Spain: Legal Highlights Of Doing Business In Spain By A Foreign Investor - Part 6 of 17

Last Updated: 28 July 1995

2.6 Economic Interest Grouping.

Spain has had for a long time now a legal vehicle for the implementation of co-operation arrangements between entrepreneurs.(35) The system provides for various forms of co-operation, though the relevant ones are the so called Groupings of Enterprises and Temporary Unions of Enterprises. Briefly explained individuals or companies may engage in any form of joint activity; in the case of Groupings of Enterprises, to facilitate or jointly develop their business activities and in the case of Temporary Unions of Enterprises, to carry out specific tasks, supply specific services or provide supplies. The Groupings and Unions are not separate legal persons, are subject to corporate tax but may qualify through their registration with the Revenue Service for the so called transparency method whereby profits or losses are ascribed directly to the co-operating parties respectively. The Groupings and Unions may take advantage of certain tax benefits and must keep their own accounts. The partners are jointly and severally liable to third parties for any debts incurred by the entity in question.

Spain has also regulated the European Economic Interest Grouping (EEIG).(36)

The structure and purpose of the Economic Interest Grouping resemble the Groupings of Enterprises above referred, although important changes are introduced. In fact both the Spanish Economic Interest Grouping proper though with certain qualifications (which in the law supersedes the current Grouping of Enterprises) and the EEIG incorporated in Spain are regulated in the law. The current regulation of the Temporary Unions of Enterprises is kept without amendments.

According to the EC Regulation, the Grouping is not allowed to make profit for itself, it must perform an activity which is auxiliary to that of its members and these have unlimited joint and several liability for the Grouping's debts though an action against its members can only be brought if the Grouping has failed to pay its debts within a two month period; these characteristics are reflected in the law except for the two-month waiting period for suing the members of the EEIG which is not recognised. Nevertheless, an action against its members can only be brought if the Grouping has failed to pay its debts. The law (pursuant to Article 1.3 of the EC Regulation) grants a separate legal personality both to the Spanish EIG proper and the EEIG incorporated in Spain. The rules on general partnerships are to be applied on a suppletory basis to the Grouping.

The Economic Interest Groupings, whether Spanish proper or Europeans incorporated in Spain, are subject to corporate tax under the so called transparency method whereby the profits or losses are ascribed directly to the partners with the following qualification: the income corresponding to the non-resident partners is taxed in Spain at the current 35% corporate tax rate provided that the activity carried out by the non-resident partner through the Economic Interest Grouping is deemed to be carried out by a permanent establishment in Spain of the non-resident partner. The subsequent distribution of dividends is not subject to any withholding tax. In the event that the activity carried out by the non-resident partner through the Economic Interest Grouping is not deemed to be carried out by a permanent establishment in Spain of the non-resident partner, the income is not deemed to be Spanish source income, and therefore is not subject to taxation in Spain. The possible application of treaties to avoid double taxation may result in a different tax treatment, usually more favourable. The formation of either Economic Interest Grouping shall benefit from a 100% exemption in the current Impuesto de Transmisiones Patrimoniales y Actos Jur-dicos Documentados (Transfer Tax) which is levied upon incorporation of any type of commercial entity at the rate of 1% on its capital.

The directors of the Grouping shall be jointly and severally liable for the prompt fulfilment of all formal and material tax obligations. Lastly the resident partners (including those permanent establishments in Spain of the non-resident partners should the investment be made through them) shall keep separate accounts clearly reflecting the operations with the EEIG.

2.7 Distribution and Agency Agreements

2.7.1 Distribution agreements

These are not specifically regulated by either Spanish civil or commercial law. In the absence of such regulation, the general commercial and civil law rules apply. The general principle in the Spanish law of contracts is that the parties are free to bind themselves in the manner they may deem appropriate provided the covenants, clauses and terms agreed upon are not against the Law, public morality and public policy (37). As a direct consequence of this rule, the obligations arising from contracts bind the parties as the law would and must be performed as agreed(38).

The distributor usually conducts its own independent business, buying and selling for its own account, and carrying the credit risk and generally the risk of the business. It is compensated by the difference between the purchase price paid to the supplier or principal and the resale price of the goods.

