Guide to Business in Spain

This guide was researched and written by Garrigues Abogados y Asesores Tributarios on behalfof the Spanish Institute for Foreign Trade (ICEX) and the Directorate General of Trade and Investments(DGCI).

This guide is correct to the best of our knowledge and belief at the time of going to press. It is, however,written as a general guide so it is recommended thatspecific professional advice be sought before any actionis taken, and therefore no responsibility whatsoever is assumed for the contents, including opinions, contained in this guide or for any actions based on such contents.

Madrid, February, 2003

Spanish Institute for Foreign Trade (ICEX)

Instituto Espaol de Comercio Exterior (ICEX)

Paseo de la Castellana, 14-16, 28046 Madrid

Ph: 00 (34) 91 349 61 00

Fax: 00 (34) 91 431 61 28

E-mail: [email protected]

Web: www.icex.es

Creacin y realizacin: Bravo Lofish, S.L.

Imprime:

ISBN: 84-7811-479-3

ISSN: 1137-2907

N.I.P.O.: 381-03-022-5

Depsito Legal:

This publication has been edited with thetechnical advice of the Directorate-General forTrade and Investment. The Directorate withinSpains Ministry of Economy is in charge ofpromoting foreign investment in Spain.

Acknowledgements:

General Subdirectorate of Regional EconomicIncentives

S p a i n : a p r o f i l e

7

Spain:a profileI. Introduction 9

II. The country, its people and its institutions 101. Geography, climate

and living conditions 102. Population and

human resources 103. Political institutions 12

III. Spain and the European Union 14

IV. Infrastructure 15

V. Economic overview 17

VI. Domestic market 20

VII. Foreign trade and investment 21

Spain: a profile1


9

Spain is, at the beginning of the twenty-firstcentury, one of the worlds most developedcountries, with a very important role in theinternational political and economic arenas.The country has well proved its capacity toeffectively translate consistent economicgrowth into significant investments, includingcommunication networks comprisingthousands of kilometers of highways, high-speed train services and satellite facilities.This capacity and the constant effort madeto ensure the competitiveness of itseconomic structure have enabled Spain to beplaced among the worlds main economicplayers.

Spains leading role within the EU wasparticularly patent in 2002 during which yearSpain held for the third time the Presidencyof the European Union. The process ofdevelopment and enlargement of the EU hasled to the recent decision of including tennew countries in the Union, the biggestenlargement ever in terms of scope anddiversity. This enlargement will boosteconomic growth in Spain, thereforeenhancing the opportunities of the Spanishmarket.

The single currency introduced in 2002 intwelve countries of the EU, the Euro Zone,has proved to be a success. The Euro Zoneis a monetary zone comparable to theUnited States and a consolidated, tariff-freemarket of more than 379 million consumers.With the euro, the opportunities of growthand development for Spain have been furtherincreased.

The effective economic performance of Spainis the result of the legislative reformsundertaken and of the heavy investmentsmade by Spanish enterprises to ensurecompetitiveness, develop foreign networksand join multinational projects.

I. Introduction


10

1. Geography, climate andliving conditionsThe Kingdom of Spain occupies an area of506,013 square kilometers in the southwestof Europe, and is the second largest countryin the EU. The territory of Spain coversmost of the Iberian Peninsula, which it shareswith Portugal, and also includes the BalearicIslands in the Mediterranean, the CanaryIslands in the Atlantic Ocean, the NorthAfrican cities of Ceuta and Melilla and somesurrounding rocky islands.

Despite the differences among the variousregions of Spain, the country can be said tohave mainly a typical Mediterranean climate.The weather in the northern coastal region(looking onto the Atlantic and the Bay ofBiscay) is mild and generally rainy throughoutthe year, with temperatures neither very lowin the winter nor very high in the summer.The climate on the Mediterranean coastline,including the Balearic Islands, Ceuta andMelilla, is mild in the winter and hot and dryin the summer. The most extremedifferences occur in the interior of thePeninsula, with a continental climate, withcold winters and hot summers. The CanaryIslands have a climate of their own, withtemperatures constantly around 20 Celsiusdegrees and only minor variations intemperature between seasons or betweenday and night.

Spain has an excellent quality of life and isvery open to foreigners. Over four thousandkilometers of beaches, abundant sportingfacilities and events and social opportunitiesare crowned by the diversity of the countryscultural heritage as a crossroads ofcivilizations (Celts, Romans, Visigoths, Arabs,Jews, etc.).

2. Population and humanresourcesThe estimated population of Spain in 2001was 40.847 million people, with a populationdensity of nearly 81 inhabitants per squarekilometer. Spain is a markedly urban society(see Table 1), as evidenced by the fact thatmore than 34% of the population lives in thecapitals of the provinces of Spain.

The official national language is Spanish,which is used jointly with other officialregional languages (Catalan, Basque, Galicianand Valencian) in specific AutonomousCommunities. Education is compulsory untilthe age of 16 and English is the main foreignlanguage studied at school.

Compared with other OECD countries,Spains population is relatively young:approximately 21% are under 19 years old,62% are between 19 and 65 years old, andonly 17% are over 65 according to year 2001figures.

Spain has a labor force of around 18.5 millionpeople, representing 54% of the countryspopulation over 16 years old. There are

II. The country, its people and its institutions

Table 1

The biggest cities in Spain*

Population

Madrid 2,938,723Barcelona 1,503,884Valencia 738,441Seville 684,633Zaragoza 614,905Malaga 524,414Murcia 370,745Las Palmas de Gran Canaria 354,863Bilbao 349,972

* Figures refer only to the municipal district of each city.Source: Revised Census of registered population in Spanish cities

as of November 1, 2001. Instituto Nacional de Estadstica (National Statistics Institute).


11

fewer women in the labor force in Spain incomparison with the rest of the Europeancountries (33.27% of the Spanish workingpopulation are women), although these figuresare increasing at a fast rate.

The working population is generally middle-aged. Additionally, as seen in Table 2 below,Spain is also experiencing in recent years arelevant inflow of immigrants which isexpected to lower the work populations agein coming years.

The structure of the labor force byeconomic sector has also changedsignificantly in recent years, with a notableincrease in the number of those employed inthe services sector and a decrease in thenumber of farmworkers (see Table 3 andChart 1).

Table 2

Foreigners resident in Spain by continent of origin

1998 1999 2000 2001

Europe 330,528 353,556 361,437 414,555North and Center America 62,522 69,524 69,434 75,592South America 84,678 97,185 130,530 223,206Asia 60,714 66,340 71,015 89,519Africa 179,487 213,012 261,385 304,149Oceania 1,023 1,013 902 944Unknown nationality 695 699 1,017 1,095Total 719,647 801,329 895,720 1,109,060

Source: Instituto Nacional de Estadstica (National Statistic Institute)

Chart 1

Labor force structure by economicsector in 2002

Source: Instituto Nacional de Estadstica (National Statistic Institute)

6%

20%

12%

62%

Agriculture Construction

Industry Services


12

The labor force is very qualified, productiveand capable of adapting to technologicalchanges, productivity growth being as aconsequence, among the highest in Europe.

Lastly, in line with the existing commitmentwithin the EU to foster employment, sincethe mid-nineties the Government hasimplemented wide-ranging reforms of thelabor market regulations, introducing a highdegree of flexibility in the use of the laborforce by companies. The success of thereforms undertaken is attested by the factthat on 2001 the percentage of job creationin Spain in relation to the previous year wasseven times higher that the percentage of theEuro Zone.

3. Political institutionsSpain is a parliamentary monarchy. The King isthe Head of State; his primary mission is toarbitrate and moderate the regular functioningof the countrys institutions in accordancewith the Constitution. He also formally ratifiesthe appointment or designation of the highestholders of public office in the legislative,executive and judicial branches.

The Constitution of 1978 enshrined thefundamental civil rights and public freedomsand assigned legislative power to the CortesGenerales (Parliament), executive power to

the Government of the nation, and judicialpowers to independent judges andmagistrates.

The responsibility for enacting laws isentrusted to the Cortes Generales,comprising the Congreso de los Diputados(Lower House of Parliament) and theSenado (Senate), the members of whichare elected by universal suffrage every fouryears.

The Cortes Generales exercise thelegislative power of the nation, approve theannual State budgets, control the actions ofthe Government and ratify internationaltreaties.

The Government is headed by thePresidente del Gobierno (President of theGovernment) who is elected by the CortesGenerales and is, in turn, in charge ofelecting the members of the Consejo deMinistros (Council of Ministers).

The members of the Council of Ministers areappointed and removed by the President ofthe Goverment at his or her discretion.

For administrative purposes, Spain isorganised into 17 Autonomous Communitieseach containing generally one or moreprovinces, plus the Autonomous Cities ofCeuta and Melilla in Northern Africa; thetotal number of provinces is 50.

Table 3

Evolution of labor force structure by economic sectors(Percentages)

1985 1990 1995 2000 2001 2002

Agriculture 18.2 11.8 9.3 6.6 6.2 5.5Industry 24.5 23.8 20.1 19.8 19.7 19.6Construction 7.3 9.7 10.4 11.1 11.5 11.7Services 50.0 54.7 60.2 62.5 62.6 63.2

Source: Instituto Nacional de Estadstica (National Statistic Institute), Labor Force Survey, 2002.


