Spanish stamp duty on mortgage loans: the endless maze

The most recent background: The Spanish Supreme Court judgement of 16 October 2018

The Spanish Supreme Court (SC) published on 18 October a very relevant judgment of 16 October, which changed its previous criterion in relation to the consideration of who is responsible (ie the taxpayer) for the payment of Stamp Duty (SD) levied on mortgages. According to the judgement, the taxpayer of SD was the mortgagee (the bank) that granted the mortgage-secured loan, and not the borrower.

The decision constituted a remarkable shift in SD taxation that could have potentially impacted mortgage secured loans not only going forward but also existing mortgages, opening a possibility for consumers to recover stamp duty paid on past transactions. In the worst-case scenario some sources were estimating the potential impact on Spanish banks reaching €30bn in total, and around €5bn if the backward effects were limited to the statute of limitations for tax purposes (4 years).

Given the potentially extraordinary impact of the ruling and the turmoil that it caused on the Spanish stock exchange, the President of the Tax Chamber of the Spanish Supreme Court, in a decision without precedents, announced within 24 hours from the publication of the ruling that he had called all the 33 judges of the Tax Chamber for a plenary session on 5 November to review similar cases in the pipeline and decide whether they will re-confirm the change of criterion or not. Expectations rapidly focussed also on the fact that the Supreme Court judges could take the opportunity of such plenary session to at least clarify to what extent, if any, this shift could have a retroactive impact.

Some background on mortgage secured loans taxation in Spain

SD has a particularly complex regulation in Spain. This tax is included in the Transfer Tax, Stamp Duty and Capital Tax Law (the Law), which includes provisions regulating all the three aforementioned taxes. A mortgage secured loan involves different transactions (the provision of the loan and the mortgage as security), however it is generally considered as a single transaction at least for Transfer Tax purposes and up to date for SD purposes.

The provision of a loan would generally be subject to Spanish VAT in the case where the lender acts in a professional capacity - such as banks -, though it is exempt from such tax.

With regards to the taxation of the mortgage, SD is levied upon the execution before a Spanish notary of the mortgage deed to secure the loan.

The taxable base is the total secured amount, which includes the principal secured plus the relevant amounts to cover interest and indemnities.

The tax rate depends on the region where the property is located (in case the mortgage is created over a real estate asset), generally ranging from 0.5% to 1.5%.

In relation to the taxpayer, the Law establishes different rules for each different tax covered in the law (Transfer Tax, SDT and Capital Duty). In the particular case of SD, the taxpayer is “the acquirer of the asset or the right”. In case the acquirer could not be determined, the taxpayer is “the person that requests the notarial deed or the person in whose interest the documents are issued”.

However, article 68 of  Royal Decree 828/1995 (which approves the Regulations implementing the Law, hereinafter the 1995 Regulations) expressly specifies that in the particular case of mortgage secured loans, the borrower shall be considered to be the “acquirer” and therefore the person responsible for the payment of the tax as taxpayer.

It is important to note that this provision is not included in the Law, but in a second level implementing regulation which in Spain cannot determine any of the key elements of the tax, such as the identity of the taxpayer.

Following the provision stated in the 1995 Regulations, SD has been traditionally paid by borrowers as taxpayers, despite such point was recurrently subject to challenge in courts by borrowers, on the basis of several arguments. These were mainly twofold: (i) the 1995 Regulations had gone beyond their legally fixed scope and where clearly inconsistent with the general framework rules set by the Law, and (ii) the person who actually benefits more directly from the registration of the mortgage right with the Property Registry (a requirement for the validity of the security under Spanish law) is the mortgagee, and not the mortgagor.

The SC’s past criterion in relation to the taxpayer of SD in mortgage secured loans

The SC reiterated in a number of previous judgements since 1995 that the taxpayer of the SD was the borrower, on the basis - in short - of the following main arguments:

• A mortgage secured loan is a single legal transaction for the purposes of the Law, and on the basis that under Spanish laws the creation of the mortgage security is considered an ancillary transaction to the provision of the loan, the SD treatment for the loan (including the determination of the borrower as taxpayer) should be extended to a mortgage-secured loan.
• The “right” to which the Law refers which is acquired in a mortgage-secured loan is the loan itself -as opposed to the security- which therefore is a right acquired by the borrower.
• Even though the creation of a mortgage security -as opposed to the loan- is the transaction suitable for registration with the Land Registry (actually, such registration is a legal requirement for the validity of the mortgage), the requirement in the Law that the relevant notarial deed shall include a transaction suitable for registration with the Land Registry for the tax to be levied shall be understood to refer to the mortgage-secured loan as a single transaction, and not separately to the loan.
• Despite it may be true that the more direct beneficiary of the mortgage security is the mortgagee, ultimately the borrower is also benefitting from such mortgage security since otherwise the borrower might not have access to long-term financing, or at least not at the affordable rates which derive from the existence of a valid mortgage security.
• The aforementioned arguments were confirmed by Article 68.2 of the 1995 Regulations which expressly clarified that when speaking of mortgage-secured loans, the borrower shall be considered the “acquirer” referred to in the Law. Such provision is a very relevant factor for the purposes of construing the underlying principle set by the Law, and shall be deemed valid as it does only clarify a key element of the tax which despite could be inferred from the above argumentation, probably was not clear cut enough.

