How-To

What You Should Know About Doing Business In Spain

Market Overview

• Spain has one of the fastest growing economies in the European Community. It

enjoys a long-standing and wide-ranging bilateral relationship with the United

States and has traditionally provided a healthy export market. U.S. exports to

Spain through September 2007 were USD 4.6 billion, an increase of 26 percent

compared with the same period in 2006.

• Spanish economic growth was estimated at 3.9 percent in 2006, slightly higher

than that of the previous year, making Spain one of the fastest growing countries

in the European Union (EU). Full-year 2007 growth is expected to be around 3.8

percent. 2008 economic growth is projected to drop to something between 2.5

percent and 3.0 percent, though it should still be above the Eurozone average.

Higher interest rates and tighter credit terms are slowing Spain’s hitherto very

strong construction sector. Moreover, inflation remains above the Eurozone

average. Thus, for the first time in about 10 years, Spaniards are somewhat less

optimistic about the economy.

• Spanish Government economists see local spending on capital goods remaining

bouyant. General export performance has also been positive. Spain is the

seventh worldwide manufacturer of cars and first European producer of light

commercial vehicles. New vehicles with complex electronic/electrical

components will force auto shops to seek more modern and sophisticated

equipment in order to meet consumer demand and avoid loosing clients to

competitors. In the tourism sector, Spain continues to be one of the star

performers in the European Union. Travel to the United States is estimated to

rise over 20 percent in 2007. Within the energy sector, Spain’s installed wind-

power capacity (more than 12,800 MW) makes it the second largest winder-

energy producer in the world.

• Major Spanish firms in the telecommunications, banking, infrastructure and

energy sectors have become global leaders. The largest bank in the Euro area,

Europe’s second largest phone company by market capitalization, and the

majority of Europe’s top-ten construction companies are headquartered in Spain.

Major procurement decisions for the largest British airports, Brazil’s major cellular

operator, Mexico’s leading bank, and the Trans-Texas Corridor Project are made

in Spain.

• Spain will hold parliamentary elections in March 2008. Terrorism, housing,

immigration and employment are among the key local issues.

• Despite a significant drop in investment levels, the U.S. continues to rank among

the top ten investor nations in Spain. Official statistics show that U.S. direct

investment went from USD 10.5 billion in 2000 to USD 14.8 billion in 2002, USD

6.4 billion in 2003, USD 2.2 billion in 2004, USD 1.8 billion in 2005 and USD

633.6 million in 2006. In 2006 the U.S. was the fourth largest source of FDI in

Spain with 5.2 percent of the total. U.S. investors also hold significant portfolio

investment in shares of some of Spain’s largest companies.

• Venture capital increased by 44 percent in 2007 to Euros 4.3 billion (USD 5.9

billion), surpassing the record high of Euros 4.2 billion (USD 5.8 billion) in 2005.

Market Challenges • The weakness of the dollar versus the euro is advantageous for U.S. exporters.

Nevertheless, U.S. suppliers will continue to face stiff competition from EU

countries and from Japan.

• Cost, financing terms, and after-sales service are important competitive factors.

European exporters provide generous financing and extensive cooperative

advertising, and most European governments support exporting with trade

promotion events. Japanese and Chinese companies are also emerging as

formidable competitors. Although U.S. products are well respected for their high

level of technology and quality, American firms sometimes fall short of their

competitors in flexibility on financing, adaptation of product design to local market

needs, and assistance with marketing and after-sales service.

• Export-ready U.S. firms are urged to explore opportunities in Spain and

throughout the euro zone.

Market Entry Strategy

• The Spanish market is made up of a number of regional markets joined by the

two hubs of Madrid and Barcelona. There are a total of 17 autonomous

communities in Spain (similar to U.S. states) with varying degrees of autonomy

and cultural identity. However, the vast majority of agents, distributors, foreign

subsidiaries and government-controlled entities that make up the economic

power block of the country, operate in these two hubs. The key to a foreign firm’s

sales success is to either appoint a competent agent or distributor, or to establish

an effective subsidiary in the Madrid or Barcelona areas.