13

Each Autonomous Community exercises thepowers assigned to it by the Constitution asspecified in its Statute of Autonomy. TheseStatutes also stipulate the institutionalorganization of the Community concerned,consisting generally of: a legislative assemblyelected by universal suffrage, which enactslegislation applicable in the Community; aGovernment with executive andadministrative functions, headed by aPresident elected by the Assembly, who isthe Communitys supreme representative;and a Superior Court of Justice, in whichjudicial power in the Communitys territoryis vested. A Delegate appointed by theCentral Government directs theAdministration of the State in theAutonomous Community, and co-ordinates itwith the Communitys administration.

The Autonomous Communities arefinancially autonomous and can share in therevenues collected under central taxes orcan levy their own taxes. The AutonomousCommunities also receive allocations fromthe general State budgets.

As a result of the structure above describedSpain has become one of the mostdecentralized countries in Europe.


14

Spain became a full member of the thenEuropean Economic Community seventeenyears ago. Therefore, EU legislation is fullyapplicable in Spain. In this connection andaccording to the nineteenth annual report ofthe European Commission, Spain andDenmark are the only countries in the EUthat comply with the objectives establishedby the European Council regarding thenumber of Directives implemented innational law.

A major impact of European Unionmembership for Spain, and for the otherMember States, came in the mid-ninetieswith the advent of the European SingleMarket and the European Economic Area,which created a genuine barrier-free tradingspace. Since then, the EU has advancedsignificantly in the process of unification bystrengthening the political and social tiesamong its citizens, and Spain, throughout allthis process, has always stood out as one ofthe leaders in the implementation ofliberalization measures.

Spain has a strong responsibility in the EU,evidenced by the fact that it has become thefifth country in terms of voting power in theCouncil of Ministers with 27 votes,immediately following Germany, France, Italyand the United Kingdom, each with 29 votes.

During 2002, it held its third Presidency ofthe Council of the European Union with theoverall intention of culminating theintegration process and the historicalchanges which began over a decade ago.

The introduction of the euro (January 1st,2002) initially in twelve countries marked thebeginning of the Spanish Presidency,representing the culmination of a lengthyprocess and a whole deal of growthopportunities for the Spanish and Europeanmarkets.

With the euro in the European Union, amonetary zone has been established to formthe worlds number one trading power,triggering the integration of the financialmarkets and economic policies of theMember States adopting it. Such changeshave also fostered the coordination andintegration of the tax systems of the EuroZone Member States, thus further increasingthe stability of the EU.

The euro has yielded clear results at theinternational level, promoting the visibility ofthe Euro Zone both in international andfinancial fora (the G-7 group meetings) andin multilateral organizations. The economicand commercial stability provided by theeuro has further bolstered Spains currenteconomic growth along with additionalinternational political presence.

The EU aproved the joining of 10 newcountries for May 1, 2004 (Cyprus, theCzech Republic, Estonia, Hungary, Latvia,Lithuania, Malta, Poland, the SlovakRepublic and Slovenia). Such enlargementof the UE poses a unique challenge since itis without precedent in terms of scope anddiversity: an extension of land area of 23%and a population increase of 75 millionpeople.

Spain is the EU Member State that in thelast years has received the most EUstructural and cohesion funds used tofinance infrastructure and developmentprojects. In fact, Spain is expected to receivein total around US$ 46 billion in EUstructural funds in the 1999-2007 period.This implies a 13% growth from the previousterm. With these funds, the Governmentplans to encourage actions undertaken inthis area as well as the cooperation ofprivate initiatives financing theinfrastructures mentioned.

III. Spain and the European Union


15

Over the last decade Spain has undergone aprocess of modernization that has includedan extensive renewal of its infrastructure.

The Government plans to continue investingheavily in the future. This is reflected in theOverall Infrastructure Plan for 1993-2007,which provided for investment totalling US$133 billion. Intercity transport is the mainitem in the Infrastructure Plan, followed byurban transport. There will also beaccompanying measures in hydraulic worksand environmental infrastructure.

The motorway network, totalling nearly10,500 km, has more than tripled in lengthsince 1982 and has undergone continuousrenovation to enhance efficiency andconvenience. The Government investmentplan will result in over 13,000 km ofmotorway network for year 2010, with totalinvestment expected to surpass 25 billioneuros between 2000 and 2006, thusbecoming one of the most modern networksin the world.

As far as rail transport is concerned, Spainhas a network of over 15.000 km of track,and in 1992 introduced a 471-km high-speedtrain line from Madrid to Seville. High-speedtrain lines have become a priority for theGovernment infrastructure plans (theforeseen network of high-speed trains willtotal 7,200 km), and as a consequence ofthem, by December 2004, Madrid will beconnected by high-speed train to the Frenchborder via Zaragoza (Aragn) and Barcelona(Catalonia) and additionally via Vitoria andIrn (Basque Country). In fact, the sectionMadrid-Zaragoza-Lrida will be openedduring 2003, and these two cities will be only35 minutes and 1 hour and 55 away fromMadrid, respectively. Furthermore, by theyear 2005 Madrid will be connected to theMediterranean coast via Valencia (the

Government has announced that this sectionwill be opened by 2006). In connection withthe Northern route (Madrid-Valladolid-La Corua), completion of works for theMadrid-Segovia-Valladolid section is foreseenfor 2007. The high-speed train lines haverecently been further extended by 122kilometers, which will soon connect thecities of Crdoba and Mlaga, providing theSouth with an extensive high-speed network.Additionally, high-speed lines are beingdesigned in order to connect Portugal andthe remaining major Spanish cities. Theinvestment forecast for railroads totals 40.9billion euros between 2000 and 2007.

There are air transport services between themain cities and the approximately 250airlines with scheduled flights operating outof the countrys 33 international airportsensure complete service abroad. Spain is animportant intermediate stop in the linesbetween Latin America and Europe and liesin a crucial position in the network toAmerica and Africa from Europe. Spain alsohas excellent sea communications, with 44international ports on the Atlantic andMediterranean coasts.

Spain is also well equipped with industrialland and technological and industrialinfrastructure. In the last few years,technology parks have proliferated in themain industrial areas and near universitiesand R&D centers. There are currently 20technology parks (12 fully operational, 8 ina development stage). In these technologyparks there are 874 companies, 88 R&Dcenters and 12 incubators operating. R&Dexpenditure has risen significantly in recentyears. The fourth national R&D Plan (2000-2003) forecasts that R&D expenditure inthe following term will amount to 1.3% ofGDP.

IV. Infrastructure


16

Lastly, Spain has a good telecommunicationsnetwork. In addition to the extensive fiberoptic network which covers almost all theterritory, Spain manages one of the largestinternational undersea cable networks andhas satellite connections with the fivecontinents. In this respect, it is worthwhilementioning the strong liberalization processundertaken in most industries, including thetelecommunications sector, well within theEuropean schedule. Among other benefits,this implies a more competitive and costeffective offering of this type of services,essential for an appropriate economicdevelopment.

4.5

4

3.5

3

2.5

2

1.5

1

0.5

01999 2000 2001 2002

Source: European Central Bank and Banco de Espaa (Bank of Spain).


17

Spains GDP was increased by 2.7% in 2001totalling around US$ 560 billion that year,making it the eighth largest in the OECD.Growth of the GDP for 2002 reached 2%.

The structure of the Spanish economy is thatof an industrialized country, with the servicessector being the main contributor to GDP,followed by industry. These two sectorsrepresent almost 90% of Spains GDP withagricultures share today representing less

than 5% of GDP, and declining sharply as aresult of the countrys intense economicgrowth (see Table 4).

Spain is a fairly dynamic country, and hasconsistently achieved high economic growthrates, clearly above the average for otherindustrialized countries. The growth in Spainin 2001 and 2002 was much greater than theaggregate growth of the Euro Zone (seeChart 2).

V. Economic overview

Table 4

Structure of GDP(% of total, in 1995 constant pesetas)

Sector 1997 1998 1999 2000 2001 2002*

Agriculture and fishery 4.8 4.7 4.3 4.5 4.3 4.1Industry 29.7 30.2 29.6 24.1 23.1 23.4Construction 6.9 7.0 7.1 8.1 8.5 8.3Services 58.6 58.1 59.0 63.3 64.1 64.2

* January-June.Source: Instituto Nacional de Estadstica (National Statistics Institute).

Chart 2

GDP growth(% growth rate, in constant 1995 prices)

Spain

EU

4.2

2.8

4.2

3.42.7

1.5

2.0

0.8


18

The prospects for the coming year, takinginto account the international situation,which has lowered all of the perspectives,are that Spain will have growth rates ofnearly 3% in 2003, once again exceeding theaverage for the EU (see Table 5). As a matterof fact, projections released by the OECDindicate that it shall start to recover by 2003,to achieve real GDP growth rates over 3 %in 2004.

Inflation in Spain has fallen steadily since thelate 1980s. The average inflation rate for1987 through 1992 was 5.8%. The rate of

inflation was kept under 5% for the first timein 1993, and has been further reduced insubsequent years. Year 2002 ended with aninflation of 4%. Among others, the reasonsfor this small increase are the result of thecrude price escalation initiated at the start ofthe year, adverse weather conditionsaffecting fresh products like fruits andvegetables, an increase in certain taxes at theyears outset, the entry into circulation ofeuro coins and notes and the fact that Spainis the only country in the EU which stillmaintains important real growth rates.

