Jules Stewart looks at the initiatives the Spanish government and businesses have made in recent months to attract more foreign investment.

Facing a challenging FDI environment, the Spanish government has produced a series of initiatives for foreign investors in an effort to stoke economic growth.

Luis Blanc, a senior tax manager at Ernst & Young, says the country’s holding company legislation already ranks among the most attractive in Europe, while Spain’s tax consolidation system allows investors to offset profits versus losses from one subsidiary to another.

“There have been a number of significant initiatives this year,” he says. “One of these is the carry-forward system introduced in January. Investors were previously allowed to carry forward losses for 10 years, but this has been extended to 15 years to enable new companies to grow. The capital gains tax rules were this year reduced to 18% on the sale of assets provided the proceeds are reinvested within three years.”

Mr Blanc says there are also advantages to using Spain as a base for establishing a holding company for European assets. “Dividends obtained from operations in other jurisdictions do not pay taxes in Spain,” he observes. “Capital gains obtained from the disposal of shares of other companies are also tax exempt.”

Tax benefits

Most multinationals pay little or no tax in Spain, a fact that the Spanish government is happy to live with provided investors continue to do business via holding companies in sectors such as oil, telecoms and infrastructure. The government is now looking to attract investment for its public infrastructure programme, one of Europe’s largest, which includes building a number of high-speed rail links, hydroelectric plants and promoting urban renewal schemes until 2007.

Spain has suffered the impact of the global economic slowdown; FDI fell by 37.2% to e16bn in the first half of 2001, the last period for which official figures are available. Within this general decline, some sectors have held up relatively well. FDI in manufacturing showed a 22.4% increase to e2.2bn; transport and communications was up 172% to e2.0bn and investment in the chemical industry rose 84.5% to e917m. The Organisation for Economic Co-operation & Development (OECD) provided the bulk of FDI, with 21.2% coming from the Netherlands, 17.6% from the UK, 16.5% from the US, and 9.9% from France. Outside the European Union, the US was a major contributor with 16.5%, as was Canada, with 15% of the total.

Investors have tended increasingly to look at Spain on a regional basis, taking into account factors such as the level of skilled labour, infrastructure, location and investment incentives. Spain offers the foreign investor a framework of distinct and well-defined regional investment centres to choose from. The country is organised into 17 autonomous regions, each with its own code of investment incentives that in some cases surpass those enshrined in national legislation.

The Basque Provinces in northern Spain, for instance, have brought out a unique initiative, not only for Spain but also within the EU, by levying a 32.5% rate of corporate tax compared with the 35% national level. Madrid has on several occasions challenged the Basque Provinces’ taxation policies on the grounds of unfair competition, but to date it has failed to win its case. For a number of large multinational firms, this 2.5% tax advantage represents massive savings and thus has attracted investors such as Daewoo, Mercedes-Benz and IT&T. The Basque Provinces’ lucrative tax code reflects the need to offset the threat of violence from the separatist terrorist group ETA, although to date the guerrillas have not targeted foreigners.

Asturias’ legacy

The Principality of Asturias is another case of a region saddled with a legacy that is less than investor friendly. This was the country’s coal mining heartland, as well as a major area for steel production and shipbuilding. The region is struggling to revamp its image. It wants to attract FDI in areas such as tourism, chemicals and food processing – virtually any sector that will help compensate for the collapse of heavy industry. The principality has been classified by the EU as a Group I region in need of urgent reindustrialisation and hence it can offer the maximum investment incentives allowed under EU law. So far it has not fared badly, given the region’s remoteness and low profile, and now attracts between 1% and 3% of Spain’s total FDI, mainly from the US, Germany, France and the UK. Major investors in recent years have included DuPont, Thyssen and Suzuki.

FDI goes to town

The changing nature of FDI in the past couple of decades has also brought a shift in investment away from the periphery, mainly from the country’s industrial heartland of Catalonia, to the central region of Madrid.

Until the late-1980s and early-1990s, Catalonia was the undisputed catch-all for foreign investment, most of which came in the form of heavy industry and auto manufacturing. But the trend towards less labour-intensive and more high-tech manufacturing has benefited Madrid. Given its location in the exact geographical centre of Spain and the fact that all central government offices are located in the capital, people are finding Madrid a convenient location to set up and do business. Easy access to government agencies helps cut through the bureaucracy and speed up the process of obtaining permits and licences.

Telecom towers

María Antonia Scheifler, manager of the foreign investment department of Instituto Madrileńo de Desarrollo (IMADE), the regional ministry of economy, says: “The telecommunications sector has been a major component of foreign investment and in this respect Madrid has the best infrastructure on offer.” Among the telecoms companies that have recently stepped up their investment in the Madrid regions are Vodafone, Motorola and Easynet. Japan’s NEC and Motorola have made Madrid their research and development centre, while other recent investments include Xpert, IDT of the US, the NetCentrex consortium, Corvis, Krone Communications (optic fibre signalling), NTT’s Verio, Massana and Colt.