• Spanish commercial procedures are in line with the rest of Western Europe,

where price and value remain paramount. However, credit terms, marketing

assistance and after-sales service are also important factors in local purchase

decisions. The use of credit to purchase consumer goods is widely accepted in

Spain, particularly in the cities, with banks competing to offer coverage.

• The Spanish government has eased regulations at all levels and increased

incentives in an effort to attract foreign firms and investments. In recent years

investment incentives designed to reward investors for establishing

manufacturing operations in less developed areas have dispersed some

investment from the major hubs. Except in a few cases, Spanish law permits

foreign investment of up to 100 percent of equity. However, disincentives such

as high labor costs, inflexible labor laws, and concern for intellectual property

rights in the copyright area still exist.

• Spaniards tend to be more formal in personal relations than Americans but much

less rigid than they were 10 years ago. Nonetheless, the approach to doing

business is more in line with that in Italy or France rather than Mexico and Latin

America. Professional attire is recommended and business cards are expected.

• There is no substitute for face-to-face meetings with Spanish business

representatives to break into this market. Spaniards expect a personal

relationship with suppliers. Initial communication by phone or fax is far less

effective than a personal meeting. Mail campaigns generally yield meager

results. Less than 30 percent of local managers are fluent in English.

• Spaniards tend to be conservative in their buying habits. Known brands do well.

Large government and private sector buyers appear more comfortable dealing

with other large, established organizations or with firms that are recognized as

leaders within their sectors.

Using an Agent or Distributor

There are several forms of representation agreements in Spain. The most common are:

Distribution Agreements

Agency Agreements

Commission Agency Agreements

The law applicable to this type of contracts in Spain is similar to that in most other OECD

countries.

Companies wishing to use distribution, franchising and agency arrangements need to

ensure that the agreements are in accordance with European Union (EU) and member

state national laws. Council Directive 86/653/EEC establishes certain minimum

standards of protection for self-employed commercial agents who sell or purchase goods

on behalf of their principals. In essence, the directive establishes the rights and

obligations of the principal and its agents; the agent’s remuneration; and the conclusion

and termination of an agency contract, including the notice to be given and indemnity or

compensation to be paid to the agent. U.S. companies should be aware that the

directive states that parties may not derogate certain requirements. Accordingly, the

inclusion of a clause specifying an alternate body of law to be applied in the event of a

dispute will likely be ruled invalid by European courts.

The European Commission’s Directorate General for Competition enforces legislation

concerned with the effects on competition in the internal market of “vertical agreements.”

Most U.S. exporters are small- and medium-sized companies and are therefore exempt

from the regulations because their agreements likely would qualify as “agreements of

minor importance,” meaning they are considered incapable of affecting competition at

the EU level but useful for cooperation between SMEs. Generally speaking, companies

with fewer than 250 employees and an annual turnover of less than Euros 50 million

approx. USD 62 million) are considered small- and medium-sized undertakings. The EU

has additionally indicated that agreements that affect less than 10 percent of a particular

market are generally exempted as well

Distribution Agreements

Distribution agreements in Spain have traditionally allowed the contracting parties broad

discretion to decide on the form of contract.

The distributor obtains the merchandise from the supplier “in its own name and

interest” and assumes the risk of the transaction for later re-sale at a profit.

The relationship between the supplier and the distributor is a legal relationship

within a specific time period.

The distribution contract may obligate the parties to future purchases and sales.

The ordinary clauses of a distribution contract may cover any subject to which the

parties agree unless the clauses are contrary to the laws of Spain. Normally, the

standard clauses include the markets or territory covered, volume of sales, conditions

regarding the sale of goods, pricing, length of contract, advertising, financing, servicing,

licensing of industrial property and conditions for termination, among others.

The most common basic distribution agreements are:

1) Commercial Concessions or Exclusive Distribution Agreements: The supplier agrees

not to supply its products to more than one distributor in a specific territory and also not

to sell those products directly to end users in the territory of the exclusive distributor.

2) Sole Distribution Agreement: Similar to the above category, but in this case the

supplier reserves the right to supply certain products to end users in the territory.

3) Authorized distribution agreements under the selective distribution system: The

distributors are carefully selected according to their ability to handle technically complex

products and to retain a certain image or brand name.

