The 11th additional provision of Royal Decree-Law 4/2004 on corporate income tax(1) now provides as follows:
- Any investment made in new tangible assets and real estate between 2011 and 2015 may be freely depreciated.
- Investment in construction works resulting from procurement activities may also be freely depreciated. However, if the project will take at least two years from procurement to handover or commencement of operations (and even if this occurs after 2015), investments in tangible assets or real estate investment may be depreciated only with regard to work carried out between 2011 and 2015.
The recent shortage of available financing for developers has led to a dramatic contraction in the construction industry, which has been exacerbated in the residential sector by the parlous financial situation of many homeowners. As the wheels stopped turning, large tracts of land have been left undeveloped.
However, in the current market there is still room for turnkey build-to-suit projects involving logistics buildings (eg, as some consumer product corporations are regrouping their distribution centres) and office buildings.
In Spain, a turnkey project generally involves the conclusion of a pre-letting agreement with the occupier, through which the latter agrees to take on the future building through an operational lease for a minimum compulsory period, which ensures that the landowner - in the role of the developer - can make a return on its investment.
However, under forthcoming changes to the rules on the accounting of leases, in the case of pre-letting agreements where the minimum compulsory period exceeds a specified duration, the occupier will be required to declare the lease as an asset and the entire contractual rent that will fall due as a liability on its balance sheet. Moreover, the arrangement means that the freedom to depreciate is of little benefit to the developer, which must bear all of the construction costs and can only subequently begin to recoup them by collecting rent from the occupier.
This leads us to two main considerations. The first, on the landowner's side, is whether a financially healthy developer with various assets leased to third parties -some already in operation and others still under development - should group several of those assets either under the same subsidiary or under a consolidation group. This would bring together regular revenues from operational buildings in sufficient levels to allow it to take advantage of freedom of depreciation for properties under development in its corporate income tax return, thus benefiting from a tax deferral.
The second, on the occupier's side, is whether changing its role and partnering in the development would allow it to benefit from the freedom to depreciate by sharing ownership with the landowner, rather than taking a lease. In this sense, a ground lease or 'surface right' (for further details please see the Overview (June 2004)) is a right in rem that affords the beneficiary the right to build, operate and own constructions erected on land owned by a third party for a limited period (which, in Catalonia, cannot exceed 99 years), either for free or for a consideration. Upon the expiry of this term, ownership of the construction transfers to the landowner at no cost, unless otherwise stipulated; in the meantime, it is recordable in the Land Registry and thus opposable against third parties, transferable and likely to be mortgaged by the beneficiary. By becoming a ground tenant, rather than merely a tenant, the occupier will share in the construction costs, but in principle can freely depreciate this investment in its corporate income tax return, thus benefiting from a tax deferral.
Section 564 of the Catalonian Civil Code further allows for the creation of operational ground leases over existing constructions.
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 through Act 4/2008 and progressively restated on April 9 2010 by Royal Decree-Law 6/2010 and on December 3 2010 by Royal Decree-Law 13/2010