Table 5

Growth and inflation forecasts for OECD countries(Percentages)

Real GDP Growth Inflation

2002 2003 2002 2003

EU countries

Austria 1.2 2.8 1.8 1.7Belgium 1.1 2.7 2.2 2.3Denmark 1.9 2.2 2.1 2.1Finland 1.5 3.4 1.7 1.8France 1.4 3.0 1.5 1.4Germany 0.7 2.5 1.4 1.6Greece 3.5 4.2 3.0 2.9Italy 1.5 2.8 2.5 2.1Ireland 3.5 6.3 4.0 3.2Luxembourg 2.7 6.8 2.2 2.3Netherlands 1.4 2.6 3.0 2.2Portugal 1.7 2.7 3.3 2.8Spain 2.1 3.3 2.8 2.6Sweden 2.1 3.2 2.4 2.4United Kingdom 1.9 2.8 2.3 2.3

Other countries

United States 2.5 3.5 1.4 1.8Japan -0.7 0.3 1.6 -1.7

Total EU 1.5 2.8 2.1 2.0

Total Euro Zone 1.3 2.9 2.0 1.9

Total OECD 1.8 3.0 2.2 2.0

Source: OECD Economic Outlook (projections). June 2002.


19

Also, in 1999 Spain engaged in an earnesteffort to reduce the budget deficit, includinga successful program of major privatizationsand of contention of public expenditure. Theactions taken by the Government have onceagain proved the flexibility of the Spanisheconomy as it has been recently confirmedthat on year 2001 the Spanish public deficitwas eradicated. According to Governmentforecasts, public deficit for 2002 will only be0.1%.

Very noteworthy is the impressive reductionin the official interest rates in Spain from10% in 1993 to the current 2.75%.


20

The growth of the Spanish economy inrecent years has been driven by a strongdemand and a substantial expansion ofproduction in the context of an increasinglyopen economy.

Today Spain has a domestic market of over40 million people with a per capita incomefor 2001 of roughly 15,000 US$, and anadditional injection of demand coming fromthe 75.7 million international visitors everyyear. The close links (economic, cultural,political) with Latin America and NorthAfrica and the obvious advantages of usingSpain as a gateway to those countries areworthy of mention.

Table 6 reflects the evolution of basicproduction and demand components since1997. Recent indicators show a sustainedrecovery of industrial production. As regards

demand, the slight slowdown corresponds toa renewed uptrend in personal savings, asobserved in 2001 after several years ofconstant decline. In general, the potential forgrowth is still very high in many industrialsectors due to the relatively lower level ofper capita consumption as compared toother European countries. This is the case,for instance, in the telecommunications and,among others, environmental equipmentindustries.

VI. Domestic market

Table 6

Growth of production and demand components(Percentages)

1997 1999 2000 2001 2002*

Production components

Agriculture and fishery 2.3 -3.1 1.5 -3.1 -3.1Industry 5.2 3.0 4.0 1.2 -2.2Energy ** ** ** 2.8 6.4Construction 2.8 8.7 6.3 5.4 4.7Services 3.4 4.0 3.9 3.2 2.7

Demand components

Private consumption 3.1 4.7 4.0 2.5 2.0Public consumption 2.9 2.9 4.0 3.1 1.7Gross fixed capital formation 5.0 8.9 5.7 3.2 1.2Domestic demand 3.4 5.5 4.3 2.8 1.9Exports of goods and services 15.3 6.6 9.6 3.4 -2.0Imports of goods and services 13.3 11.9 9.8 3.5 -2.1

* January-June. ** For these years, Industry and Energy were added under the Industry heading.Source: Instituto Nacional de Estadstica (National Statistics Institute).


21

In recent years, Spains exports and importshave grown rapidly. As can be seen in Table7, the basic features of the countrys balanceof payments today include a trade deficitwhich is being completely financed by thesurplus in the services account (driven bytourism) and in the capital and financial

accounts. However, it should be noted thatdespite the strong volume of foreign directinvestment that Spain receives, Spanish directinvestment abroad is since 1997 larger thanforeign direct investment in Spain.

VII. Foreign trade and investment

Table 7

Spains balance of payments(Millions of euros)

2000 2001 2002*

I. Current account -18,959 -16,947 -7,161

Trade Balance -35,643 -35,265 -14,346Services Balance 24,216 27,138 11,218Income -9,055 -10,655 -5,695Net Current Transfers 1,523 1,836 1,660

II. Capital Account 5,217 5,556 3,982

III. Financial Account 21,509 18,827 9,207

Total (excluding Bank of Spain) 27,652 1,352 6,376Direct investment 18,561 -6,732 2,612Portfolio investment -2,919 -17,758 -6,575Other investment 46,961 26,431 12,623Financial derivatives 2,172 -589 -2,285Bank of Spain -6,143 17,475 2,831Reserves 3,302 1,581 -414Claims with the Eurosystem -9,250 16,122 3,151Other net assets -195 -228 95

IV. Net errors & omissions -7,768 -7,436 -6,028

*January-June.N.B.: A positive sign in the current and capital accounts means a surplus (receipts greater than payments) and represents a net loan from Spain tothe rest of the world (increase in assets or decrease in liabilities), whereas in the financial account a positive sign means a net inflow of capital andrepresents a net loan from the rest of the world to Spain. A negative sign in reserves means an increase.Source: Banco de Espaa (Bank of Spain).

The main products traded by Spain in 2002are shown in Table 8. The sophistication ofthe main products exported clearly showsthe degree of technology and capability ofSpanish economy.


22

In 2001, Spains main trading partners wereEU countries, with 70.9% of total exportsand 63.2% of total imports. Latin Americancountries represented 6% of Spanish exportsand 4.1% of imports, the U.S. accounted for4.84% of exports and 5.20% of imports andJapan accounted for 0.9% of exports and2.93% of imports.

Perhaps the most striking feature of theSpanish balance of payments is the net inflowof foreign investment, consistently receivedby Spain since 1996, with the exception of2001 and 2002, due to the internationalcrisis (see Chart 3).

Table 8

Distribution of exports and imports 2002*(Percentages)

Exports Imports

Transport vehicles 23.0 Transport vehicles 16.2Machinery and equipment 8.2 Machinery and equipment 12.0Electronic machinery 6.8 Fuels and mineral oils 11.0Plastics and plastic products 3.5 Electronic machinery 8.4Fresh fruits 3.0 Plastics and plastic products 3.3Fresh vegetables 2.5 Pharmaceutical products 3.1Pharmaceutical products 2.4 Organic chemical products 3.0Cast iron and steel 2.3 Cast iron and steel 3.0Fuels and mineral oils 2.3 Optical machinery 2.4Organic chemical products 2.0 Fishery products 2.2Cast iron and steel products 2.0 Wood and cardboard products 2.0Ceramic products 2.0 Clothing products 1.6

* January-September.Source: Ministry of Economy.

Chart 3

Foreign investment in Spain (1999-2002)(Millions of euros)

120

100

80

60

40

20

01999 2000 2001 2002*

Direct Portfolio Total* January-August.Source: Banco de Espaa (Bank of Spain).

14.79

42.69

57.48

40.73

63.64

104.37

24.34

30.84

55.18

11.71

18.12

29.83


23

According to the Annual World InvestmentReport released by the United NationsConference on Trade and Development,global foreign direct investment declinedsharply in 2001 (59% in developed countries).Spain did not escape this international trend,but it is one of the EU countries with lowestdecreases.

Foreign direct investment is mainly routed toservices (77.5% between 1997 and 2000)and industry (22.5%). The industrial sectorsthat received most investment were, amongothers, the automobile, chemicals, iron andsteel, food and beverages and electricequipment industries. Among services, thefinancial and insurance sectors arepredominant.

Electronics, aeronautics, environment,healthcare and leisure also offer investmentopportunities for foreign investors.

Lastly, Table 9 shows Spains integration inthe worlds global economy and theopenness of its structures, reflecting therelevancy of the direct investment abroadperformed in the last years by Spanishcompanies and entrepreneurs. Particularlynoteworthy is the substantial investment inLatin America performed by Spain in the19962000 period which led Spain to beranked as the worlds second largest investorin the region, and the first in countries suchas Peru, Brazil, Venezuela, DominicanRepublic, Cuba and Chile.

Table 9

Net direct Spanish investment abroad(Millions of euros)

1999 2000 2001 2002*

EU 11,340 20,111 25,688 3,444US -127 7,156 1,346 617Latin America 27,629 20,490 3,395 1,618

* January - June.Source: Direccin General de Comercio e Inversiones (General Directorate of Trade and Investments).

T h e f i n a n c i a l s y s t e m

25

I. Introduction 27II. Financial institutions 28

1. Credit institutions 282. Collective investment

entities 303. Credit market 314. Stock market 32

a) Equity market 33b) Options and futures

market 36c) Fixed-income market 36d) New Market 37

5. Money market 386. Credit finance

establishments 417. Venture capital

institutions 418. Asset securitization 429. Mutual guarantee

societies 4210. Pension plans and

insurance companies 43

III. Law 44/2002 on financialsystem reform measures 46

IV. Taxation of financial products 48

The financial system

2


27

From the institutional standpoint, a financialsystem can be defined as the group ofentities which generates, gathers, administersand manages saving and investment in apolitico-economic system.