Models of distribution contracts and clauses can be obtained on-line from the bookstore

of the International Chamber of Commerce, section “Model of Commercial Contracts”,

at: http://www.iccbooks.com/Product/CategoryInfo.aspx?cid=81

Further counseling on international contracts can also be obtained from US Export

Assistance Centers and local chambers of commerce.

Agency Agreements

Through an agency agreement, and individual or company, called the agent, is bound

with another (the principal) to advance the principal’s business, or to advance and

conclude transactions on the principal’s behalf, without assuming the risk of such

transactions.

Beyond the basic obligations (to act loyally and in good faith), the agent must:

Promote the products, and if authorized to do so, conclude the transactions;

Inform the principal supplier of all matters relating to the agency, especially the

financial aspects of all parties with whom there are pending transactions;

Follow the principal’s instructions and company policies (for example, prices,

delivery dates, and procedure for claims

Receive any claims by third parties regarding defective merchandise in the

merchant’s name; and

Maintain independent accounting for each principal represented.

Beyond the same basic obligations of loyalty and good faith, the principal supplier must:

Provide books, catalogs, price lists and other needed literature;

Make payments on time and as agreed;

Give the agent the information required for the performance of the agency

contract;

Inform the agent with reasonable advance notice of the acceptance, refusal, or

the lack of performance of each deal obtained by the agent. The agent has the

power to request the accounting books of the principal.

Commission Agency Agreements Under Commission Agency Agreements, an authorized agent (commission agent)

participates in a commercial transaction or agreement on behalf of another (the

principal). Commission agents may act in their own name or that of their principal.

The main difference with an Agency Agreement is that Commission Agency Agreements

involve occasional engagements. In addition, a commission agent facilitates the

conclusion of an agreement but does not ultimately represent either party. The

commission agent brings the parties together so that they can conclude an agreement,

but is not party to that agreement, whereas an agent represents one of the parties.

As Spain is part of the EU, U.S. companies benefit from greater transparency in agent

and distributor commissions throughout Europe, uniform compensation plans and

greater transparency in reporting revenues to local tax authorities.

Establishing an Office

U.S. companies interested in investing in Spain must first decide whether to incorporate

a subsidiary (i.e. as a separate corporation) or establish a branch. Both have full legal

status and their profits are taxable in Spain.

If the investor decides to incorporate a subsidiary, the next decision is whether to

incorporate a corporation or public limited-liability company (Sociedad Anonima, SA) or a

private limited company (Sociedad de Responsabilidad Limitada, SL or SRL). The

structure of the SA is for larger operations and the SL for smaller.

Shareholders in corporations (S.A.) and limited liability companies (S.L.) are not liable

for the company’s debts, and limited to their contribution. The main differences between

these entities are: capital (Euros 60,000 minimum versus Euros 3,000); the number of

founding members (three versus two), flexibility permitted at general meetings, transfer

of shares and management of an SL.

Other kinds of mercantile entity can be formed, but they are not used very frequently.

Companies interested in setting up operations in Spain should obtain legal advice.

Major consulting groups and law firms are available to help firms incorporate.

Data Privacy

Processing Customer Data

The EU’s general data protection Directive (95/46/EC) spells out strict rules concerning

the processing of personal data. Businesses must tell consumers that they are collecting

data, what they intend to use it for, and to whom it will be disclosed. Data subjects must

be given the opportunity to object to the processing of their personal details and to opt-

out of having them used for direct marketing purposes. This opt-out should be available

at the time of collection and at any point thereafter. This general legislation is

supplemented by specific rules set out in the “Directive on the processing of personal

data and the protection of privacy in the electronic communications sector”

2002/58/EC). This requires companies to secure the prior consent of consumers before

sending them marketing emails. The only exception to this opt-in provision is if the

marketer has already obtained the intended recipient’s contact details in the context of a

previous sale and wishes to send them information on similar products and services.

The EU’s general data protection Directive provides for the free flow of personal data

within the EU but also for its protection when it leaves the region’s borders. Personal

data can only be transferred outside the EU if adequate protection is provided for it or if

the unambiguous consent of the data subject is secured. The European Commission

has decided that a handful of countries have regulatory frameworks in place that

guarantee the adequate protection of data transferred to them – the United States is not

one.