As Spanish law stands there is no statutory compensation for the termination of distribution agreements for reasons of goodwill, clientele, lay-off of personnel, etc. Distribution agreements do not fall within the current Spanish statute that under certain circumstances entitles certain commercial representatives, other than self-employed agents, to a goodwill compensation and severance pay in case of unfair dismissal. Neither would they be entitled to seek compensation under the Law 12/92 of 27 May (published on May 29) whereby the Spanish Government transposed into the Spanish law the EC Directive on Commercial Agents which also provides for goodwill compensation and damages under certain circumstances for self-employed commercial agents.

There is no statutory notice of termination for a distribution agreement. Under existing case law, either party to exclusive distribution agreements concluded for indefinite periods of time, is entitled to terminate the agreement provided the party wishing to terminate it gives notice to the other party in accordance with the agreement, or with trade usage's or, lastly, in the absence of both references, a reasonable time in advance depending on the nature of the obligation. Case law has further established that, while the unilateral termination of a distribution agreement on grounds other than the breach of the agreement by the distributor cannot give rise per se to damages, there may be room for compensation should the termination be either unfair in light of the agreement and/or leave the Principal with the benefit of the customer portfolio created or developed by the distributor.

As case law refers to exclusive distribution agreements concluded for indefinite periods of time, notice of termination would not be required in the case of exclusive distribution agreements concluded for limited periods of time. It should not be ignored, however, that an exclusive distribution agreement limited in time but repeatedly renewed could be treated as an indefinite distributorship. The burden of proof -particularly establishing the building up of a clientele- would rest upon the distributor. So the indemnity principle would have to be applied on a case by case basis.

2.7.2 Agency agreements

Traditionally there has been several types of agent that are recognised by current Spanish legislation such as the commission agent, the "del credere" agent and the agent carrying stock(39). Generally, these are self-employed commercial agents who promote or conclude commercial transactions characteristically on a non-continuing basis for the account of one or more principals as owners of an autonomous business organisation having its own installations and staff. Generally, the agent does not buy or sell for his own account and instead is rewarded by a commission which is usually calculated on net sales. The agent may ("del credere") or may not (commission or others) bear the credit risk on sales to customers.

Save the qualifications made below, as Spanish law stood at 17th June 1992 there was no statutory compensation for the termination of agency agreements for reasons of goodwill, clientele, lay-off of personnel, etc. Likewise, there was no statutory notice of termination for this type of agency agreement, in fact the principal was entitled to terminate the agreement at any time(40), although under case law referred to above, which also applies to agency agreements, the party wishing to terminate an agency agreement which was concluded for an indefinite length of time would have to give notice in accordance with the agreement, trade usage's or a reasonable time in advance.

However, by Law 12/92 of 27 May (published on May 29), the Spanish Government transposed into the Spanish law the EC Directive n 86/653/EC on independent (self-employed) commercial agents dated 18 December 1986 (published 31.12.86). The Law took effect 20 calendar days after the date of publication, i.e., on June 18th, 1992. Beginning on January 1st, 1994 onwards the law applies to all agency agreements whether executed before or after the Law came into effect.

Under the Law agents are also defined as self-employed intermediaries who promote or conclude commercial transactions in exchange for a remuneration characteristically on a continuing and stable basis for the account of one or more principals as owners of an autonomous business organisation having its own installations and staff. Generally, the agent does not buy or sell for his own account or take the risk of the venture. Continuity and stability are the features that according to the Preamble of the Law would differentiate the agents envisaged in the old Code of Commerce from those envisaged in the new Law. In the absence of a specific law which is applicable to the agreement, the agency agreement shall be governed by the provisions of the new Law. The provisions of the Law are mandatory except as otherwise indicated therein.

(35) The Law 196/1963 of 28 December provided a legal framework and a number of tax benefits. This Law was later substantially amended by Law 18/1982 of 26 May (published on 9 June 1982).

(36) By Law 12/1991, of 29 April, as required by Articles 39 and 41 of the Regulation adopted by the EC Council on 25 July 1985 (Regulation (EC) No 2137/85 published on 31.7.85, No L 199/1). The Regulation on EEIGs is effective from 1 July 1989 and applies directly throughout the Community from that date.

(37) Article 1255 of the Civil Code.
(38) Article 1091 of the Civil Code.
(39) Articles 244 through 280 of the Code of Commerce.
(40) Article 279 of the Code of Commerce.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstance.

For further information contact Mr. Jorge Angell, L. C. Rodrigo Abogados, Madrid (Spain) Fax: 010 341 576 6716, or enter a text search "L. C. Rodrigo Abogados" and "Business Monitor".

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