Economical and Political Environment
Spain's mixed capitalist economy is the 12th largest in the world, and its per capita income roughly matches that of Germany and France. However, after almost 15 years of above average GDP growth, the Spanish economy began to slow in late 2007 and entered into a recession in the second quarter of 2008. GDP contracted by 3.7% in 2009, ending a 16-year growth trend, and by another 0.2% in 2010, making Spain the last major economy to emerge from the global recession.
The reversal in Spain's economic growth reflected a significant decline in construction amid an oversupply of housing and falling consumer spending, while exports actually have begun to grow. Government efforts to boost the economy through stimulus spending, extended unemployment benefits, and loan guarantees did not prevent a sharp rise in the unemployment rate, which rose from a low of about 8% in 2007 to 20% in 2010.
The government budget deficit worsened from 3.8% of GDP in 2008 to about 9.7% of GDP in 2010, more than three times the euro-zone limit. Spain's large budget deficit and poor economic growth prospects have made it vulnerable to financial contagion from other highly-indebted euro zone members despite the government's efforts to cut spending, privatize industries, and boost competitiveness through labor market reforms.
Spanish banks' high exposure to the collapsed domestic construction and real estate market also poses a continued risk for the sector. The government oversaw a restructuring of the savings bank sector in 2010, and provided some $15 billion in capital to various institutions. Investors remain concerned that Madrid may need to bail out more troubled banks. The Bank of Spain, however, is seeking to boost confidence in the financial sector by pressuring banks to come clean about their losses and consolidate into stronger groups.
Key economic indicators:
- Population: 46,754,784 (July 2011 est.)
- GDP (purchasing power parity): $1.376 trillion (2010 est.)
- Per capita GDP: $29,500 (2010 est.)
- Real GDP growth: -0.2% (2010 est.)
- Unemployment: 20% (2010 est.)
- Public debt: 63.4% of GDP (2010 est.)
The Banking Environment
Banking in general
The Spanish banking system is made up of three major groups of institutions: commercial banks, savings banks and credit co-operatives. The commercial banks are the most important group with just under two-thirds of total assets, followed by the savings banks with a third and the credit co-operatives with the balance. Spanish law does not establish functional differences between commercial and savings banks, so all are permitted to engage in any activity permitted under EC law. However, savings banks and credit co-operatives tend to concentrate their activities in specific geographical areas.
The largest banks are Banco Santander and Banco Bilbao Vizcaya Argentaria while the largest savings banks are La Caixa and Caja Madrid.
The Banco de España is the central bank and regulates all financial institutions in the country. With the advent of the Euro a key role of the Banco de España is co-ordination of the central monetary policy with the European Central Bank.
In general, all banking commissions are ad-valorem with a minimum but without maximum. Normally, big corporate and important customers negotiate the pricing in advance to open accounts.
Traditionally the standard commissions that the Spanish banks applied to transactions and customers are more expensive than the European Banks, mainly for the bureaucratic and administrative work that they have to support with the monetary authorities
Generally the same pricing is applied to residents as to non-residents. Some special exceptions exist related to operations for non-residents in Spain.
Resident and non-resident corporations may hold accounts in Spain that are denominated in Euro, US Dollar and other currencies. Credit balances can attract credit interest, although banks have to hold minimum reserves against such balances and this restricts the yield to the customer.
Overdrafts are permitted but are not generally used because of their high cost. Term loans (polizas de credito) and discounting bills are both available through commercial banks, which are the major source of short term funding. Commercial paper is available.
Time deposits have a minimum tenor of one month and certificates of deposit are not in common use. Treasury bills (letras de Tesoro) are issued for up to 18 months but can have an effective tenor of 1 day through repurchase agreements.
Cash Management Features
There are a lot of payment types, and the ones unique to Spain are main vehicles for obtaining working capital finance: so it is counterproductive not to use them.
While clearing systems are almost fully automated, customers still have to deal with instruments in paper form, and so they want to bank these close to their offices.
Since the retail clearing is achieved by bilateral exchange, it is important to bank with a direct member for three reasons:
- The usual ones about earlier information availability, later cut-off times, lower unit cost;
- The ability of major banks to receive collections into their own network nearer to the bank of the remitter and so speed the money onto the beneficiary’s account;
- The earlier in the payment chain that the payment is received into the beneficiary bank’s network, the lower the fees for the beneficiary.
