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The Spanish Lawyer Online

Antonio Flores’ Blog

Thoughts about laws and regulations which affect foreigners in Spain

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Archive for the ‘Companies’ Category

Illegal Investments: Fiduciary Duty Claim Sticks Against Santander Bank

August 10th, 2016

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For the first time that we are aware of, a Spanish Court has found a complaint to sufficiently allege a breach of fiduciary duty against a bank, Santander, who had opened an account to an unauthorized financial investment company and allowed it to take clients’ deposits for unregulated investments. Needless to say, clients’ money was almost all lost.

According to the Madrid Appeal Court, (…) the unauthorized firm acted illicitly by breaching is contractual terms with its clients and more importantly, the Court deemed this firm was (…) offering the public an investment service in blatant violation of mandatory regulatory laws.

The directors of the unauthorized have also been found to have acted illicitly –for the above reasons- and as a result, deemed personally responsible for the losses of clients’ savings.

And Santander, more crucially, was found to have (…) acted reprehensibly by allowing the unauthorized firm to operate freely by opening bank accounts, authorizing transfers and permitting other typical banking transactions reserved to authorized firms.

The Court invoked article 7 of the annex to the Financial Markets Code of Conduct that prohibits dealings with illegal companies:

Entities will refuse any operation from non-authorized intermediaries, as well as those in which they have knowledge that the relevant legislation applicable to the former may be infringed.

Such “knowledge” was decisive in this case for the Court to rule that Santander was in breach of the above obligation and order the bank to indemnify the client for the losses sustained by the boiler room.

This events leading to this ruling happened prior to the approval of the Anti-Money Laundering Act where banks –and other obliged parties-, are obliged to obtain information as to the

purpose and expected nature of the business connection of the client and in particular, the nature of the professional and/or business activity, carrying out those measures to reasonably prove the information” (art. 5),

as well as a

continuous follow up of such business connection, inclusive of scrutiny of any dealings conducted throughout the relationship” (art. 6).

On this basis, we believe that the above “knowledge” is no longer essential and therefore banks that facilitate any person, company or otherwise to illegally operate in the financial markets could be deemed responsible for the losses sustained by their clients/victims.

For the avoidance of doubt, an unauthorized entity (or “fly-by-night operation” as described by Spanish regulators) is any such that offers investment or insurance services and is not approved by the CNMV (Financial Conduct Authority) or the DGS (Insurance Regulator).

Companies, Corporate Law, Scams , , , , ,

Spanish Limited Company or Self-Employed: 7 things to know

February 4th, 2016

  1. The One-Man Band Company: if you are a singer, a real estate agent with no employees or a dentist and you set up a limited company to pay less tax, you have a problem. The Directorate General of Taxes has stated that a company –consisting of a single shareholder who also is the director- that is unable to trade without the direct participation of owner/director, is in fact a shell or ‘simulated’ company.The main consequence is that the Tax Office will deem the person acting through company as self-employed, for tax purposes. To avoid this, a company must have enough human and material resources to operate irrespective of owner/director. In 2014, the Tax Office initiated 1.919 full inquiries in connection to this type of fraud. 
  2. Limited vs Personal Liability: the acronym S.L. stands for “Sociedad Limited”, which suggests companies will protect the entrepreneur should things go wrong (save for fraud). Self-employed do not enjoy such protection and are personally liable with present and future assets for losses incurred in the course of the business activity.
  3. Growth expectations: an entrepreneur that intends to grow cannot operate as a sole trader. As the business increases its turnover, so do the associated risks. Self-employed operators without corporate protection will risk less and, as a consequence, expand at a slower pace (which may not be a bad thing after all).
  4. Dealing with monies: Sole traders will have direct access to the proceeds of the business activity whereas in a company, the director (or the shareholders) cannot just dip into the account when in need of cash. In the latter case, it is important to note that any money received by the company belongs to the company and legally, to draw cash out, the director will have to issue a salary (“nomina”) or take out a dividend, both of which are taxable.
  5. Costs: Setting up as a sole trader will not attract cost whereas a company will cost anything from €600 to €1400 Euros, depending on various variables: share capital, legal assistance, choice of Notary Public etc.
  6. Professional Image: In some businesses and industries, having a limited company will provide a more professional image. If you are doing business with larger companies, you may find that they prefer to deal only with limited companies rather than sole traders or partnerships.

