PRINT THIS PAGE Private equity in Spain20/02/2006. Source: SJ Berwin. Javier Morera, Alejandro Hurtado
Buy-out funds in Spain have never been busier, and the signs are that last year's boom is set to continue, says SJ Berwin. So it is timely that the industry has had a boost from a change to the law - widely sought by industry practitioners - aimed at stimulating even more activity in the Spanish market. It is clear that there is very healthy competition among European lawmakers to create a legal and tax environment which is attractive to funds. The Spanish reforms follow changes in Belgium and Luxembourg, who have developed structures that they hope will persuade European private equity to locate there - or, at least, to use their professional service providers. Perhaps they are jealous of the UK's dominant position - in part a result of its robust and flexible legal structure.
In Spain, the basic legal framework has existed for some time, and offered favourable tax treatment to domestic private equity fund vehicles (whether structured as companies or partnerships). But, although they were a good foundation, the (inflexible) rules were badly in need of an update. Largely thanks to concerted lobbying by the Spanish industry, that happened at the end of last year.
The new regulation makes it much easier to establish and operate private equity entities (entidades de capital-riesgo, or ECRs). And although ECRs will be regulated by the Comisión Nacional del Mercado de Valores (CNMV), it will be much quicker to get authorisation - indeed, in some cases authorisation is automatic if no objection is made within a specified period.
There is also a "simplified" vehicle for funds that are aimed principally at institutional investors, and some welcome legal clarifications - including (for the first time) specific rules on funds of funds and public to privates.
There are important tax changes too and, although many of these are purely technical, others are radical. The basic rules are preserved from the old regime: there is a 99% exemption from capital gains tax, which makes it a very attractive vehicle for domestic and international investors, together with a remarkable advantage for Spanish corporate investors - usually no tax on investment returns from an ECR, compared to the normal rate of 35% on income from investments in most other types of vehicle.
But there are also some new anti-abuse restrictions that may result in withdrawal of the 99% exemption in some specific cases where transactions are with closely related parties. To counter-balance that, however, there is now increased flexibility in structuring carried interest, which will make it easier to do that in a tax efficient way for managers.
The new legislation is clearly an improvement, and adds another attractive vehicle to Europe's growing list. Most obviously, for funds attracting significant investor interest from Spain, the ECR will have to be considered as a possible fund vehicle. And, because the tax and regulatory regime is likely to suit a range of international investors, the structure could have broader appeal. In any case, this is clearly a big step forward for Spanish private equity, and a triumph for industry lobbyists.
SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. For more information on the ECR, or any aspect of Spanish private equity, please contact Javier Morera (javier.morera@sjberwin.com ) or Alejandro Hurtado (alejandro.hurtado@sjberwin.com), or visit our website at www.sjberwin.com
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