in a private equity fund have any licences or registrations?
Yes, the offering of interests in an ECR can only be performed by financial intermediaries as provided by Law No. 22/2014 and its regulations.
Describe any money laundering rules or other regulations applicable in your jurisdiction requiring due diligence, record keeping or disclosure of the identities of (or other related information about) the investors in a private equity fund or the individual members of the sponsor.
ECR management companies and self-managed SCRs are subject to a number of money-laundering prevention obligations, including the following:
- approving and complying with a money-laundering prevention handbook drafted in accordance with the anti-money laundering regulations in force;
- duly identifying each investor in the ECR management company or the ECR, and keeping records of the investors’ identification documents as well as of the transactions;
- complying with the relevant FATCA and CRS regulations and filings as implemented under Spanish law;
- training its directors and employees in the relevant money-laundering prevention procedures and handbook;
- reporting any suspicious transaction or investor to the Bank of Spain; and
- having an annual independent expert provide reports regarding compliance with money laundering obligations.
Are private equity funds able to list on a securities exchange in your jurisdiction and, if so, is this customary? What are the principal initial and ongoing requirements for listing? What are the advantages and disadvantages of a listing?
A securities and exchange market (MAB) was established in 2006 in order to facilitate the listing of collective investment schemes incorporated as companies, small and medium-sized companies and other particular entities (for example, ECRs) whose specific characteristics (such as liquidity and size) would make their listing difficult in the regular Spanish Stock Exchange. In June 2007, the MAB market opened a specific segment for the listing of ECRs although, so far, only one ECR has been listed.
The principal and continuing requirements for listing are as follows:
- the MAB will obtain the pertinent documentation from the CNMV’s registries, including the ECR’s annual report and prospectus;
- the ECR must appoint a specialised entity as responsible for the ECR’s shareholders’ or unitholders’ register;
- the ECR shall inform of the liquidity and counterparty commitments reached with a MAB member or participating entity in their capacity as a specialist in the securities issued by the ECR;
- the ECR must undertake to send to the MAB any relevant information that might affect trading of its shares, in accordance with applicable legislation and market regulations; and
- the MAB board of directors shall authorise the admission to trading of the ECR’s securities.
The main advantages for trading are enhanced liquidity, a more efficient and secure transfer of shares, increased transparency and broadening of the investor base (including access to certain institutional investors who may be subject to regulatory restrictions to invest in non-listed ECRs).
The main disadvantages of listing are the administrative and regulatory costs derived from such listing, the increase of information, accounting and filing obligations, and the difficulties in establishing, on a regular basis, a valuation and liquidation price for the ECR’s securities.
Restriction on transfers of interest
To what extent can a listed fund restrict transfers of its interests?
The restriction on the transfer of securities in listed ECRs is, in general terms, not allowed by the MAB market authorities.
Participation in private equity transactions
Legal and regulatory restrictions
Are funds formed in your jurisdiction subject to any legal or regulatory restrictions that affect their participation in private equity transactions or otherwise affect the structuring of private equity transactions completed inside or outside your jurisdiction?
As explained in questions 1 and 8, an ECR must invest at least 60 per cent of its assets or 75 per cent for ECRs-Pyme in certain equity or equity-related instruments in companies, other ECRs or foreign private equity funds that meet certain requirements (including, subject to certain limits, profit-sharing loans). Investments in certain real estate companies, in financial entities or in listed companies (other than public-to-private transactions) will not qualify within the mentioned 60 per cent. The remaining assets, up to a maximum of 40 per cent, may be invested in the share capital of other companies, profit-sharing loans to any company, other types of financing but only to companies included in its main corporate purpose, fixed income securities or cash. Likewise, the Spanish special tax regime applicable to ECRs contains a number of anti-abuse rules applicable to transactions made by ECRs with related entities, and to transfers to tax haven residents, which may result in the non-application of the ECRs’ special tax regime to certain transactions.
In addition to the above, article 71 of Law No. 22/2014 has included certain additional information requirements and restrictions to ECRs and their management companies that exceed the size limits or are marketed to non-professional investors as described in question 10, regarding the acquisition and holding of stakes in entities not considered to be small and medium-sized companies, such as the following:
- the obligation to notify to the CNMV of the acquisition of any relevant stake (10, 20, 30, 50 or 75 per cent and above) either individually or together with other private equity funds in companies;
- the obligation, when said stake acquired is higher than 50 per cent, to inform the CNMV, the company and its shareholders of the following:
- the ECR identity;
- the ECR conflict of interest and communications policy;
- the terms of the financing used for said acquisition; and
- the ECR intentions regarding the future activities of the company and their consequences or implications in the company’s employment; and
- the prohibition, when said stake acquired is higher than 50 per cent and for a period of 24 months, to approve certain share capital reductions, as well as, depending on the net asset value and balance sheet situation of the company, certain dividend distributions or the acquisition of the company’s shares by the company.
Other than the above, there are no particular legal or regulatory restrictions that would normally affect or prevent an ECR’s participation in private equity transactions.
Compensation and profit-sharing
Describe any legal or regulatory issues that would affect the structuring of the sponsor’s compensation and profit-sharing arrangements with respect to the fund and, specifically, anything that could affect the sponsor’s ability to take management fees, transaction fees and a carried interest (or other form of profit share) from the fund.
An ECR may pay management fees and success fees as compensation for the management services provided by its management company as long as such fees have been duly regulated in the ECR’s constitutional documents. Although the management company may also charge transaction fees, monitoring fees or other similar fees if they are established in said documents, it is best market practice that any such fees would give rise to offset management fees. The ECR management company may also receive fees for the rendering of advisory or other services, on an arm’s-length basis, to portfolio companies or prospective portfolio companies, although pursuant to market practice, the provision of such services is usually subject to some kind of investors’ consent, or at least, disclosure obligations.
As for profit-sharing arrangements other than success fees, ECRs may issue different classes of units or shares, and therefore different profit-sharing compensation schemes can be structured through the investment in such units or shares.
Update and trends
Updates and trends
The majority of the provisions of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II Directive) were implemented into Spanish law during 2018, and it is envisaged that the Spanish Securities Market Law will be further amended in 2019 to finalise such implementation. Such provisions have imposed limitations on fee retrocessions and a complete ban on inducements that have required Spanish banks, investment brokers and collective investment managers to adapt their private equity funds distribution policies. Additionally, the implementation of PRIPPs has also required Spanish private equity managers to adapt their marketing procedures as the Spanish Securities Market Commission (CNMV) issued regulatory guidance with respect to the preparation and distribution of KIDs and such documents are now required to be filed with the CNMV when an ECR is marketed to retail investors.
Despite the above regulatory changes, banks and other financial intermediaries, given the ongoing low interest rate scenario in Europe, have been very active offering private equity products and fund of funds to private banking clients and retail investors. This has produced an increase in the number of private equity managers that have decided to voluntarily submit to Spanish AIFMD full licence status to be able to market their funds to retail investors.