Cash is widely used and, even if taken from ATMs, held in larger amounts than in many other countries. So any customer dealing with the public will be receiving a lot of cash and will need a local account to pay it into.
Domestic withholding tax and stamp duty need to be borne in mind as costs that can occur if transactions or cash management structures are wrongly configured – but both are avoidable.
Certain transactions still need to be backed up with paper supporting documents, and so it is convenient if these can be delivered to a bank nearby.
2.1 Tax Considerations
As a general rule, a withholding tax of 15% is levied on all dividends and other profit distributions paid to resident companies and individuals. However, no withholding tax rate is levied on dividends paid between Spanish resident companies if the participation exceeds 5% and the tenancy period exceeds one year.
A withholding tax of 18% is levied on interest payments made to residents.
In the case of non-residents, the general withholding tax rate for dividends and interest is 15%, and the rate on royalties is 25%, although these rates could be reduced or eliminated, without prejudice to the obligation to declare, when:
The income is exempt in some specific cases stated by domestic legislation;
The income is exempt or subject to reduced rate under a Treaty for avoidance of double taxation which may be applicable;
The non-resident proves the payment of the tax corresponding to the income received.
VAT is not applicable to the bank commissions. The standard rate is 16%, though certain goods are banded at 7% (e.g. food) or 4% (e.g. basic necessities other than food).
The standard Corporation Tax rate is 35%, though for smaller companies (with turnover below EUR5m.), the first EUR 90,000 of profit is only taxed at 30%.
Groups of companies can arrange to be taxed on a consolidated basis.
There are a number of sources of domestic tax credits, for investment, professional training and R & D.
Transfer pricing rules follow OECD arm’s-length guidelines. Interest on loans from a non-resident party related to the resident borrower is disallowed where the borrower’s debt:equity ratio is 3:1 or above.
There are payroll and social taxes for the employer (which are deductible), of around 31% of a fixed amount equating to base salary (salaries are banded and it is 31% of the median of the band). The maximum is EUR9,740 per employee per annum, though it is higher for contractors.
2.2 Central Bank Reporting
Central Bank reporting is required for payments of amounts over EUR 12,500. Central Bank reporting applies to the following payments:
Resident to/from non-resident;
Transactions between residents in foreign currency;
Resident making/receiving on their accounts held abroad.
Banks are responsible for reporting transactions but responsibility for verifying all information lies with the resident. Reporting must be no later than the day of the transaction.
Two other activities have to be reported:
Where a resident makes a loan of EUR 600,000 or above, the loan has to be reported within a month of being made;
Residents have to report all transactions on accounts abroad when the account holds EUR 3m. or more.
2.3 Foreign Exchange Controls
In principle there are no foreign exchange controls.
However, there is a regulation in the area of international liquidity management that is noteworthy. Resident customers can have domestic standing instructions of sweeping and topping but if they want to participate in international sweeps/tops it is necessary to have the prior authorisation of the monetary authorities. For the non-residents there are no such regulations.
Payments and Collections
Unlike many other European countries, there is very little role for the post office in the Spanish payments system, largely due to the extensive branch networks of the commercial and savings banks.
Banco de España is legally obliged to promote the sound functioning of the payments systems and ensure stability of operation. To this end, Banco España is entitled to regulate interbank markets and foreign exchange markets and manage the relevant clearing and settlement systems.
Cash is still very widely used for retail payments.
Although declining in volume, the most widely used non-cash payment instrument in terms of value is the cheque. The most widely used in terms of volume is the direct debit (over 50%), and their use for regular payments is also increasing: most of these transactions are automated via the bilateral exchange of magnetic tapes.
Collections of Non-resident direct debits are extremely difficult because they have to be exchanged using paper-based documents until full standardisation is complete.
Debit and credit cards represent some 20% of non-cash payments in Spain and the falling volume of cheques drawn in Spain is partly due to their increased use.