The Department of Commerce and the European Commission negotiated Safe Harbor to

provide U.S. companies with a simple, streamlined means of complying with the

adequacy requirement. It allows those U.S. companies that commit to a series of data

protection principles (based on the Directive), and who publicly state that commitment by

“self-certifying” on a dedicated website, to continue to receive personal data from the

EU. Signing up is voluntary but the rules are binding on those who do. The ultimate

means of enforcing Safe Harbor is that failure to fulfill the commitments will be

actionable as an unfair and deceptive practice under Section 5 of the FTC Act or under a

concurrent Department of Transportation statute for air carriers and ticket agents. While

the United States as a whole does not enjoy an adequacy finding, companies that join

up to the Safe Harbor scheme will. Companies whose activities are not regulated by the

FTC or DoT (e.g. banks, credit unions, savings and loan institutions, securities dealers,

insurance companies, not-for-profit organizations, meat packing facilities, or

telecommunications carriers) are not eligible to sign up to the Safe Harbor.

EU based exporters or U.S. based importers of personal data can also satisfy the

adequacy requirement by including data privacy clauses in the contracts they sign with

each other. The Data Protection Authority in the EU country from where the data is being

exported must approve these contracts. To fast track this procedure the European

Commission has approved sets of model clauses for personal data transfers that can be

inserted into contracts between data importers and exporters. The most recent were

published at the beginning of 2005. Most transfers using contracts based on these

model clauses do not require prior approval. Companies must bear in mind that the

transfer of personal data to third countries is a processing operation that is subject to the

general data protection Directive regardless of any Safe Harbor, contractual or consent

arrangements.

EU countries’ Data Protection Authorities (DPAs) and large multinational companies are

also developing a third major approach to compliance with EU rules on transfers of

personal data to countries outside the EU. This is based on country-by-country approval

of “binding corporate rules” (BCRs). Companies that set up BCRs that satisfy European

DPAs will be able to use the presumption of conformity that these approvals provide to

transfer personal data from the EU to any location in the world – not just the United

States. BCRs can be a tool for compliance with privacy rules on a global scale. The

process of negotiation and approval of the BCRs is currently lengthy and complex, and

has not been attempted by small or medium-sized companies.

Franchising

The franchise sector has been a steady performer over the past several years. Spanish

franchisors account for 83 percent of the systems; the remaining 17 percent are from the

United States, France, Italy, Portugal and the UK.

Statistics vary due to the difference in criteria used by main trade sources. The number

of systems is estimated at 830 – 900 with 51,500 - 63,000 outlets, and sales averaging

Euros 16 billion (USD 22 billion).

Although Spain does not have specific legislation regulating franchising, Article 62 of the

1996 Retail Trade Act provides a definition as well as conditions for franchising in Spain.

When drawing up contracts, franchisors should bear in mind that franchise companies -

whether Spanish, foreign, or master franchisee – must be registered in a special

administrative Franchisors Registry. They are also bound by the Disclosure of Pre-

Contractual Information requirement.

All required information must be delivered in writing to the intended franchisee at least

20 days prior to signing a franchising contract or pre-contract or prior to any payment to

the franchisor.

As of April 2003, Spanish legislation enacted EU regulations on franchising, distribution

agreements and exclusive purchases. The purpose of the EU regulation is to guarantee

competition practices in agency and distribution contracts. Some of the areas covered

include term of contract, market share considerations, exclusivity rights, and mandatory

volume of products. Companies are advised to have all new contracts drawn up in

compliance with this new legislation, and to have current contracts reviewed whenever

possible.

Direct Marketing

The different sub sectors of direct marketing are feeling the impact of expanding e-

commerce. Some have already been absorbed by e-commerce, and currently many

activities previously performed via telephone or regular mail are conducted via Internet.

The telemarketing sub sector employs 48,000 permanent employees and is the sector

that generates the most positions for the disabled. Banks, insurance agencies, and

public administration are the leading consumers of telemarketing services in Spain.

Sales for 2006 are estimated at USD1.59 billion, mainly fueled by the proliferation and

success of call centers. The sector’s future is brightened by increased sophistication in

the telephone services offered by Spain’s largest telecom company, Telefonica, as well

as competition by a number of new telecom providers. The five main call center

operators in Spain - Atento, Sitel Ibérica, Qualytel Teleservicios, TeleTech, and AGM

Contacta - control 46 percent of market share.