Spain has a diversified modern financialsystem, which is fully integrated withinternational financial markets.

The system comprises credit, stock andmoney markets, and specific markets forderivatives (options and futures based ondifferent assets, e.g. a share index called Ibex35).

I. Introduction


28

The operators in the Spanish financial systemcan be classified as follows:

The central bank: Bank of Spain

Credit institutions:

Spanish and foreign banks

Savings banks

Credit cooperatives - Rural savings banks

Other credit entities:

Credit Financial Establishments(introduced by Law 3/94, implementingthe Second EC Directive on bankingcoordination). These are credit entitiesspecialized in certain asset products e.g., leasing, financing, mortgage loans,etc. which cannot take public deposits.

Instituto de Crdito Official, ICO (acts asthe States finance agency and investmentbank).

Investment institutions:

Collective investment entities:

- Investment companies dealing in:

Marketable securities

Property assets

- Investment funds:

Marketable securities

Property assets

- Money market assets:

Mortgage securities

Pension plans and funds

Other

Venture capital funds and companies

Other investment entities

Brokers:

Stock market:

- Stockbroker companies and agencies

General:

- Banks

- Security management and depositcompanies

Insurance and reinsurance companiesand insurance brokers

1. Credit institutionsBanks and savings banks are of particularimportance in the financial sector in Spain,because of the volume of their business andbecause they are active in all segments of theeconomy.

In Spain, since the European System ofCentral Banks (ESCB) and the EuropeanCentral Bank were set up, the functions ofthe Bank of Spain have been redefined. Theynow consist of participating in the followingbasic functions attributed to the ESCB:

Defining and implementing the Euro Zonesmonetary policy, with the aim ofmaintaining price stability within it.

Conducting currency exchange operationsand holding and managing the SpanishStates official foreign exchange reserves.

Promoting the sound working of paymentsystems in the Euro Zone.

Issuing legal tender banknotes.

Also, pursuant to its Law of Autonomy, theBank of Spain will have the followingfunctions:

Supervising the solvency and behavior ofcredit institutions and financial markets.

II. Financial institutions


29

Promoting the sound working and stabilityof the financial system and of Spainspayment systems.

Preparing and publishing statistics relatingto its functions.

Providing treasury services and acting as afinancial agent for government debt.

Advising the Government and preparingthe appropriate reports and studies.

The banks operating in Spain are financialinstitutions authorized as such which engagein intermediation transactions using fundsobtained from customers and provide otherservices of a financial nature.

At November 10, 2002, there were 84officially registered Spanish banks, manysubsidiaries, branches, representative officesand correspondents abroad1. Some 59foreign banks also have offices in Spain.

Of these foreign banks, 46 have theirheadquarters in another EU Member State.

Savings banks are credit institutions with thesame freedom as and full operational equalitywith the other members of the Spanishfinancial system. They have the legal form ofprivate foundations and a community-welfarepurpose and operate in the open market,although they reinvest a considerable portionof the earnings obtained by them incommunity welfare work.

These long-standing institutions with deeproots in Spain attract a substantial portion ofprivate savings and their lending businesscharacteristically focuses on the privatesector (through mortgage loans, etc.). Theyare also very active in financing major public

works and private-sector projects bysubscribing and purchasing fixed-incomesecurities.

The Spanish savings banks are members ofthe Spanish Confederation of Savings Banks(Confederacin Espaola de Cajas deAhorro-CECA), a credit institution formedin 1928 to act as the national association andfinancial institution of the Spanish savingsbanks and which today groups together 47confederated savings banks.

In recent years, savings banks and certainother banks have been involved in a majorprocess aimed at optimizing their positionvis--vis the EU single market for bankingservices. As part of this, a process ofintegration took place involving the largestSpanish banks and the creation of twobanking groups (SCH and BBVA) on aEuropean scale and with a major presence inLatin America.

In the last two years, the branch networkshave evolved differently in each of thebanking industries. The banks have reducedthe number of branches to 14,084 branchesin the third quarter of 2002, 672 less than inDecember 2001 whereas savings banknetworks have grown by 1.18% through theopening of 350 new branches in the sameperiod.

1 Bank of Spain.


30

2. Collective investmententitiesProspective investors planning investments atany term on the Spanish money or stockmarkets can call on the expert services ofnumerous investment and brokerage entitiesthat ensure ease and flexibility in makingtheir investments, offering risk profilessuitable for each investors requirements.

The regulations governing investment entitieslay down complete and stringentrequirements for financial reporting in thisfield, and also introduce a favorable taxregime permitting the elimination ofadditional tax costs that may occur oninvesting through these institutions.

In general, Spanish collective investmentinstitutions are of two types:

Financial: Their main activity is theinvestment in or management ofmarketable securities.

They include securities investmentcompanies and securities mutual funds,money market mutual funds and otherinstitutions whose purpose is to invest inor manage financial assets.

Nonfinancial: Their main activity is theexploitation of real estate assets.

They include real estate investmentcompanies and trusts.

The aforementioned tax relief measureshave led to a notable increase in thenumber of these institutions and in thevolume of their investments (see Table 1).The soundness of the markets in Spain andof the participating entities Spain being theseventh European country with moneyplaced in investment funds is evidenced bythe 7,808,095 shareholders and investment

institution participants in Spain at October31, 20022.

However, in the last year the assets ofmutual funds have fallen, according to theinternational tendency, although it isexpected that they will experience a gradualrecovery based on the favorableperformance of equity securities in Spain.

Charts 1 and 2 below show the variations inthe aforementioned figures.

Table 1

Growth of investment institutions

Investment Volume Institutions(million euros)

1988 6,355 4031989 7,062 4701990 9,030 5501991 25,510 6621992 39,831 7321993 64,365 8221994 69,996 9291995 75,791 1,0241996 115,642 1,2581997 167,267 1,8401998 211,903 2,4771999 219,453 3,2612000 201,507 4,1372001 204,458 4,8732002* 199,272 5,105

* October.Source: Inverco and CNMV.

2 Spanish National Securities Commission (CNMV).

6,000

5,000

4,000

3,000

2,000

1,000

01990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Oct.02

Source: Spanish Stock Market.

250,000

200,000

150,000

100,000

50,000

01990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Oct.02



31

3. Credit marketAs noted earlier, the Spanish credit market isstructured around banks, which attract mostsavings and use their funds to providefinancing for the private sector.

The banks also operate as investors andunderwriters in the stock market, and adjusttheir liquidity by interbank and moneymarket transactions.

The parallel growth in deposits from andlending to the private sector indicates the

lack of any serious problems in obtainingbusiness financing.

The liberalization of capital movements inthe EU has also made it easier for Spanishcompanies to obtain financing from abroad.

The regulation of non-mortgagesecuritization procedures should also bementioned. These will contribute tofurthering the generation of additionalresources by credit institutions, enablingthem to grant new credit facilities.

Chart 1

Negotiation volume

Chart 2

Number of Collective Investment Entities

Euros


32

4. Stock marketThe Spanish stock market consists of thefixed-income and equity markets and theregulated options and futures market (seebelow).

The issuers are mainly Spanish privatecompanies and banks. However, the sharesof some foreign companies are also listed onthe Spanish stock exchanges. Certain non-resident entities may also issue bondsdenominated in euros (matador bonds) inthe Spanish market, subject to certainconditions.

Market regulation has established a marketbased on the British/US model, aimed atprotecting small investors and the marketitself. A single computerized and centralizedcontinuous stock market (mercadocontinuo) exists, on which insider tradingis penalized. The obligatory involvement ofpublic authenticating officers in stock markettransactions was abolished, and a publicagency (the Comisin Nacional delMercado de Valores CNMV NationalStock Exchange Commission) regulates thesystem and supervises its satisfactoryoperation.

The CNMV is the agency entrusted withsupervising and inspecting the Spanish stockmarkets and the activities of all entitiesoperating in them.

The CNMVs objectives include:

Overseeing the transparency of theSpanish stock markets and proper priceformation.

Overseeing investor protection.

The CNMVs action impinges on thecompanies which issue securities for publicofferings, the secondary securities markets

and the companies which provide investmentservices.

Crossed trading on the market is cleared inthree days, trading on credit is permitted andnew hedging instruments (i.e. index andwarrant options) are available. The modernregulations for takeover bids and publicofferings should be noted.

In this respect, the Spanish Parliament iscurrently considering amendments to thelegislation on tender offers. Theseamendments are intended to broaden theprotection of small investors by introducingthe following changes:

Companies which have a holding of lessthan 25%, but which continue to purchasenew shares in the market until they have acontrolling interest, will be obliged tolaunch a tender offer.

It is proposed to eliminate the advantagecurrently enjoyed by the companylaunching the first offer, which undercurrent law is the only bidder that canrespond to possible competing offers witha higher bid.

Also, 2002 saw the formation of Bolsas yMercados Espaoles, Sociedad Holding deMercados y Sistemas Financieros, S.A.,which groups together the followingcompanies:

FC & M, Sociedad Rectora del Mercado deFuturos y Opciones sobre Ctricos, S.A.

MEFF-AIAF-SENAF Holding de MercadosFinancieros, S.A.

Servicio de Compensacin y Liquidacin deValores, S.A.

The Madrid, Barcelona, Valencia andBilbao Stock Exchange GoverningCompanies.


