Spanish real estate taxation update: good news for sellers of certain Spanish property-rich companies

The decision analyses the taxation in Spain of a capital gain made by a Luxembourg entity on the transfer of shares of a company engaged in the hotel business, and concludes that the gain on the share deal should not be taxed in Spain since the assets of the company can be considered part of an ongoing business instead of passive real estate property.

The Double Tax Treaty

In the case analysed by the AN, the applicable double tax treaty (the one entered into between Spain and Luxembourg) does not provide - as many of the tax treaties signed by Spain - a carve out for business activities in clause 13.1. This clause states in most cases that capital gains derived from property-rich companies will be taxed in the country where the real estate is located, regardless of whether these are used in the course of a business activity or are merely passive holding property.

In this decision, the AN implicitly disregards article 13 of the double tax treaty with Luxembourg as well as the interpretation given by the Organisation for Economic Co-operation and Development (OECD) Committee of Fiscal Affairs Commentaries to the Model Tax Convention in this matter, stating that the Spanish tax authorities shall focus purely on the nature of the assets. This analysis is therefore more focussed on a purpose-based interpretation of the domestic law provision.

Spanish Non-Resident Income Tax Law

The Spanish Non-resident Income Tax Law provides a full exemption for the capital gains obtained by residents in another EU member States (or by permanent establishments of such residents located in another EU member State) derived from the transfer of shares in a Spanish entity. However, this exemption cannot apply where the assets of the entity mainly consist - directly or indirectly - of real estate property located in Spanish territory. Again, the domestic law provision does not expressly distinguish on the basis of the use of the real estate for a business activity.

The decision issued by the AN provides a new purpose-based criterion for the interpretation of this exemption despite the lack of specification in the domestic provision. According to the AN’s position, going forward the application of this exemption will need not only an analysis based on the assets of the company, but also a further analysis based on the existence of an ongoing business.

The AN decision

The decision takes place as consequence of a tax assessment in relation to the capital gains obtained by a Luxembourg company when selling all the shares it held in a Spanish company engaged in the hotel business (being the hotel building its main asset) for a total price of €23m The balance sheet assets amounted to €1.4m of which €1m corresponded to the property in which the entity carried out the activity (the market value of the property is not specified, but should be materially lower than the total purchase price).

The AN considered that the transaction could not be regarded as the sale of the property but rather an entire ongoing business alongside the hotel itself. As stated in the contract, the price included: all its facilities, machinery, furniture, decoration elements, operating licenses, administrative permits, bookings and accommodation contracts, vehicles and all the necessary elements to continue with the business. Although the most relevant element was the property, this business relied on other relevant assets and facilities necessary for the same activity.

Further, the AN accepted that intangible assets not accounted (eg goodwill) were factored in the pricing exercise to determine the equity value.

All the above justifies the final decision issued by the AN considering that the seller of the Spanish property-rich shares can apply the full capital gains tax exemption due to the existence of an ongoing business.

What is next

Despite in our view part of the AN’s reasoning is not beyond any doubt, it is important that this decision has not been appealed by the State Lawyer before the Supreme Court, consequently the criterion - despite not of the binding nature of Supreme Court case law - is a very relevant benchmark which may be taken into account by non-residents selling Spanish property-rich companies that can be considered as an ongoing business.

On the other hand, the AN judgement gives rise to the possibility for non-residents which paid Spanish capital gains tax on the sale of property-rich companies from 2015 onwards to claim the refund on the basis of discrimination contrary to the European Union Law.

It should be noted that by the time the transaction analysed by the AN was carried out, non-residents and Spanish entities were not able to apply any exemption for the transfer of property-rich shares. This situation turned from 2015 onwards with the participation exemption regime becoming generally applicable to Spanish entities holding a 5% or a participation with purchase value of €20m or more on a Spanish resident subsidiary which operates a business (ie not merely holding or passive investment entities) whilst such exemption is not yet available to non-residents with such type of property-rich company stakes, according to the literal interpretation of the domestic law.

The AN decision thus seems to bring sound legal grounds to claim the refund of capital gain taxes unduly paid in Spain, in certain scenarios. In particular, non-resident investors which paid capital gains taxes from 2015 onwards on a share deal exit should consider their options in this regard.