Television direct-marketing companies have been operating in Spain since 1990, when

television was opened to private broadcasters. In this time, it has become increasingly

popular and profitable.

Mail-order market growth has averaged 2 percent over the last 3 years. Most activity in

this sub sector has migrated to e-commerce.

Trust is an important competitive factor in this market. Direct-marketing firms that are

members of the Spanish E-Commerce and Direct Marketing Association (Asociación

Española de Comercio Electrónico y Marketing Directo) tend to inspire more confidence

in the consumer. Membership implies adherence to a number of ethical codes, including

a code of self-regulatory rules for electronic advertising. (www.fecemd.org).

The misuse of personal data is regulated in Spain by the Spanish data protection law,

known as LORTAD as well as EU legislation.

EUROPEAN UNION

Legislation

A wide range of EU legislation impacts the direct marketing sector. Compliance

requirements are stiffest for marketing and sales to private consumers. Companies need

to focus, in particular, on the clarity and completeness of the information they provide to

consumers prior to purchase, and on their approaches to collecting and using customer

data. The following gives a brief overview of the most important provisions flowing from

EU-wide rules on data protection, distance selling and on-line commerce. Companies

are advised to consult the information available via the hyper-links below for more

specific guidance.

• Distance Selling Rules

Distance and Door-to-Door sales

The EU’s Directive on distance selling to consumers (97/7/EC) set out a number of

obligations for companies doing business at a distance with consumers. It can read

like a set of onerous “do’s” and “don’ts,” but in many ways it represents nothing more

than a customer relations good practice guide with legal effect. Direct marketers must provide clear information on the identity of themselves as well as their supplier,

full details on prices including delivery costs, and the period for which an offer

remains valid – all of this, of course, before a contract is concluded. Customers

generally have the right to return goods without any required explanation within

seven days, and retain the right to compensation for faulty goods thereafter.

Similar in nature is the Doorstep Directive (85/577/EEC), which is designed to protect

consumers from sales occurring outside of a normal business premises (e.g., door-

to-door sales) and assure the fairness of resulting contracts.

• Direct Marketing Over the Internet

The e-commerce Directive (2000/31/EC) imposes certain specific requirements

connected to the direct marketing business. Promotional offers must not mislead

customers and the terms that must be met to qualify for them have to be easily

accessible and clear. The Directive stipulates that marketing e-mails must be

identified as such to the recipient and requires that companies targeting customers

on-line must regularly consult national opt-out registers where they exist. When an

order is placed, the service provider must acknowledge receipt quickly and by

electronic means, although the Directive does not attribute any legal effect to the

placing of an order or its acknowledgment. This is a matter for national law. Vendors

of electronically supplied services must also collect value added tax (VAT).

Joint Ventures/Licensing

U.S. companies can also penetrate the Spanish market through joint ventures. This type

of agreement allows the parties to share risks and combine resources and expertise.

License contracts in Spain may cover industrial property rights (patents, utility models,

trademarks), intellectual property rights (rights of use for literary, scientific, artistic works,

or software), know-how, or other uses of technology. Spanish regulations allow the

parties a wide range of freedom to negotiate terms and conditions of the agreement.

There are many clauses common to this type of contract, such as:

Exclusivity clauses, sometimes including exclusive purchase obligations;

Measures to limit the licensor’s commercial activity;

Confidentiality and non-competition obligations;

Obligations relating to improvements and innovations (this includes updating the

rights granted to the licensee and communicating to the licensor innovations

developed by the licensee

Indemnities in case of breach of contract by one party.

Selling to the Government

Government procurement theory follows the principle of best value through competition.

There is no official domestic preference policy, or discrimination against foreign

suppliers, although the Spanish Government encourages “full and fair opportunity” for

Spanish suppliers.

In Spain, all levels of administration – central government, autonomous communities,

municipalities and companies that have over 50 percent government ownership – have

to follow certain procurement practices as regulated by the Law of Contracts With the

Public Administration. Royal Decree 2/2000 of June 16 refunds previous legislation on

contracts with the government, and especially Law 13/95, of May 18.

