Spain: The Issue Of Preferred Securities In Spain

Law 19/2003, published in the Spanish Official Gazette dated 5^th July 2003, includes in its Third Additional Disposition the normative that, amending Spanish Law 13/1985 on investment coefficients, equity and information obligation of financial intermediaries, rules preferred securities under Spanish legislation.

Below we will describe the main mercantile, regulatory and tax characteristics of preferred securities in Spain introduced by Law 19/2003, establishing a new alternative for obtaining resources which, previously, Spanish companies were forced to obtain through vehicles sited abroad. The new law also enables EU companies to set up vehicles in Spain for the issuance of preferred securities.

Characteristics Of The Preferred Securities

Tax regime

Preferred securities issued under the terms of the new legislation will have a very favourable tax regime. Specifically:

• The issuing entity is allowed to deduct as an expense the remuneration of preferred securities.
• Income from the preferred securities will be treated as interest income for the investor under current Spanish tax legislation.
• Income obtained from preferred securities by non-resident taxpayers without permanent establishment in Spain will be exempt under the same conditions as Spanish public debt.
• Transactions derived from the issue of preferred securities are exempted from Capital Tax and Stamp Duty.

Issuers

Even though the legal regime of the preferred securities is included in a Law for financial companies and is referring specifically to preferred securities issued by credit entities, it also allows Spanish and EU vehicles totally controlled by publicly quoting entities that are not credit entities to issue this newly regulated type of securities under similar conditions as the credit entities.

Preferred securities must be issued either by a credit entity, by an entity in which all voting rights are held directly or indirectly by a credit entity that controls a group or sub-group of credit entities eligible for consolidation, whose sole business or sole corporate purpose is to issue preferred securities or by a company in which all voting rights are held directly or indirectly by a publicly quoting entity that is not a credit entity. In all cases, the issuing entity must be resident in Spain or in a territory of the European Union other than a tax haven.

If the issue is made by a subsidiary entity, the preferred securities will have to be jointly, severally and irrevocably guaranteed by the entity that owns all the voting rights or by the entity acting as depositary.

Remuneration, rights, maturity and quotation

The holders of the securities will be entitled to be paid a predetermined remuneration of a non-cumulative nature. This remuneration shall be payable on the condition that the controlling entity or the group or subgroup eligible for consolidation has distributable profits.

The securities will not carry any political rights, save in such exceptional circumstances established in the respective terms and conditions of the issue. Preferred subscription rights in respect of future new issues will not be carried by the preferred securities either.

The securities will be of a perpetual type, although it may be decided that they have early redemption, from the fifth anniversary of the date when the shares are paid up. In case the issuing company is a credit entity or an entity in which all voting rights are held directly or indirectly by a credit entity that controls a group or sub-group of credit entities eligible for consolidation, such early redemption will require the prior approval of the Bank of Spain.

The preferred securities issued will also have to quote in any organised secondary market.

Liquidation and dissolution

In the event of liquidation or dissolution of the issuing entity or the entity which controls the group or subgroup of entities eligible for consolidation, or in other cases that call for applying the order of priority foreseen in the Spanish Commercial Code, the holders of preferred securities would only be entitled to the reimbursement of the nominal value of the securities along with the remuneration accrued but not yet paid and would rank, for the purposes of the order of preference of the debt claims, immediately behind all the creditors, whether subordinated or not, of the issuing entity or the entity which controls the group or subgroup of entities eligible for consolidation, and ahead of the ordinary shareholders or participants.

Conditions of issue

In case the issuing company is a credit entity or an entity in which all voting rights are held directly or indirectly by a credit entity that controls a group or sub-group of credit entities eligible for consolidation, the nominal amount of outstanding securities, at the time an issue takes place, may not exceed 30 per cent of the basic equity of the group or subgroup eligible for consolidation, including the amount of the issue itself, without prejudice to any additional restrictions that may be imposed for solvency purposes. If said percentage is exceeded when the issue takes place, the credit institution must file with the Bank of Spain, for the latter’s approval, a plan for restoring said percentage. The Bank of Spain may modify the required percentage.

The above mentioned legal and tax rules will also be applicable in those cases in which the controlling entity of the issuing entity is an entity governed by non Spanish laws.

Conclusion

Law 19/2003 introduces a new instrument, the preferred securities, as a new way for Spanish and EU entities to obtain resources through exclusively purpose entities placed in Spain, under a favourable tax regime, in order to avoid the existing situation until now, in which Spanish credit entities obtained resources through their special purpose vehicles sited in tax havens.