Cheques and electronic transfer are used to settle commercial obligations, which are typically paid on very extended terms. Larger settlements tend to be done by cheque because slow/late payment is the commercial custom in Spain, even though large payments can be processed electronically on a same day basis.
The type of cheque known as “pagares” is issued by high-quality debtors in favour of suppliers and can be discounted by banks as a form of working capital finance.
Equally, suppliers can draw a bill of exchange (“Letra de cambio”) on a customer, which, if accepted by the customer, can be discounted.
Lockbox type arrangements are permitted but still relatively uncommon.
See table at the foot of the page
Cheques have a strong legal basis for the creditor, and have the advantage for the debtor of being slow to clear. Also, the beneficiary has to pay collection charges.
Because cheques are widely used in commercial business and can be for large amounts, it is essential to have an efficient bank for collecting their value.
Cheques are truncated and submitted through the SNCE clearing and it is important that they be presented to the drawee’s bank or branch via the most advantageous route – which may not be through that bank’s Madrid office.
Banks which can present cheques from a range of their own offices in a range of centres are advantaged in cutting clearing times and reducing total fees for their customer.
A cheque drawn on a foreign bank may be seen as disadvantageous because it can take longer to clear.
There are three clearing systems in Spain that relates to cash and treasury management, two High Value (SLBE and SEPI), and one Low Value (SNCE).
SLBE – SLBE (Servicio liquidación Banco de España)
SLBE is the RTGS system and is linked to TARGET since 1999; as such its opening hours reflect those of the pan-European RTGS network (i.e 07:00 – 17:00 for customer payments, and an extra 1 hour for interbank payments).
The features of SLBE are:
- Same-day value gross settlement of interbank and commercial payments in EUR;
- Used for settlement of public debt transactions registered in the CADE exchange, clearing is to accounts held at Banco de España;
- Non-revocable payments
- Payments instruction can be sent through Bank of Spain terminals or via SWIFT.
- There are around 230 direct participants in SLBE.
SEPI (Servicio Español de Pagos Interbancarios)
SEPI is a Net Settlement system. The features of SEPI are:
- used for large commercial and treasury payments (in EUR only)
- specifically it is for payments involving non-residents larger than EUR 300.00, and payments between residents for settlement of FX and securities obligations
- 95% of the transactions are cross-border and the residual 5% of transactions relate to the EUR leg of foreign exchange done by residents and proceeds of securities coupons;
- same day value system with end of day settlement in SLBE;
- guaranteed liquidity via collateral and bilateral/multilateral limits; share of losses in case of failures; guaranteed finality by law;
- SWIFT (MT100, MT205) formats;
- owned by its 39 direct members;
- oversight board is chaired by the Banco de Espana;
- 160 indirect members.
ACH - SNCE
The system is the National Electronic Clearing System - SNCE (Sistema Nacional de Compensación Electrónica) and it is the single centralised clearing system for retail payments in Spain. Its principal features are:
Clears small payments in EUR;
- Payments between residents and non-residents of less than EUR 300.000;
- End of day settlement.
- The SNCE uses bilateral electronic transmission between the participating institutions to clear cheques, credit transfers and direct debits. SNCE´s credit cycle is D+1 (D+2 to end customer).
- There are 28 direct and more than 200 indirect participants in the cheque clearing sub-system, and slightly fewer indirect participants in the credit transfers sub-system.
Camara Unica is a net settlement system used for the exchange of paper-based documents for cheques, commercial bills, Non Residents direct debits, etc. However, it is only a residual and interim sub-system utilised solely for clearing non-standardised payments until full standardisation is complete.
SNCE contains a separate sub-system for each transaction type:
- Credit transfers (“Transferencias”);
- Petrol and travellers cheques;
- Direct debits (“Domiciliaciones”);
- Bills of exchange (“Letras de cambio”).
- Participants exchange files bilaterally for each payment type, and the system records the amounts of each file, resulting in an end-of-day credit to and debit from each participant in each sub-system.
There is no sub-system for cards; however, the card networks follow a similar procedure within their own systems and determine the net balance of each institution in each card system. Then these balances are settled in SNCE.
