The 11th Additional Provision of the Corporate Income Tax Decree (4/2004)(1) now provides as follows:
- Investment in new tangible assets and real estate investment that is passed to a company in fiscal years 2011 to 2015 may be freely depreciated.
- When dealing with development stemming from the procurement of construction works, freedom of depreciation exists but varies; if the construction or investment project requires at least two years from procurement to handover or commencement of operations, depreciation of investments in tangible assets or real estate investment can be applied only on the amount of work in progress carried out in fiscal years 2011 to 2015.
The shortage of financing for developers in Spain led to a severe reduction in construction, which was particularly aggravated in the residential sector due to the reduced financial circumstances of homeowners). As development stopped, a large amount of land was left in limbo. However, the current market shows that there is still room for turnkey build-to-suit projects in logistics buildings and office buildings.
In Spain, a turnkey project would usually involve a pre-letting agreement with the end user, which would take the future building on an operational lease for a minimum compulsory period that allows the landowner to obtain the return of its investment. Forthcoming changes to lease accountancy will require the end user to account for the entire rent due in contracts with a minimum compulsory period of more than a certain number of years as 'assets' and 'liabilities'. However, the freedom to depreciate is of little tax benefit to a developer which has paid for all the construction costs and is now starting to collect rent, its main source of income.
This results in two main considerations. First, on the part of the landowner, it is uncertain whether a financially healthy developer with various assets leased to third parties (some in operation, some under development) would be interested in grouping several of them under either the same subsidiary or a consolidation group. This would combine regular revenues from inventory buildings in operation at a sufficient level to take advantage of the freedom of depreciation in properties under development in the landowner's corporate income tax declaration, thus resulting in a tax deferral.
Second, on the part of the end user, it is uncertain whether becoming a partnering in the development would lead to the end user benefiting from the freedom to depreciate by sharing ownership with the landowner, rather than taking the property under a lease. In this sense, a ground lease or 'surface right' is a right in rem that affords its beneficiary the right to build, operate and own buildings erected on land owned by a third party for a limited period (in Catalonia, no more than 99 years)(2) for free or for a consideration. Upon expiry of the limited period, the building becomes the property of the landowner at no cost unless otherwise stipulated; but in the meantime, it is recordable in the Land Registry and thus can be protected against third parties, transferred and mortgaged by the beneficiary.
By becoming ground tenants rather than mere tenants, end users would bear the construction costs but, in principle and subject to a detailed case study, could freely depreciate such costs in their corporate income tax returns, thus obtaining a tax deferral.
For further information on this topic please contact José Antonio Pérez Breva or Francisco Chamorro at Garrigues by telephone (+34 93 253 3700), fax (+34 93 253 3750) or email ([email protected] or [email protected]).
(1) As introduced on December 23 2008 by Act 4/2008 and restated on April 9 2010 by Royal Decree-Law 6/2010 and on December 3 2010 by Royal Decree-Law 13/2010.
(2) Section 564 of the Catalonian Civil Code allows creating operational ground leases over already existing constructions.