Ms Scheifler says: “Call centres, logistics, leisure, internet and telecoms are sectors for which we produce free market research reports. Investors are also attracted by the quality of life. If IBM cannot find, say, a native Norwegian speaker with the relevant skills in Madrid, it can hire direct from Norway and never have a problem convincing anyone to come here.”

IMADE says another comparative advantage with its closest rival, Catalonia, is that inward investors only need to have a command of one foreign language, Spanish, whereas in Barcelona and the rest of Catalonia the Catalan language is becoming increasingly predominant.

Madrid’s expansion

One of the areas Madrid is particularly keen to develop is the so-called “eastern corridor”, running from the city along the Barcelona motorway. This commercial zone, according to IMADE, offers easy access to the airport, public transport and commercial distribution networks. Investors in this area are eligible to claim funding from the regional government on minimum investments of e2m that create at least 30 permanent jobs.

Madrid offers a number of incentives for large investors and a wide range of perks for smaller companies. Some companies can attract subsidies of up to 20% on their investment, while other incentives are available for R&D, production of prototypes and training, for instance in the services sector and for call centres.

Since the Barcelona Olympics in 1992, Madrid has been investing heavily in infrastructure – roads, transport, commercial property – to narrow the gap and eventually pull ahead of its main rival. As of June 2001, Madrid attracted 71% of FDI compared with 14% for second-place Catalonia and 5% for the Basque Provinces. The remaining autonomous regions that attracted FDI accounted for 1%–2% each. However, it would be wrong to dismiss Catalonia as an also-ran. The Barcelona Chamber of Commerce, for instance, will this year spend e7m on overseas promotion, a 13.5% increase on last year’s budget.

Property continues to be one of the country’s most dynamic sectors for FDI. The first three quarters of 2001 saw a 26.1% boost in foreign investment, which reached e3.56bn in new commercial and leisure centres as well as factory premises and warehouses. In recent months, Madrid has become the site for a number of commercial property development schemes, including Europe’s largest indoor ski run, built by US-based Mills Corporation.

Consultancy Jones Lang LaSalle says Spain is now the fourth largest property investment centre in Europe, with e2.02bn in FDI last year, up 7% from the previous year.

Carlos Arranz, chief executive of DTZ Ibérica, the Spanish subsidiary of the international property consultants, says the key factors fuelling the high level of foreign interest in leisure centres are the average 6.5%-7% rate of return on investment, restrictions on the number of licences granted by the autonomous regions and the relatively low level of risk involved.

Mr Arranz points out, however, that the slowdown in the world economy and the events of September 11 have put a number of plans on hold in this sector. He says transactions such as Deutsche Bank’s recent purchase of Hotel Arts in Barcelona for e288m could distort the larger picture.

Madrid: beyond the city

Everybody knows that Madrid is the capital of Spain. But Madrid is also a region as well as a city. A region of 8000 square km and five million inhabitants. A region with a GDP of E86m representing more than 17% of the national total. A region that has, in recent years, consistently garnered more than 70% of all foreign investment allocations to Spain.

Madrid’s geo-strategic position as a bridge between Europe, Africa, and Latin America – coupled with the best quality/cost ratio in Europe in terms of living standards – creates an ideal location for basing a business.

The workforce is young, highly educated and multilingual. Labour costs are distinctly competitive when compared with those of other countries in the European Union.

Like most capital regions, the Madrid economy is heavily tilted towards services. It is also the second most important industrial region in Spain, an important consumer market and the second world destination for conferences and trade fairs, after London.

Barajas airport is the busiest in Spain, with 32 million passengers in 2000. The Coslada Logistics Centre – the largest of its kind in southern Europe – houses a dry port that connects Madrid by rail to the major Spanish ports. The high-speed passenger train, the AVE, puts Seville just two and a half hours from Madrid and a second AVE, to Barcelona, is due for completion in 2004.

The region of Madrid is Spain’s undisputed centre for high technology, especially telecommunications. Following liberalisation of the sector in 1998, the region has become a hub for offering customer service to any part of the world including Latin America, and now accounts for 50% of all call centres in Spain.

A prospective resident of Madrid can rely on first class education and health care, as well as its famous array of leisure activities. Indeed, easy access to sports facilities and high quality infrastructure are just two of the ingredients that will help Madrid’s bid for the 2012 Olympics.

For information on Madrid, please contact: IMADE Foreign Investment Office, tel: (34) 913 997 472/3/6, fax: (34) 913 997 464, e-mail: inversiones@imade.es, web: www.investinmadrid.com