Every institution reports its net balances on each other bank to the Banco de Espana, which are loaded in the “SNL” (National Settlement System). The SNL consolidates all bilateral balances per sub-system (to ensure the net movement in each sub-system individually is zero) and then also derives the net balance per institution across all sub-systems. The latter amounts are settled to the institution’s accounts in SLBE. Settlement is final at the point this has occurred.
Under credit transfers are understood two types:
“Nominas”, which are for payroll (the banks offer the employer the option of creating physical drafts to be given to employees).
“Transferencias” – other credit transfers.
There are three types, known as “Normas”:
Norma 19, which are regular domiciled direct debits used for example for utility bills (telephone, gas, electricity), subscriptions etc.
Norma 32, which is used for bills of exchange, direct debits “recibos” due to sale of goods or services on a non regular basis. Stamp duty payable on this type.
Norma 58, which is the same as Norma 32 except for stamp duty which is not payable on this type. The “recibos” are passed onto the bank who advance the legitimate credit held by the customer with respect to their debtors.
All three “normas” are available to resident and non resident customers. In the case of non resident customers an NIE (Foreign Identification Number) must previously be obtained.
Bills of Exchange
There are essentially three types, although two of them clear as cheques, and of the cheque types, the one is only distinguished from the other in clearing terms by being guaranteed by the drawer’s bank; all Bills imply a strong legal obligation and are issued by companies of strong standing:
Letra de cambio – issued by the supplier, it clears through a separate sub-system of the SNCE. Once accepted by the buyer, these can be discounted with recourse as they can have a maturity of up to 6 months. Stamp duty is payable on this type.
Pagares – these are post-dated cheques, often at 3-6 months, issued by the buyer. They clear as cheques at maturity. No stamp duty is payable. It is common, as a beneficiary of pagares, to discount them with recourse.
Pagos certificados (“certified payments”) – these are effectively “pagares” but guaranteed by the bank, so readily discountable in the hands of the beneficiary.
Cards are in wide circulation, with far greater instance of debit cards compared to credit cards. Visa is the dominant credit card.
Institutions issuing credit cards belong to one of the three Spanish networks:
- SEMP (with strong tie-in to Visa)
- Sistema 4B
- Confederation of savings banks.
There is interoperability: a card issued by any member of one of the networks can be used in any ATM or EFTPOS terminal. All the same, the number of transactions per card per year is quite low.
ATMs and EFTPOS terminals are controlled by three interoperable networks, more or less corresponding to the issuer networks:
- Sistema 4B
- Red 6000.
There are around 1,000 ATMs and 20,000 EFTPOS per million inhabitants – very high.
Each card network has a pre-paid card scheme:
- Visa Cash
- Monedero 4B
- Euro 6000
Cards can be charged up at ATMs and then used offline; however, the issuer has to hold minimum reserves against balances stored on its customers’ cards.
Spain Payment Volumes
|Payment Method||1999 Transactions|
|Debit Card payments||256.9||286.6||+11.6%||10||11.3||+13.0%|
|Credit Card payments||219||221.8||+1.3%||12.9||13.6||+5.4%|
|Bills of exchange /”Pagares”||123.8||106.5||-14.0%||252.3||253.8||+0.6%|
4) Liquidity Management
All common treasury management techniques are permitted in Spain including leading/lagging, reinvoicing, sweeping, and cash concentration. Multilateral netting is permitted without restriction.
The domestic ZBA is the most used system.
Resident and Non-resident companies can participate in the same system, having in consideration that any movement of funds between resident and non-resident is subject to Central Bank Reporting if it is above EUR 12,500 or equivalent.
The main issue is that the 18% withholding tax on interest paid by one resident to another would also apply to intercompany interest within ZBA systems (and interest must be paid or else there is a breach of the arm’s length principle).
This issue can be dealt with in two ways:
- The master account holder is an EU-incorporated non-resident.
- The Spanish resident companies obtain “Consolidated tax treatment” whereby the master account holder pays taxes on behalf of the other. They then become a single tax entity so the interest payments are not “intercompany” but strictly “intracompany”. There are two tests that must be met:
(a) all participants must be over 90% owned, and
(b) the shares must have been acquired before the current fiscal year.
Non-resident companies cannot be fiscally consolidated with resident companies.
