Drivers for the ride-sharing service Uber will receive penalties of up to €18,000 (£14,000, $22,500) and could have their cars immobilised under new laws imposed by Madrid's local government.
The new measures will be seen as a significant victory for the taxi industry in Spain, which has been lobbying against Uber ever since the service launched in the country earlier this year.
It has been disputed that drivers who do not hold the proper permits are unable to use their vehicles to transport people for profit under Spanish law.
"We held a meeting in which we expressed the commitment of the community to ensure the safety of users and prevent unfair competition and we will work together with the taxi to inspect and punish pirate vehicles already operating at the airport, Uber phone or applications, " Borja Carabante, Spain's deputy minister of transport, infrastructure and housing, told 20minutos.
The fines imposed will range from €4,000 to €18,000 and will be enforced by local police. It is not yet clear how vehicles operating with Uber will be spotted by authorities when there are no physical markings that distinguish regular cars from Uber cars.
Uber currently operates in over 200 cities across 45 countries around the world and is continuing to expand internationally despite resistance from local taxi organisations and unions.
In a recent interview with El Pais, Uber co-founder and CEO Travis Kalanick said that taxi drivers should see Uber as an opportunity rather than a threat.
"We have seen a number of taxi drivers who have come to Uber to earn a better living," Kalanick said. "Taxi drivers who come to us make an average of $10,000 more per year.
"Uber represents the ability for locals to get around their town for half the price of the taxi, while also creating tens of thousands of jobs, reducing congestion and providing a more friendly mobility environment. So I wonder what's wrong with all this."