The updated SC position as per the 16 October 2018 judgement

In the case under discussion a Spanish corporate borrower litigated against the Administrative Court of Madrid (Madrid TEAR) claiming the availability of a tax exemption in relation to the SD paid in the creation of a mortgage secured loan. As a secondary claim, the borrower considered that, even if the tax exemption was not applicable, the borrower should not be considered the taxpayer for SD purposes. The Madrid TEAR decision rejected both arguments and the subsequent appeal before the Madrid High Court of Justice followed the same outcome. Against that decision, the claimant appealed to the SC.

In the 16 October ruling, the SC concluded that the consolidated position previously followed by them for over 20 years should be amended based on the following arguments:

• Articles 8 and 15 of the Law, which according to the traditional criterion of the SC justify the treatment for SD purposes of the mortgage-secured loan as a single taxable event, are only applicable to Transfer Tax, not to SD and there is no clear reasoning which supports the extension of such criterion to SD previously supported by the SC.
• Despite the creation of a mortgage security may be considered from a legal standpoint as ancillary to the main legal transaction (the loan), for the purposes of SD it is clear that the mortgage shall be regarded as the main transaction, given that it is the only one suitable for registration with the Land Registry (which is one of the basic requirements for triggering SD), and actually is a legal transaction which requires such registration to be completed for its validity and enforcement.
• Article 29 of the Law provides three criteria for the determination of the taxpayer for SD purposes, the first one pointing at “the acquirer of the asset or the right”. Given that there are difficulties to interpret with certainty who is the “acquirer” - this could potentially refer to either the acquirer of the mortgage security (the mortgagee) or the acquirer of the loan (the borrower) - the determination of who is the taxpayer cannot be resolved on the basis of this criterion.
• In these circumstances, the other two criteria, which refer to “the person that requests the notarial deed or the person in whose interest the documents are issued”), lead the SC to conclude that the taxpayer shall be the mortgagee, since it is the only direct beneficiary of the mortgage security (it is the one who may enforce it) whilst the borrower is the direct beneficiary of the loan.
• The taxable base set by the Law (the total secured amount, as opposed to the principal amount of the loan) also suggests that the SD is seeking to tax the beneficiary of such right, that is the mortgagee. This interpretation helps to support that the SD meets the general principle for taxing economic capacity (the one generated to the mortgagee as a result of holding this right), which could otherwise be challenged.
• Should the borrower be the taxpayer, then in the event of non-borrower mortgagees the taxpayer condition would lie in a person (the borrower) who is not a party to the transaction which is subject to tax (the creation of the mortgage).
• The main requirement to apply SD is a notarial deed subject to be registered in a Public Registry. The registration in a public registry of the mortgage secured loan deed is mandatory only because it includes a right of mortgage. Note that the loan is not registrable in a public register, however, by law, the mortgage must be registered in the Land Registry to be considered valid. Therefore, the mortgage cannot be considered as an accessory business in the incorporation deed of a mortgage secured loan.
• Article 68.2 of the 1995 Regulations does not merely provide clarifications to the Law but rather it is regulating a key element of the SD which must be determined by law, and a reasonable interpretation of the Law could not give rise to that clarification.

Based on the above, the SC amends its own criterion and considers that the SD must be paid by the mortgagee.

Further, the SC declares null and void article 68.2 of the 1995 Regulations.

Since another two rulings with the same outcome were issued by the judges on the same voting session of 16 October (they related to the same claimant and different mortgages), the aforementioned SC approach should be regarded as binding case law for all other courts and tax authorities. Therefore, presumably at least two rulings on a different direction would be required to change the current case law created by the Supreme Court.

The updated position of the Supreme Court under the 6 November announcement

According to the press release published in the evening of 6 November, the new position approved by the Plenary Session of the Supreme Court held on 6 November 2018 implies changing the recent position fixed in their 16 October 2018 rulings and going back to the traditional position of the SC on this matter, which is to consider that the taxpayer of SD on mortgage-secured loans is the borrower

The release specifies that the outcome of the voting session was very tight, with 15 favourable votes and 13 dissident votes.

What is next

The new ruling, once published, will be final and should create new case law (jurisprudencia) on the basis that there would be at least two rulings (news in the press refer to three claims being voted, though this has not been officially confirmed by the SC in their press release) setting the same criterion in equivalent cases. Under Spanish laws, such case law is binding on all courts and tax authorities. The SC press release mentions that the full wording of the of the rulings will be published shortly.

Potentially interested parties should provisionally wait and see until a full version of the judgements voted on 06 November are notified to the parties of the relevant claims and thereafter officially published. Given that there are a number of dissident votes we believe that this could take some time despite the reference in the announcement. Careful analysis of the full judgements will need to be undertaken.

However, it should be noted that the 6 November rulings cannot apply to the specific cases dealt in the 16 October rulings, in respect of which the 16 October rulings are final.

Further, once the 06 November rulings are published, it remains to be seen whether any borrowers will attempt to keep challenging the SC approach in the future either at domestic courts level or otherwise.

Going forward, it also remains to be seen whether lawmakers decide to react to this case law, for example in the context of the implementation to the Mortgage Credit Directive which is currently being discussed at the Spanish parliament. For the moment, Prime Minister Sánchez just announced yesterday that the Government was planning to approve today an urgent measure to establish that mortgagees shall be the taxpayers of the SD going forward, instead of the borrowers. The Government’s spokesperson has confirmed the approval of this measure, to be effective tomorrow.