33

The purpose of this holding company is toact as the integrating force behind thevarious Spanish stock markets and as the keyinstrument of their international projection.

All these advances have made the securitiesmarket in Spain more transparent and safer.

a) Equity market

The activity of the Spanish stock marketcan be gauged by the trading volume of theMadrid Stock Exchange, which was g 106,000 million in 2001, with thenumber of transactions amounting to 1.89million.

The equity market capitalization was g 525,839 million, which represented a fallof 2.09% with respect to the level in 2000.This means that, despite the situation ofthe equity markets in recent times, theMadrid market has been that in which themarket value of listed companies has fallenthe least.

As a result, the Madrid Stock Exchange hasretained its position as the fourth Europeanmarket in terms of trading volume.

Foreign investment also made a significantcontribution to growth in the Spanishstock market. As of May 2002, foreigninvestment amounted to g 103,871 millionof listed shares, representing an increase of3.01% with respect to the correspondingperiod of 2001.

Chart 3 shows the high volume of foreigninvestment in the Spanish stock market.

As mentioned above, the equity markettrend was bearish in 2001 and a leadingrole was played by the interest rate cuts inthe U.S. From February 2001 world stockexchanges began to reflect the unfavorableexpectations for U.S. GDP growth and

business earnings. Moreover, theuncertainty arising from the September 11attacks in the U.S. and the deterioration inthe major world economies led toconsiderable declines in all the Septemberstock market indicators, although the shareindexes regained some of theiraccumulated losses in the fourth quarter.

The importance of foreign investment inlisted shares, market capitalization andshare index variations in the majorEuropean stock exchanges is shown inTables 2 and 3, and Chart 4 below.

Chart 3

Madrid Stock Exchange tradingvolume by type of investor(December 2001)

Source: Madrid Stock Market.

Foreign Retail operators

Collective Proprietary (banks)investment and other

Proprietary (brokers)

63.42%

4.01%6.35%

14.66%

11.56%


34

Chart 4

Capitalization of shares in the Madrid Stock Exchange (annual evolution)(Billions of actual euros)

600

500

400

300

200

100

01997 1998 1999 2000 2001 Oct. 2002

Source: Madrid Stock Market.

Table 2

Foreign investment in shares of listed companies (transactions on the secondary market)(Millions of euros)

Year Purchases Sales Net Investment

1987 8,941.42 6,415.29 2,526.131988 6,546.35 5,219.17 1,327.181989 10,194.97 6,011.55 4,183.431990 10,023.94 6,640.99 3,382.951991 9,922.43 8,059.56 1,862.871992 11,026.16 8,877.07 2,149.091993 18,211.90 12,647.96 5,563.951994 20,784.85 20,051.53 733.321995 20,766.93 18,037.82 2,729.111996 30,789.29 31,059.69 -270.401997 61,571.63 62,027.41 -455.781998 115,765.75 110,594.74 5,171.011999 136,165.00 131,825.00 4,340.002000 260,721.60 275,505.66 -14,784.052001 227,730.00 251,070.00 -23,340.002002* 162,750.00 177,810.00 -15,060.00

* Data at August, 2002.Source: Spanish Stock Market.

266.60

342.70

430.70

537.05 525.84

425.30


35

Stock market activity is measured by the so-called performance indexes based on shareprices as the best indicator of the marketprice level. Thus, the index representschanges and price fluctuations and themarket trend at different points in time.

The IBEX-35 is the Spanish continuous marketindex. It is prepared in real time and showsthe capitalization of the 35 best companies onthe electronic stock market. It is an extremelyefficient instrument providing information tobrokers, as it is an indicator of the shares withgreatest liquidity and is not subject tomanipulations of any kind. The securities thatit should include are reviewed twice a year.

To be included in the index, certainguidelines must be observed such as:

Trading on the continuous market for atleast six months.

Companies with stock exchangecapitalization of less than 0.3% of theaverage capitalization of the Ibex-35 maynot be included.

Rules on the weighing of companiesaccording to their free float must beobserved.

Chart 5 below shows the performance ofthis index in the last two years.

Table 3

Comparative stock exchange index variation

Market Index Variation(percentages)

Italy -26,20Germany -19,80Spain -7,80France -22,00United Kingdom -16,20USA -7,10Japan -23,50

Source: Infobolsa, 2001.

12,000

10,000

8,000

6,000

4,000

2,000

0Jan. 01 Mar. 01 May. 01 Jul. 01 Sep. 01 Nov. 01 Jan. 02 Mar. 02 May. 02 Jul. 02 Sep. 02 Nov. 02


Chart 5

Average value of Ibex-35


36

b) Options and futures market

The regulated Spanish options and futuresmarket is the MEFF (Mercado Espaol deFuturos Financieros).

MEFF is an official market and thereforeentirely regulated, controlled andsupervised by the financial authorities(CNMV and the Ministry of Economy)performing the functions for trading andthose of clearance and settlement, fullyintegrated in the electronic marketdeveloped for the purpose.

c) Fixed-income market

The fixed-income markets in Spain arecharacterized by:

The establishment of a predeterminedsecurity redemption plan at the maturitydate.

The yield provided to investors in theform of interest or the differencebetween the redemption price and thesubscription price.

The Spanish market for the trading offixed-income securities and assets ofprivate companies and private institutionsis the AIAF, Asociacin de Intermediariosde Activos Financieros, which forms apart of the official organized financialmarket in this country.

The AIAF market has developed swiftly inrecent years because of the expansion offixed-income securities in Spain. It wascreated in 1987 through an initiative of theBank of Spain, which wished to put newmechanisms in place to encourage businessinnovations with funds procured throughfixed-income assets.

Subsequently, taking the AIAF as a base,the regulatory and supervisory authoritiesprovided it with the attributes necessary

to compete in its surroundings untilequating it in legal terms with the financialmarkets.

Therefore AIAF Mercado de Renta Fijacan be described as an organized marketwith ninety-four members, including theleading banks, savings banks andstockbroker companies and agencies in theSpanish financial system.

At October 2001, AIAF held a 60.1%interest in SENAF (Sistema Electrnico de Negociacin de Activos Financieros),an electronic financial assets trading system created in 1999 by Infomedas (a stockbroker agency acting as a tradingplatform for the blind market). SENAF wasorganized as the electronic platform fortrading Spanish government notes andbonds, and it acts neutrally towards thebond market, since its legal statuteprevents it from taking positions. It issubject to supervision by the CNMV andby the Bank of Spain.

The SENAF develops and operates a blindelectronic system for bond trading, inwhich the traders do not know thecounter party in their transactions. Thispromotes the efficiency of the market andgenerates great liquidity

On February 23, 2001, the Cabinetauthorized the creation of SENAF as anorganized trading system. This means thatall the members of any official fixed-income second market may join thesystem, including the members of fixed-income markets in other countries,provided that they meet certainconditions.

The aim of this interest held by AIAF inSENAF was to begin to support theintegration of fixed-income trading systemsin Spain. This has materialized with the


37

creation of the MEFF-AIAF-SENAF Holdingde Mercados Financieros, S.A. on October4, 2001.

With the creation of this holding company,the first group of financial markets by totaltrading volume has been set up. It is alsothe first initiative for the interconnectionof all Spanish financial markets, with a jointprojection of domestic and internationalscope. It also means the provision of anintegrated service and the offer of newproducts and services, under unbeatableconditions of quality and cost.

Also, the incorporation of this companyaims to strengthen the three entitiescompetitive position, signifies the provisionof an integrated service, enables newproducts and services to be offered andoffers the possibility of sharing technicalsolutions and harnessing economies ofscale, which will result in lower operatingcosts for market members.

d) New Market

As a noteworthy new feature of thesecurities market, the New Market wascreated in 2000 by CNMV Circular 1/2000,implementing the Ministerial Order ofDecember 22, 1999, as a special tradingsegment in the Spanish stock exchanges.The New Market is used to trade securitiesof companies in state-of-the-art sectors asregards their final products, theirproduction processes or their performanceof business with high growth potential.

The New Market (Nuevo Mercado) wascreated essentially because of the presenceon the Spanish stock market of companiesassociated with the new communicationstechnologies and particularly with theInternet, and it was thus based onexperiences of a similar kind in themarkets of other countries.

Among the special features of the NewMarket, note the exception made, at theregulatory level, with regard to theperiod for obtaining profits and theprovision of reports on businessprospects and potential futuredevelopment. This is considered of greatimportance for new-economy companies,since many of them, organized recentlyon the base on future expectations, donot have a positive profit and lossaccount at the present time.

To protect investors, the Sociedad deBolsas has laid down specific rules fortrading, considering the higher volatilityand risk of the securities. Thus, for thespecific case of New Market securities, themaximum percentage of price variationsfor each session has been increased to25% (it is 15% for traditional securities),and this percentage may be furtherincreased if the circumstances of themarket or of the security make thisadvisable.

However, the investors safety inconnection with these securities is basedon reporting obligations in additional tothe traditional ones (relevant events,quarterly, six-monthly and yearlyinformation), since at least once a yearthese companies must publish explanatoryinformation on the evolution and prospectsof their businesses at the short term or inthe next financial year.

The New Market began operating with tenlisted companies on April 10, 2000. Now ithas 13 listed companies, after Natraceuticalwas included on November 29. To helpmonitor the New Market, the IBEX NMindex was created. Its value of 1,785.20 onNovember 30, 2002, was down 46% onthe levels in late 2001.