The procedure to bid for a specific tender is relatively straightforward. All proposals are

kept secret and must be accompanied by proper documentation. This information

should include:

Accreditation of the legal representation used by the company.

Proof of economic and financial solvency and technical or professional

competence plus a declaration that the company is not prohibited from

contracting.

Proof that a provisional guarantee, as required by the conditions of participation,

has been deposited.

For foreign companies, formal acceptance of the jurisdiction of the Spanish

courts if necessary.

Accreditation of having met all fiscal and social security obligations.

U.S. companies have to comply with the Spanish Law of Procurement Process with

Public Administration (Ley de Contratos de las Administraciones Públicas). Article 23 of

this Law establishes that the U.S. supplier should provide a statement issued by the

Spanish authorities in the United States (the Spanish Embassy in Washington), stating

that Spanish companies have equal rights and access to public tenders in the United

States.

U.S. companies interested in bidding for contracts with the public administration must

contact the Spanish Embassy in Washington DC to document their compliance, at:

Embassy of Spain

Commercial Service

2558 Massachusetts Ave. NW

Washington, DC 20008-2865

Tel: (202) 265-8600; Fax: (202) 265-9478

http://www.spainemb.org/

Although procurement decisions are made at the respective department or agency level,

the Spanish Under Directorate of Purchasing has released a centralized bidding

mechanism that even incorporates an on-line register for bidders and open bids, valid for

some categories of products (computers, vehicles, office equipment, heating).

EU Procurement

The EU public procurement market, including EU institutions and Member States, totals

around EUR 1,600 billion (USD 2,206 billion). This market is regulated by two Directives:

• Directive 2004/18 on Coordination of procedures for the award of public works,

services and supplies contracts, • Directive 2004/17 on Coordination of procedures of entities operating in the

Utilities sector, which covers the following sectors: water, energy, transport and

postal services.

Remedies directives cover legal means for companies who face discriminatory public

procurement practices. These directives are implemented in the national procurement

legislation of the 27 EU Member States.

The US and the EU are signatories of the World Trade Organization’s (WTO)

Government Procurement Agreement (GPA), which grants access to most public

supplies and some services and works contracts published by national procuring

authorities of the countries that are parties to the Agreement. In practice, this means that

U.S.-based companies are eligible to bid on supplies contracts from European public

contracting authorities above the agreed thresholds.

However, there are restrictions for U.S. suppliers in the EU utilities sector both in the EU

Utilities Directive and in the EU coverage of the Government Procurement Agreement

GPA). The Utilities Directive allows EU contracting authorities in these sectors to either

reject non-EU bids where the proportion of goods originating in non-EU countries

exceeds 50 percent of the total value of the goods constituting the tender, or are entitled

to apply a 3 percent price difference to non-EU bids in order to give preference to the EU

bid. These restrictions are applied when no reciprocal access for EU companies in the

U.S. market is offered. Those restrictions however were waived for the electricity sector.

Distribution and Sales Channels

As a result of the growth of the Spanish economy, distribution has become a key factor

in supplying the consumer market. Sales channels to consumers have developed

significantly in the last few years, ranging from traditional distribution methods, in which

wholesalers sell to traditional shops and those shops sell to the public, to more

sophisticated methods, with an increased presence of large multinational supermarkets,

retail stores and central purchasing units.

The major competitors to U.S. exporters and investors in Spain are Western European

firms, although Japanese and Chinese companies have emerged as formidable

competitors as well. Cost, financing terms, and after-sales service play important roles

in a firm’s market success. Since Spain joined the EU, member states’ exports to Spain

have benefited from lower tariffs than U.S. goods, which remain subject to the EU’s

Common External Tariff.

Nonetheless, U.S. products are still competitive with EU exports, often due to lower

production costs in the U.S. derived from economies of scale, and are expected to

become more so as long as there is a favorable dollar-euro exchange rate.

European exporters provide generous financing and extensive cooperative advertising,

and most of their governments actively underwrite their exporting efforts with trade

promotion events and other support. Although U.S. products are well respected for their

high level of technology and quality, some U.S. firms face challenges, including flexibility

on financing, adaptation of product design to local market needs.