One significant inconvenience is that many transactions are posted to accounts (and so included in ledger balances) with forward value dates. So, in a sweep, the amount moved on any day can be very different from the ledger balance, and it will be hard for the treasurer to reconcile the amount moved with the ledger balance.
5) Electronic Banking
Use of electronic banking is widespread amongst larger Spanish companies (68% use an electronic balance and transaction reporting system which provides information as at the previous day´s close of business). However, functionality is variable, and many systems supplied do not support cross-border or multi-bank transmission of information or payments. Additionally, a very low proportion of Spanish corporate uses urgent international electronic funds transfer.
There is not a single EB standard in Spain.
Nevertheless, the domestic activity is highly facilitated by electronic banking and the conversion of the previously paper instruments (especially direct debits) into electronic records.
Banks will provide proprietary systems; underlying the information service on domestic transactions will be the ASCII format established by the Spanish Banking Association, and this format has a data layout for each transaction type, facilitating accounting and reconciliation.
The bank’s system will also support each domestic payment type, if not directly in the clearing system’s format, then in one that can readily be converted by the bank without intervention, and also be interfaced to the customer’s treasury or accounts payable system (or accounts receivable system if direct debits are being introduced).
6) Legal Entity that exist in the corresponding country
Spain Legal Entity Types - Mainstream
|Legal entity type||Comments|
|Sociedad anonima “SA” – stock corporation and the legal form used by listed companies|
- Notarised “escritura” (deed of incorporation) and “estatutos” (statutes)
- Filed at the Registro Mercantil (Commercial Registry)
- Minimum capital of EUR60101 with minimum of 25% paid-up
- Between 1 and 12 directors
- Management must comprise a president a secretary (“letrado asesor”) and any number of officers
- This group may be constituted as a Management Board (“Consejo de Administracion”)
- Any general powers must be documented as a public deed filed at the Registro Mercantil
- No legal concept of ultra vires if third-parties are acting in good faith
|Sociedad de responsabilidad limitada “SL or SRL” – private limited liability company|
- “Escritura” is required also filed at the Registro Mercantil
- Minimum capital of EUR3005all paid-up
- Management must follow SA model, but with fewer individuals usually
- No legal concept of ultra vires if third-parties are acting in good faith
|Legal entity type||Purpose||Comments|
|Sociedad colectiva – general partnership where the partners’ liability is unlimited joint and several|
- Partners have unlimited joint and several liability
- Notarised “escritura” must be created and filed at the Registro Mercantil
- Any partner can bind the partnership
- Partners may not the carry on the partnership activity outside it and in competition with it
- Not suitable for financial and insurance business
|Sociedad comanditaria - Limited partnership where the limited partners’ liability is the amount they pay in as capital|
- General partners have unlimited joint and several liability
- Notarised “escritura” must be created and filed at the Registro Mercantil
- Only the general partners can bind the partnership
- Not suitable for financial and insurance business
Other legal entity types that exist:
|Other legal entity types|
|Sociedad comanditaria por aciones – partnership limited by shares, sub-type of limited partnership where limited partners’ investments are denominated in shares|
|Sociedad cooperative – a cooperative company, whose objects must benefit the community|
|Sociedad laboral – workers company, which must be at least 51% owned by employees|
|Sociedad agrarian de transformacion – must be engaged in agriculture|
|Sociedad de garantia reciprocal – reciprocal guarantee company, form of limited liability partnership whose sole activity is to provide guarantees in support of its owners/members’ activities|
|Sociedad de reafinanzamiento – provides refinancing/reinsurance for liabilities solely of a “Sociedad de garantia reciprocal”|
|Sociedad de capital riesgo – a capital risk company, engaged in promoting and financing SMEs|
|Sociedad de inversion mobiliaria – investment company|
|Sociedad de inversion immobiliaria – real estate investment company|
|Sociedad leasing – leasing company|
|Sociedad factoring - factoring company|
|Union temporal de empresas – “UTE”, joint-venture, limited to carrying out a specific activity for a limited period of time|
|Agrupacion de Interes Economico – “AIE”, Economic Interest Group|
|Agrupacion Europea de Interes Economico– “AEIE”, European Economic Interest Group|
|Succursal - branch|