Companies , , ,

Unregulated IFAs (Independent Financial Advisers) and Unauthorized Insurance Companies

January 4th, 2016

Much has been written about unregulated IFAs operating in Spain. In 2012, The European Commission was considering setting up an ombudsman to help expat victims reclaim against these firms and the Spanish regulators -the CNMV (financial investment) and the DGS (insurance) – regularly post warnings about unregistered operators.

The CNMV is particularly proud of its achievements in the supervisory arena. Its website boasts the following: “Spain enjoys a modern, efficient regulatory and surveillance system, but we must continue working to perfect it. Our regulatory and surveillance system is among the most advanced in the world, and the CNMV is determined to maintain its quality.”

Whatever the surveillance system the CNMV is working on to perfect, its methodology has failed to prevent the activities of not just unregulated IFAs but also, unauthorized insurance companies.

Let’s take the example of Old Mutual (former Royal Skandia), a FTSE100 company “overseeing 319.4bn assets under management for more than 16 million customers worldwide (as at 30 September 2015).”

In Spain, Old Mutual operates via the companies Old Mutual International Life Ireland Limited (Dublin) and Old Mutual Wealth Life & Pensions Limited (Southampton), the only group companies authorized by the DGS. On the Costa del Sol, Old Mutual is known for it has been offering a life assurance policy called “Executive Investment Bond” (EIB), a bond that has incidentally lost millions to investors.

Yet for some reason, the EIB is being offered in Spain through IFAs by Old Mutual International Isle of Man Limited, a standalone company registered in the IOM but not ‘passported’ -meaning not registered in regulatory jargon- into Spain to offer any product, whether insurance or financial. And the same applied to its unauthorized predecessor Royal Skandia Life Assurance Limited (based in IOM), which too offered the “Executive Investment Bond”.

For its part, article 4.2 of the 2004 Insurance Supervisory Act states the following:

Insurance contracts and other legal arrangements subject to this law signed or agreed with an unauthorized entity, or an entity whose authorization was revoked, will be null and void. A person that having entered into a contract with it will be under no obligation pay the premium and will have a right to obtain a refund of any paid premium.

Corporate lawyers are always quick to point out that registered entities forming part of a group of companies are autonomous and separate from each other, regardless of whether they share common brand or names. To this extent, Old Mutual Isle of Man (and Royal Skandia Isle Of Man) should have been registered in Spain and where not, all of its contracts could be null and voided by Spanish Courts.

Companies, Corporate Law

Advertising Laws in Spain: Implications of Aggresive Marketing

September 22nd, 2014

Companies that regularly advertise are under the impression that, if you insert a disclaimer at the bottom of the ad, you are fully covered. This recurring mistake and a few others can have very serious implications, more so considering that an ad forms part of the contract; let us see some of them.

  • Clause “advertiser is not responsible for pricing errors or misprints”: This is a clause prima facie deemed abusive and therefore void. The most cited example is the woman who received a printed offer for a luxury car that, although retailed for €45k, had a price tag of €9k. The ruling held that the advertiser had not rectified in any form and granted the claimant the right to the car for the advertised price.
  • Clause “valid whilst supplies last”: this clause is only accepted in season sales or, generally, provided the consumer is able to establish the size and duration of those supplies. The aim of ruling on its illegality is to avoid a supplier’s prerogative to cease selling a product, at an attractive price, at their sole discretion.
  • Representations made on brochures: Brochures do have a contractual binding force. A Marbella based property developer, Erasur S.L., was forced by the Supreme Court (12/7/2011) to return 205k to buyers who, having relied on advertised representations of sea, golf and mountain views, bought an apartment that ended up having only mountain views. The Court found that the brochure was not a mere “invitation to negotiate” but a contractual offer for an off-plan apartment.
  • Responsibility of editors for publishing misleading ads: In a recent ruling, multinational Hachette Filipacchi was found co-responsible of misleading advertising for hosting an ad for a miraculous slimming product later found to be deceitful (aren’t they all?). Although they were acquitted in the first instance, the Courts applied article 34 of the Unfair Competition and Advertising Act 29/2009 ordering them to cease and to refrain from hosting identical advertising.
  • Clause stating a “limitation of liability for losses sustained as a result of relying total or partially on this product”; this clause, shocking as it may sound, was inserted in a brochure issued by a Danish bank that gave Inheritance Tax advice, and wish to now get away with it once the Spanish “Hacienda” has concluded it is fraud. The fate of the clause can be explained by reference to the law on the matter:

Consumer Protection Act, Article 130: Inefficacy of limitation or exoneration of liability clauses: clauses limiting or exonerating from responsibility in respect of instances of civil responsibility under this Act are not applicable and thus, inefficacious.