38

The aforementioned decline was basicallydue to the decision by certain companiesinterested in joining this market not to doso. Further, the New Market consists ofscantly homogenous companies and since itwas created the new technologies sectorhas not been at its best, owing to thefading of interest in technology in the U.S.and the appearance of the first signs of theworld economic crisis.

The market capitalization of the companieslisted in the New Market on November 30,2002 is shown in Table 4:

5. Money marketThe money market in Spain is basedfundamentally on the issuance of short-termsecurities by the Bank of Spain, which aretaken up by banks, finance companies andmoney market operators that subsequentlyplace a portion of them with individuals andbusinesses.

In a broader sense, the money market isdeemed to encompass also interbankdeposits (the interest rates for which areused as benchmarks for other transactions)and trading in short-term corporatesecurities.

The money market has become increasinglyimportant as a result of the liberalization andgreater flexibility of the Spanish financialsystem as a whole in past years. This isevident from the fact that interest rates areordinarily higher than the rate of inflationand from the substantial volume of trading inmoney market securities.

The government debt market is of specialimportance in Spain and is very often usedby both resident and foreign investors. Thefavorable tax arrangements for investmentsby nonresidents in these securities is makingthis market particularly attractive.Noteworthy developments were thestructuring of money market operationsthrough a book-entry system and thecreation of the options and futures markets,both linked to the book-entry system oftrading in government debt securities. TheCentral de Anotaciones (central book-entry office) of the Bank of Spain is thegoverning body of this market.

Five central securities depositories coexist inSpain: SCLV, the Central de Anotaciones ofthe Bank of Spain (CADE), SCLBarcelona,

Table 4

Capitalization of New Marketcompanies at Nov. 29, 2001

New Market Euro capitalizationIBEX Securities (million euros)

Abengoa 467.73Amadeus 3,050.30Amper 61.40Avanzit 44.81Indra 1,152.16Jazztel 71.82Natraceutical Not availablePuleva Biotech 169.76Serv. Point Solutions 98.23Tecnocom 51.03Terra-Lycos 3,218.16TPI 1,355.10Zeltia 1,358.06

Source: Invertia.


39

SCLBilbao and SCLValencia. This is incontrast to the majority of Europeancountries, where there are at most twodepositories per country, which are in mostcases in the process of unification. Theglobalization of the securities markets is alsobeing demonstrated by mergers and alliancesamong depositories of the Euro Zone, asfrom 1999, such as the trans-border mergersof Euroclear with the Central Depositoriesof France, Belgium and Holland, or that ofCedel with the Deutsche Brse Clearing(DBC). In the Spanish context, theintegration of the SCLV and the CADE wastherefore desirable. The first step for themerger of the SCLV and the CADE into asingle entity has been the creation of theSociedad Promotora in the presence of anotary public on June 7, 2000, with theapproval of the Spanish Treasury and theCNMV. This company will act as a singlecentral depository, particularly in thestrategic and representative sphere. Until themerger is complete, the SCLV and CADEretain their present responsibilities withregard to the day-to-day management ofsecurities registration and settlement,entrusted to them by law.

The combination of these factors has had animportant effect on the fixed-incomemarkets, demonstrated by:

Increased interaction between theefficiency of the channels for issues andtrading and the appraisal of fixed-incomeassets.

Increased interchangeability betweenproducts issued by the public treasures inthe Euro Zone. The enhancedtransparency of markets facilitatescomparison of the various assets andtherefore increases competition amongissuers.

Liquidity and spread in lending, togetherwith the expectations of agentsconcerning the future evaluation ofvariables, have become decisive factors forthe price of the assets and their relativevalue compared with other fixed-incomeissues.

Trading in the Spanish government debtmarket accelerated in 2001, in line with theupward trend initiated in 1989, and averagedaily trading was nearly 80% higher than in2000. As a result, the total volume traded inthe Spanish government debt securitiesmarket in 2001, including Treasury bills andboth single and double transactions,amounted to g 18.5 trillion.

Thus the level of bond and debenture markettrading was higher in 2001 than in 2000. Thisrise was due to the increase in operationsbetween accountholders (up 83% year-on-year) and in double transactions, whereastrading with third parties and single-transaction trades fell.

Total bond and debenture trading in 2001rose to g 15.4 trillion from g 11.3 trillion in2000, representing a 37% increase. This totalalso exceeded the Treasury bill tradingvolume (four times higher in 2001).

The performance of the Spanish governmentbond and debenture market in terms ofsimultaneous transactions and repos isshown in Chart 6 below.

Also noteworthy was the sharp increase inthe debt securities held by nonresidents.Their debt portfolio consisted mainly ofgovernment bonds and debentures andincluded scantly significant Treasury billholdings (representing scarcely 1% of theTreasury bills outstanding at the end of2001).


40

Analysis of this market showed most notablythat until 1999 the unstripped bonds anddebentures held by nonresidents represented24% of the outstanding total, although in2001 there was a surge in this segment,which now accounts for 46.3% of the totalamount of these products.

The reasons for this sharp rise in the growthof government debt securities held bynonresidents are as follows:

Spains accession to the Economic andMonetary Union (EMU) eliminatedexchange risk, which made Spanishgovernment debt more attractive.

The strong performance of the Spanisheconomy in 2001 and its healthy growthrate led to a higher rating of Spanish debt.

The significant contribution by nonresidentmarket makers who entered the Spanishgovernment debt market in 1999 and havemoved significant volumes of debt, therebymaking for an active market.

Chart 6

Trading volume of Spanish Stock Market: average trading between market members(million euros)

25,000

20,000

15,000

10,000

5,000

01989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Simultaneous Repos

Source: Public Treasury, 2001 Report.


41

6. Credit financeestablishmentsThese institutions are regulated by RoyalDecree 692/1996, which characterizes themas subject to the legal regime of creditinstitutions, although with certain changesregarding their financing possibilities andoperating capacity.

They may engage in the following activities:

Lending and credit, including consumercredit, mortgage loans and the financing ofcommercial transactions.

Factoring, with and without recourse, andother supplementary transactions.

Financial leasing.

Provision of guarantees.

These institutions include most notablyfinancial lease and factoring companies.

Financial lease companies engage in leasingand renting.

Leasing is a transaction of a financial naturegoverned by commercial law whereby acustomer acquires an asset previouslychosen by him and its use is assigned to himin exchange for certain periodic (normallymonthly) payments; on completion of thecontract term, the customer can opt toexercise a purchase option on the asset andpay its residual value.

Renting is a manner of medium- and long-term leasing of assets. Under this contractthe customer undertakes to pay a fixedamount, generally monthly, for a certain timeand the credit institution undertakes tofurnish the use of the asset for thecontractual period, assure that the asset ismaintained in good condition and arrangecomprehensive insurance on the asset.

On expiration of the contract the customercan opt to replace the assets with others orrenew the contract for a certain period.

Factoring is a transaction whereby acompany assigns the trade accountsreceivable from its customers to aspecialized financial institution in exchangefor a consideration. This enables companiesto transfer their cash management tasks toanother party.

There are two types of factoring:

With recourse: The factor does notassume liability for any factored receivableswhich cannot be collected. Accordingly, ifthe debtor fails to pay, the factor can claimpayment from its customer, which assumesliability for nonpayment.

Without recourse: the factor accepts thecredit risk arising from the receivablesfactored by the customer.

7. Venture capitalinstitutionsVenture capital is defined as a financialactivity which consists of routing investmentsto unlisted nonfinancial companies andassuming the risk arising from their activitythrough the acquisition of a temporaryholding in their capital stock.

Venture capital institutions can take the legalform of a corporation or a fund and, inaddition to their main corporate purpose,can grant participating loans and providecounseling services to the investees.


42

8. Asset securitizationSecuritization consists basically of thetransformation of securities acquired fromcredit institutions into standardized fixed-income securities for subsequent trading inorganized markets, where they can bepurchased by investors.

Two types of securitization can bedistinguished:

Mortgage-backed securitization: This isperformed through mortgage securitizationfunds, which are separate asset poolslacking legal personality whose assets arethe mortgage loans pooled by them andwhose liabilities are the securities issued,such that their net asset value is zero.

Asset-backed securitization: Assetsecuritization funds are separate asset poolslacking legal personality whose assets aretheir financial assets and other collectionrights, including assignments of present andfuture receivables, and whose liabilities arethe fixed-income securities issued, loansfrom credit institutions and anycontributions from institutional investors.

9. Mutual guaranteesocietiesThese companies were first introduced in1978 and since then have operated in thearea of medium- and long-term financing ofsmall and medium-sized enterprises, towhich they provide guarantees.

Accordingly, their corporate purpose is asfollows:

To provide their members with access tocredit and to credit-related services.

To improve the financial conditions of theirmembers.

To provide personal guarantees in anylawful form.

To provide assistance and financial adviceto their members.

To take holdings in companies andassociations whose sole purpose is toengage in activities for small and medium-sized companies. To this end, they musthave the required reserves and obligatoryprovisions.

The following members of mutual guaranteesocieties should be distinguished:

Participating members: Also known asmutual members. They are the individualsor legal entities eligible to obtainguarantees from the society. Therefore,they are required to belong to the industryspecified in their bylaws.

