Spanish Tax Authorities confirm that acquisitions of shares in REOCOs do not trigger Transfer Tax

We inform you that the Spanish Tax Authorities have issued a ruling clarifying the interpretation of article 108 of the Spanish Securities Market Act (Article 108 SMA), related to the taxation of acquisitions of shares and, in particular, of shares in real estate companies. As a result of this clarification, acquisitions of shares in real estate operating companies (REOCOs) will not be subject to Spanish Transfer Tax (STT) in any case.

Background

Under Article 108 SMA, acquisitions of control in companies which had at least 50 per centof their assets made up of real estate located in Spain (Real Estate Companies) were subject to STT. However, as a result of an amendment to Article 108 SMA, in force as from 31 October 2012, the scope of application of the STT on acquisitions of shares in Real Estate Companies was significantly reduced as it was limited to transactions driven by tax avoidance purposes.

According to the new wording of Article 108 SMA, the transactions which are considered as driven by tax avoidance purposes are, among others, the acquisitions of shares which:

• are carried out in the secondary market (all acquisitions in the primary markets are exempt from taxation);
• consist of unlisted securities (the transfers of listed securities are exempt in any case); and
• entail the takeover (or, if the control is already acquired, increase the purchaser's shareholding) of entities which have at least 50 per cent of their assets made up of real estate assets located in Spain which are not involved in business activities.

Until March 25 2014, the lack of an express ruling from the Spanish Tax Authorities on the interpretation of the term "involved in business activities" in application of the new wording of Article 108 SMA, caused a high degree of uncertainty, since, for example, in activities concerning leasing of real estate assets, doubts were raised on whether VAT Law (which provides that the leasing of real estate assets should always be considered as a business activity) or Personal Income Tax Law should be followed (which contains a more restrictive criteria than VAT as it requires the fulfillment of additional requirements, having an office and an employee, contained in article 27.2 of Law 35/2006 on Personal Income Tax).

Clarification from the Spanish Tax Authorities and practical implications: The application of VAT criteria and the resulting exclusion of the acquisitions of shares in REOCOs from the scope of Article 108 SMA

Spanish Tax Authorities have confirmed that the term "involved in business activities" contained in Article 108 SMA must be interpreted following VAT Law, which in practical terms means that the scope of application of the STT on acquisitions of shares in Real Estate Companies is restricted to those residual cases of indirect transfers of personal or familiar real estate assets that are not involved in a business activity, therefore excluding every indirect transfer of business activities. For this reason, we consider that it is a very appropriate interpretation as it enhances the role of Article 108 SMA as a real anti-abuse provision in the field of the STT.

Final remark: Differences between share deals and asset deals are still relevant

In the light of the above, we would like to draw attention to the fact that different indirect taxation may arise when transferring a business activity, depending on the way in which the transfer is carried out. A share deal will not trigger indirect taxation, while an asset deal, unless it benefits from the special tax regime of restructuring operations, will paradoxically trigger STT on the real estate assets that are transferred, in addition to Local Tax on Increase in Urban Land Value to be paid by the seller.

It is therefore very important to take into account the different tax implications which may result from the different possible ways to implement these transactions.