Companies, Corporate Law , , , ,

Spanish Lawyer Jailed for Setting up an Offshore Company

November 2nd, 2010

Offshore is definitely off. The times of the property owning offshore-based companies are over. The glamour associated with names such as Seychelles, British Virgin Islands, Turks & Caicos etc., has now turned into a stigma. Because there was a time in Spain when, if you went to certain summer cocktail parties or high-flying bashes and you did not own an offshore company based in some fanciful island, you were a nobody. In fact, your lawyer was quickly tagged as unsophisticated, uncreative, in essence, not up to scratch with this new posh trend that was all the rage among the richer.

The Mallorca Provincial Audience (May 2010) has sent a lawyer to jail for almost 4 years and given him a fine or €600K  for setting up a “fiscal engineering scheme to instrumentalise defrauding and money laundering procedures “, in the sale of a property in Puerto Pollensa (Mallorca). In this case, he had set up the structure to, among other aims, avoid (or rather evade) paying Capital Gains Tax (at 35%) on the real price (as opposed to the officially declared) when selling his client’s property.

According to the prosecutor, and the judge in the examined ruling, the investigated  law firm indiscriminately offered offshore companies, via the website offshore.biz site (in which even two Mallorca notaries were mentioned), to their clients with the intention of:

  • Minimizing the tax almost to the point of exemption.
  • Offering 100% protection to the assets.
  • Offering 100% anonymity.

The message this Court ruling has sent out is a very clear one: using offshore companies to hold Spanish property does not entitle the beneficiary to legally avoid payment of taxes in Spain, whether you sell the shares, and alongside it, the property. This applies also to the buyer of the structure, who is not exempt from paying transfer taxes.

The Court Office, in reaching its decision, invoked the following:

  • Non-Resident Act 5/2004: Capital Gain Taxes obtained, directly or indirectly, from property situated in Spain, will be taxed in Spain. In particular, the following gains are included: when they are originated or derived from rights or shares of a company, resident or not, which assets are made of up of, primarily, directly or indirectly, property based in Spain. The gains obtained from transferring the shares of a company, resident or otherwise, that attribute its ultimate owners the right of their enjoyment in Spain.
  • Double Taxation Agreement between Spain and Ireland of the 18th of November 1986: the gains derived from the sale of property can be taxed where the property is located (for some reason, this was invoked as part of the defence strategy).

In this case, the tax office, assisted by the police, found enough evidence of the crime when they were given authorisation by the court to raid the firm’s premises, in which they found not only crucial information on the transaction (particularly deeds of share transfer and deeds of resignation of director and appointment of new director, both done on the day that the property changed hands, bank transfer slips, etc.) but also a private purchase contract for €875,000 for the property in question, when the price paid officially paid was €425,000.

Finally, the Tax Office’s report puts under serious scrutiny Law Firms that, apart from offering the standard juridical, financial and accounting services, have specialized in the design of schemes and structures of fiscal engineering that are utilized to defraud and launder money. These professional firms, which act as company incorporating agents, don’t have as its object international fiscal planning, but are purveyors of mechanisms for subjective simulation, by inserting physical and juridical persons, national and foreign, in the ownership of the assets they intend to conceal. The mechanisms, according to the Tax Office, are as follows:

  1. Incorporation of offshore of property holding companies (offshore-based) .
  2. Incorporation of Spanish Companies (mostly Limited-SRL), owned by the above offshore, to manage Spanish property. These companies are merely holding property, having scant bank movements.
  3. Appointment of directors different from the ultimate owners, either being the same lawyers that created the structure or, as in the case study, someone paid to do the job (and who has also been sentenced to a jail term, albeit suspended). These persons are also authorised to operate both the offshore and the onshore accounts and are, at times, beggars pulled off the street. 
  4. Utilization of the law firm’s clients account to receive and remit transfers, with the intention of a) concealing the true nature of the transactions behind the transfers and b) avoiding compliance with anti-money laundering provisions (thereby making it more difficult to know the real nature of the deal).