Protector members: These cannot requestguarantees from the society and thereforeare not subject to limitations on theindustry to which they belong. Theprotector members are usually publicauthorities, public-law entities and thecompanies majority-owned by them.

Working together with these societies aresociedades de reafianzamiento (supporting-guarantee companies), whose purpose is toprovide sufficient coverage and assurance forthe risk assumed by the mutual guaranteesocieties and, in addition, furnish the cost ofthe guarantee for the members.


43

10. Pension plans andinsurance companiesIn 1987 the Pension Plans and Funds Lawintroduced a form of saving in Spain that hascreated a sound instrument for long-termfinancing. This legislation envisages theexistence of pension plans promoted byemployers, certain associations and financialentities.

Pension plans are collective investmentproducts which invest a principal sum with aview to obtaining periodic income or capitalgains in the future in order to provide forretirement, death or disability.

Pension funds are asset pools set up for thesole purpose of implementing pension plans.A pension fund may include one or morepension plans.

Inherent features of pension plans are theirfavorable tax treatment and restrictions on

use of the accumulated savings until theoccurrence of the event for which they wereintended.

Also, the Law provides for the possibility ofwithdrawing the savings accumulated inpension plans in the event of long-termunemployment or serious illness.

The Private Insurance Law (Law 30/1995)requires all Spanish companies (exceptfinancial institutions) to instrument beforeNovember 15, 2002, their pensioncommitments to employees through anexternal arrangement (pension plan orinsurance policy), which will significantly raisethe funds managed by these entities.

Pension fund assets grew in 2001 and theincrease was accompanied by a rise of 8.5%in the number of participants in the first ninemonths of 2001.

This was due particularly to the process ofpension externalization which has taken

Table 5

Pension plans and funds. Basic indicators 1990-2002(Variation in assets and participants in pension funds)

Personal System Association System Occupational SystemTotal Total

Assets Participants Assets Participants Assets Participants Assets Participants (million (units) (million (units) (million (units) (million (units)euros) euros) euros) euros)

31/12/1990 1,022 530,551 96 15,987 2,097 81,420 3,214 627,95831/12/1991 1,729 710,677 137 21,309 3,025 110,315 4,891 842,30131/12/1992 2,561 875,041 180 26,358 3,037 116,372 5,778 1,017,77131/12/1993 3,786 1,066,872 253 62,791 3,456 146,841 7,494 1,276,38231/12/1994 4,741 1,301,712 304 67,759 4,007 157,319 9,052 1,526,79031/12/1995 6,306 1,490,255 380 71,155 6,136 234,674 12,823 1,796,08431/12/1996 9,091 1,839,916 507 72,669 7,843 266,062 17,441 2,178,64731/12/1997 12,292 2,352,239 635 76,459 8,983 292,090 21,910 2,720,78831/12/1998 16,310 2,953,750 767 76,497 10,084 316,545 27,161 3,346.79231/12/1999 18,925 3,623,507 840 76,448 11,834 371,648 31,600 4,071.60331/12/2000 21,494 4,402,708 812 72,601 15,553 463.519 37,860 4,938.82831/12/2001 24,214 5,168,114 781 92,941 18,837 566,885 43,832 5,827,94030/09/2002 23,389 5,349,752 689 89,016 18,487 586,968 42,565 6,025,736

Source: Inverco.


44

place in occupational pensions and is beingimplemented by various companies.

In the last twelve months, the volumemanaged by occupational pension funds roseby 31.8% to g 18,487 million at the end ofSeptember and the participants in thispension system numbered 586,968, up 33.5%year-on-year.

The personal pension system, with assets of g 23,389 million, grew more moderately(by 6.4%) and its participants numbered5,349,752, up 20.3% on the previous year.

In contrast, the performance of theassociation system has not been so strong,with more than g 689 million of assets and89,016 participants.

The Spanish life insurance market has grownsubstantially in recent years, mainly becauseof the similarity between survivorship lifeinsurance policies and traditional savingsinstruments and because of the morefavorable tax treatment than in the past,although the economic crisis due to theSeptember 11 attacks slowed insuranceindustry growth to around 3% in 2001.

In this connection, it is noteworthy that,effective 2002, the tax treatment of savingsplaced in pension funds has again beenimproved.

The Spanish insurance industry will facemajor challenges in the next few years, which may be beneficial for it insofar as the theoretically foreseeable growth in thesize of companies will bring its ratios closer to those in countries with similareconomies.

In this connection, note the trend towardsconcentration in the Spanish insurancemarket. This trend, already relevant inprevious business years, was consolidated in

2001 as seen by the fact that at December31 that year, 342 insurance companies wereoperative in comparison with the 354companies operative in 2000.

Spanish insurance industry growth in 2001, interms of volume of premiums, is estimatedat 2.7%, with the largest variation occurringin life insurance, where the savings undermanagement grew by 15.5%.

The revenue collected by the insuranceindustry in 2001 is estimated at g 42,000million, of which 54.3% were in life and45.7% in nonlife.

Also, the automobile segment accounted forg 9,025 million and posted 13% growth withrespect to the previous year, whereas healthinsurance represented g 2,940 million withgrowth of 8.2% and total multiperil insurancegrew by 14.6% with respect to 2000.

These far-reaching changes in the structureand outlook of the insurance industry inSpain explain its positive performance, asevidenced by the volume of directlysubscribed insurance premiums, the growthof which is shown in Chart 7:


45

Charts 8 and 9 present a breakdown ofinsurance policies by type in 2000 and 2001.

45,000,000

40,000,000

35,000,000

30,000,000

25,000,000

20,000,000

15,000,000

10,000,000

5,000,000

01990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Nonlife premiums Life premiums

Source: Milenari.

Chart 7

Life and nonlife insurance premiums in Spain(Thousand euros)

Chart 8

Insurance 2000

Source: Milenari.

Risk Mixed and savings

Life annuity Unit-linked

Chart 9

Insurance 2001

Source: Milenari.

Risk Mixed and savings

Life annuity Unit-linked

6%

32%

23%

39%

6%

41%

42%

11%


46

Law 44/2002, (the Financial Law), approvedby the Lower House of Parliament onNovember 22, 2002, includes major changesto the Spanish financial system.

It seeks to set up a securities Registration,Clearing and Settlement System ManagementCompany (Systems Company) through themerger of the Securities Settlement andClearing Service (SCLV) and the SpanishGovernment Debt Book-Entry TradingCentral Office (CADE).

This company may include other systemsalready existing in Spain, such as those forfinancial derivatives or those managed by theValencia, Bilbao or Barcelona stockexchanges, and will enable the managementof interconnections and alliances with othercountries stock markets.

One or more Central Counterparty Entitieswill foreseeably be set up and interposedbetween the purchaser and the seller toeliminate counterparty risk in transactionsand ensure that they are duly completed.

The Settlement and Clearing Systems will bedemutualized and a portion of their capitalwill be placed in the hands of shareholdersthat do not trade in the market.

Also, changes have been made to the systemset up to control the cross-holdingsbetween the companies administeringsecondary markets and their counterpartsoutside Spain. This will permit a moreflexible system conducive to the integrationof crossborder markets while simultaneouslyensuring a certain control over theappropriateness of shareholders in theSpanish markets.

As regards insurance, securities andcollective investment institutions, theexchange of information has been mademore fluid by facilitating these procedures

between the EU supervisors and those inother countries, while ensuring dueconfidentiality.

Extensive regulation of the organized tradingsystems has been introduced in matters suchas the authorization system, the obligation toform governing companies with the legalform of corporations (Spanish S.A.companies) and the supervision and penaltysystem.

In the credit market, a more flexibleinvestment regime for credit cooperativeshas been introduced to make it more similarto that of banks and savings banks. Thepurpose of this change is to:

Enable these entities to achieve a largersize, thereby paving the way for increasesin their industrial portfolios.

Facilitate management of their liabilitiesand equity by means of recourse tosubordinated debt financing.

Law 44/2002 permits the Spanish StateTreasury to be managed through fixed-income security purchases under resaleagreement, so that the Treasury can obtain ahigher yield on its balance at the Bank ofSpain.

A notable event in the insurance industry isthat the Insurance Entity SettlementCommission (CLEA) was terminated and itsfunctions taken over by the ClearingConsortium.

The Risk Information Center will be given amore important role, which will befundamental in the risk control of creditinstitutions and in the supervision exercisedby the Bank of Spain.

The following reforms have been introducedto boost the competitiveness of the Spanishfinancial services industry:

III. Law 44/2002 on financial system reform measures


47

Territorial bonds have been introduced:These are fixed-income securities issued bycredit institutions to local or AutonomousCommunity governments.

The scope of operations of collectiveinvestment institutions has beenbroadened: They can perform transactionsinvolving the lending of securities fromtheir own portfolios, organized-markettransactions and Over the Counter (OTC)transactions.

To improve the terms of SME financing, theuse of factoring has been regulated so as topermit large-scale factoring of their accountsreceivable from governments.

The following measures have beenestablished to protect the customers offinancial institutions:

Introduction of bodies entrusted withdefending the customers of financialservices: agencies reporting to the Bank ofSpain, the Spanish National SecuritiesMarket Commission (CNMV) and theDirectorate-General of Insurance andPension Funds for the express purpose ofprotecting the rights of users of financialservices.