As a result of the above court action, the lawyer, the ultimate beneficiary and the director were all sentenced to jail terms, although only the lawyer will have to serve time, for the beneficiary paid up the taxes owed prior to the hearing (€135,000) as well as the fines, and the director was found guilty only of conspiracy to defraud.

Offshore is definitely off, and therefore it would be advisable that anyone willing to sell a property owned by a string of companies opted for not selling the shares abroad, because, not only all the above could easily be applicable, but also whoever was buying them would be buying into problem, unless of course he/she was sitting on a pile of cash he wanted to get rid of…(not advisable anyhow).

It may be interesting to see how this links with this new trend of incorporating UE based companies to avoid Spanish Inheritance Tax, particularly UK based, but will leave the study of this dubious proposal for a separate post.

Companies, Corporate Law, Inheritance, Property, Taxes , ,

Spanish Real Estate Sales Agreements: When Exclusive is Not So Exclusive

June 19th, 2010

I have, for some unknown reason, always been suspicious of professionals wearing a short sleeve shirt and tie combination, unless, of course, they were cheesy used car salesmen or fast food managers. I have to say in my defense, however, that I have tried to leave behind my prejudices and move on, trying to intimate with the suspect (generally some other lawyer) in spite of his attire when work circumstances demand it, and also because I am told that looks are not everything.

The same happens with exclusive real estate commission agreements. They look one thing but may mean something, nothing, or something different from what they say or mean. And this baffling scenario is what we encounter if we research court rulings issued all over Spain when the principal, who is the property owner, decides to sell the property himself or through another agent, in spite of having signed an apparently impregnable contract with his chosen agent and shaken hands subsequently, with or without a beer.

By analyzing no less than 20 court rulings, we find out that most, if not all, agree that if the property owner sells directly, then no damages are applicable to the agent as exclusive contracts cannot impede the owner from disposing of his own property privately, unless specifically agreed (already departing from what we think “exclusive” means).

This clarified, we now look are the solutions arrived at by courts when an agent different from the initially commissioned to sell, exclusively, does the deal.

  • Solution Pro-Owner: This is a restrictive opinion (also shared by French law), whereby the exclusive agent is not entitled to a commission because the essence of the mediation contract is to find a buyer, and where this has not been achieved, then no right to a commission arises. At the most, the exclusive agent will be entitled to damages, but only where these can be proved to have existed, such as meetings, sales or promotional literature,trips, staff hiring etc.In line with this view, courts have pronounced that giving the exclusive agent the right to his commission would produce “unjust enrichment”, since the main obligation of the agent is to sell, and this has not occurred as a result of his activity (it omits an important detail which is that not selling the unit may have happened due to it being sold by someone else!).The Supreme Court has added that the agent’s right to his commission (“loss of earnings” theory) when the seller breaks the exclusive contract can only be applied where there is sufficient verisimilitude to repute the earning of the commission as very probable, in its maximum approximation to an effective certainty so that the result is neither a loss nor an unjust enrichment. It also adds that the loss of earnings have to be proved, not being dubious, unfounded or founded on hope or hypothesis.Again, the courts here redefine what “exclusivity” means, and almost gives cheeky property owners carte blanche to break exclusivity property sales contracts, without visible penalties.
  • Solution Pro-Agent: This more harsher solution is more in line with common law, and determines that the exclusive agent did not have the opportunity to complete the task he was assigned with, and, therefore, considers that the exclusive agent would be entitled to any costs incurred in so far, plus full commission (loss of earnings). This opinion is based on the fact that, in the absence of a clear regulation, damages are to be calculated primarily by reference to the lost commission. However, it adds that courts are entitled to “moderate” or “adjust” the application of it on the basis of other circumstances, such as the dedication of the exclusive agent to selling, number of buyers who viewed the property, other sales made with the same client, bad faith displayed by the owner, final sales price, etc. There is an interesting local ruling (Malaga Appeal Court) involving the Kempinski Hotel owners and Sauer International real estate agent, where the latter was given entitlement to 5% commission (half of that agreed on contract) on a number of apartments that were sold by another agent (Kristina Szekely), because the courts understood that by having sold 74 apartments out of a total of 89 it could easily be inferred, with objectivity, that the remaining 15 would have also found a buyer through the services of the original agent.

So if we thought we knew what the penalty would be to an infringer property owner by reading a simple contract, be wise and stay away from assumptions, because Spanish courts are here to prove your assumptions wrong!

Companies, Litigation, Property