Obligation of credit institutions, investmentservices companies and insurancecompanies to attend to and resolvecomplaints and claims from customersrelating to their interests and rights.

For this purpose, credit institutions musthave a customer service departmentformed by an independent entity or expertwhose decisions are binding.


48

This section addresses the taxation of themain financial products in the Spanishmarket, with special reference to thosediscussed in this Chapter.

To these effects, the income taxation derivedfrom these products, and the gains or lossesgenerated on their transfer or reimbursementis here considered (this section reflects thetaxation applicable up to January 1, 2003).

IV. Taxation of financial products

Nonresidents without Permanent Establishment Resident individuals Corporate entities

Bank deposits

Explicit-yield financial assets

Implicit-yield financial assets (except Treasury bills)

Treasury bills

Interest:- Income from movable capital- General component of taxableincome

- Tax rate: EU: Exempt Tax treaty: Reduced rate orexempt (per tax treaty in question)

Other countries: 15% Nonresident Bank accounts:exempt

Interest:- Income from movable capital- Rates: EU: Exempt Tax treaty: Reduced rate orexempt (per tax treaty inquestion)

Other countries: 15% Public Debt is exempt except for tax havens

Income obtained from transfer:- Income from movable capital- Rates: EU: exempt Tax treaty: reduced rate orexempt

Other countries: 15% Public debt: exempt except fortax havens

Income obtained from transfer orredemption:- Income from movable capital EU: Exempt Tax treaty: Reduced rate orexempt (per tax treaty inquestion)

Other countries: 15% Public Debt is exempt except for tax havens

- Income from movable capital - Not subject to taxation except for tax haven

Interest:- Income from movable capital- 40% reduction if generated overmore than 2 years

- Withholding: 15%- General component or taxableincome

- Tax rate: As per tax rate table(maximum 45%)

Interest:- Income from movable capital- 40% reduction if generated overmore than 2 years



Income obtained from transfer:- Income from movable capital- 40% reduction if generated overmore than 2 years

- Withholding: Privileged issues: not subject Other issues: 15%

Income obtained from transfer orredemption:- Income from movable capital- 40% reduction if generated overmore than 2 years



- Income from movable capital- Not subject to withholding- General component of taxableincome

- Tax rate: as per tax rate table(maximum 45%)

Interest:- Yield- Withholding:15%- Tax rate: 35% (standard)

Interest:- Yield- Privileged issues: not subjectto withholding

- Withholding:15%- Tax rate: 35% Income obtained from transfer orredemption:- Yield- Withholding: Privileged issues subsequentto 1/1/99*: not subject towithholding

Other

Income obtained from transfer or redemption:- Yield- Withholding: Privileged issues subsequentto 1/1/99*: not subject towithholding

Other issues: 15%- Tax rate: 35% (standard)

- Yield - Not subject to withholding- Tax rate: 35% (standard)

* Registered in the book-entry office and listed in secondary markets.


49

Nonresidents without Permanent Establishment Resident individuals Corporate entities

Spanish shares

Shares and units of collective investment institutions

Dividends:- Income from movable capital EU: 15% save application ofparent-subsidiary Directive

Tax treaty: Reduced rate orexempt (per tax treaty inquestion)

Other countries: 15%Capital gain/loss on transfer:- Capital gain or loss Listed companies- EU: Exempt except for significantand real estate participations

- Tax treaty: Generally exempt- Tax haven: 35%- Other countries: 35%

Unlisted companies- EU: Exempt except for significantand real estate participations

- Tax treaty: Generally exempt(per tax treaty in question)

- Tax havens: 35%- Other countries: 35%

Dividends:- Income from movable capital EU: 15% save aplication of parent-subsidiary Directive

Tax treaty: Reduced rate orexempt (per tax treaty inquestion)

Other countries: 15%Capital gain/loss on transfer:- Capital gain or loss EU: Exempt Tax treaty: Generally exempt (pertax treaty in question)

Other countries: 15%

Dividends:- Income from movable capital- Included in taxable income: Totalyield (140%, 125% or 100%)

- Tax credit: Total yield (40%, 25% or 0%)

- Withholding: 15%- General component of taxable income- Tax rate: As per tax rate table(maximum 45%)

Capital gain/loss on transfer:- Capital gain or loss Acquisitions prior to 12/31/94- Application of reductioncoefficients: (25% for listed shares,14.28% for non-listed shares)

Accquisitions subsequent to 12/31/94- Non-application of coefficients

General component of taxableincome if generated over less than1 year

Special component of taxable incomeif generated over more than 1 year

- Tax rate: As per tax rate table (maximum45%): if generated over less than 1year

15%: if generated over more than 1year

Dividends:- Income from movable capital- Included in taxable income: Total yield (100%) No tax credit Withholding: 15% General component of taxableincome

Tax rate: As per tax rate table(maximum 45%)

Capital gain/loss on transfer:- Capital gain or loss Acquisitions prior to 12/31/94- Aplication of reductioncoefficients: (14.28%)

Acquisitions subsequent to 12/31/94- Non-application of coefficients

General component of taxableincome if generated over less than1 year

Special component of taxable incomeif generated over more than 1 year

Withholding: 15%- Tax rate: As per tax rate table (maximum45%): if generated over less than 1year

15% if generated over more than 1year

Dividends:- Yield- Tax credit: Standard: 50% In certain cases: 100%

- Tax rate: 35% (standard)Capital gain/loss on transfer:- Income: Possibility of tax credit(reserves)

No withholding Tax rate: 35% (standard)

Dividends:- Yield- No tax credit- Tax rate: 35% (standard)Capital gain/loss on transfer:- Income:- Tax rate: 35% (standard)

C o m p a n y a n d c o m m e r c i a l l a w

51

lawCompany

commercialandCompany lawI. Applicable legislation 53

II. Forms of business enterprise 54

III. Liability of shareholders and partners 55

IV. Basic legislation governing an S.A. 561. Minimum capital 562. Shareholders 563. Formalities of

incorporation 564. Contracts made in the

corporations name prior to registration 57

5. Acquisitions performedafter registration 57

V. Basic characteristics of an S.A. 581. Bylaws 582. Capital stock

requirements 593. Shares 59

a) Registered vs. bearer shares 59

b) Common vs. preferred stock 59

c) Shares issued with a premium 60

d) Non-voting stock 60e) Redeemable shares 61

f) Shares with ancillary obligations 61

g) Basic shareholder rights 61h) Share certificates 61

VI. Governing bodies of an S.A. 621. Shareholders meeting 62

a) Ordinary shareholdersmeeting 62

b) Extraordinary shareholders meeting 62

c) Venue and method of calling a meeting 62

d) Universal shareholders meetings 62

e) Quorum and voting rules 62

f) Proxies 63

2. Directors 63a) Powers of the Board

of Directors 64b) Adoption of resolutions

by the Board 64c) Majority for adoption

of resolutions 64d) Liability of directors 64e) Powers of attorney 64

VII. Incorporation of limited liability companies 65

VIII. Sole shareholder companies 66

IX. Branches 67

Company and commercial law

3


52

lawCompany

commercialandIntellectual property lawI. Introduction 68

II. Marks 691. National marks 692. International system 703. Community trade mark 70

III. Protection of inventions in Spain 721. Invention patents 72

a) European Patent 73b) PCT-Patent Cooperation

Treaty 73

2. Utility models 73

IV. Industrial designs and models 74

V. Topographies of semiconductor products 75

VI. Computer programs 76

VII. Unfair competition 77

VIII. Action against infringements of intellectual property rights 781. Civil actions 782. Criminal action 78

Exhibit Intellectual property conventions 79


53

Spanish corporate law was substantiallymodified by Law 19/1989. One of the statedpurposes of this law was to adapt Spanishcorporate law to the relevant EC Directivesfollowing Spains accession to the EuropeanCommunity. However, Law 19/1989 is morethan a mere adaptation, since it includesmany new provisions which are not requiredby EC law.

Due to the very substantial modificationsintroduced by Law 19/1989, an amendedversion of the Corporations Law includingsuch modifications was approved by LegislativeRoyal Decree 1564/1989 on December 22,1989. This legislation is referred to henceforthas the Corporations Law.

Following the promulgation of Law 19/1989,which dealt essentially with corporations, anew law regulating limited liability companieswas enacted in 1995 (Law 2/1995), and RoyalDecree 1784/1996 was also enacted,establishing new Mercantile RegisterRegulations.

The Commercial Code, the CorporationsLaw, the Limited Liability Companies Lawand the Mercantile Register Regulations arethe basic sources of law in this field.

Lastly, the EUs Council of Ministers onOctober 8, 2001, adopted CouncilRegulation (EC) 2157/2001, which passes theStatute for a European Company (SE),together with Council Directive 2001/86CE,which completes the Statute for theEuropean Company with regard to theinvolvement of employees.

Said regulation will come into force onOctober 8, 2004, this being the time limitgranted to Member States to adopt the legal,regulatory and administrative measuresnecessary to comply with the provisions ofthis Directive.

The Regulation of the European Companyaffords to companies operating in variousMember States the option of beingestablished as a single company under ECLaw and being capable to operatethroughout the EU with an unique regulationand unified management and reportingsystem. For companies acting in different EUMember States, the European Companyoffers the possibility of reducing theiradministrative costs with a legal structureadapted to the EU regulations. This newregulation may result in the restructuring oflarge com

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