Structuring the investment
Each investor is different and has its own goals, targets and demands when considering real estate investments.
Real estate investments can be made by acquiring the property directly (asset deal) or indirectly by purchasing the share capital of the legal entity owning the real estate (share deal).i Asset deals
Real estate investments are normally structured as an asset deal in which a Spanish SPV owned by a foreign company (typically, a company incorporated in the European Union, provided that it complies with the substance, business purpose and beneficiary ownership tests) purchases the asset.
On the Spanish tax side, the acquisition of a property by the Spanish SPV will be subject to VAT if certain requirements are met (see Section VI.iv, below) and not to non-recoverable transfer tax. The Spanish SPV will be subject to Spanish CIT, generally at a rate of 28 per cent or 25 per cent, on its net income (including, by way of example, rental income and capital gains derived from the transfer of a property). Interest (with certain limitations established in Spanish law), amortisation and expenses are generally deductible if they are linked to the company's business activities and transfer pricing rules are complied with.ii Share deals
Share deals were traditionally disregarded because the acquisition of more than 50 per cent of the shares of a company with more than 50 per cent of assets as real estate was subject to non-recoverable transfer tax (payable by the purchaser) at a rate of between 2.5 and 11 per cent over the market value of the property (depending on the region in which the real estate is located).
However, that is no longer the case and pursuant to the new drafting of Article 314 of Royal Decree 4/2015, of 23 October 2015, approving the revised Securities Market Law, only transfers of shares intended to avoid the payment of taxes applicable on the transfer of real estate will be subject to transfer tax or VAT. In relation to this, the law presumes that there exists the intention to avoid payment of the indirect taxes applicable to the transfer of real estate in the following cases:
- when, as a consequence of a secondary market transfer of shares, control of a company (defined as an equity stake higher than 50 per cent) is acquired and the company's assets consist of at least 50 per cent of real estate assets located in Spain that are not linked to a business or professional activity, or if, following the change of control, the purchaser's stake in the company increases;
- when, as a consequence of a secondary market transfer of shares, control of a company is acquired and the securities forming part of the company's assets allow control over another entity with assets comprising at least 50 per cent of real estate assets located in Spain not linked to a business or professional activity, or if, following the change of control, the purchaser's indirect stake in the company increases; or
- when there is a transfer of shares and the transferred securities have been received in exchange for contributions-in-kind of real estate assets upon the incorporation or share capital increase of a company, provided that the real estate assets are not linked to a business or professional activity and no more than three years have elapsed between the contribution date and the transfer date.
The above are rebuttable presumptions. Therefore, if any of them is met, the Spanish tax authorities do not need to prove the intention to avoid taxes. Conversely, taxpayers are also entitled to evidence the absence of an intention to avoid taxes even if the transactions carried out fall under any of the presumptions. It is worth clarifying that the tax authorities are not precluded from evidencing the existence of an intention to avoid indirect taxes in potential scenarios other than those covered by the above-mentioned presumptions.
Note that if the transfer of shares is subject to tax (i.e., because the anti-avoidance clause applies), it will be subject to VAT or transfer tax, depending on the tax that would apply to the direct transfer of the real estate assets owned by the company whose shares are being transferred (and not always to transfer tax, as established under the former regime).iii Sale of the property
Profits generated from real estate investments are subject to general direct taxation rules.
Capital gains from the transfer of property will be determined based on the difference between the transfer price and the net book value of the property, and are subject to the general Spanish CIT rate (i.e., 28 or 25 per cent).
The acquisition of commercial real estate in Spain by foreign institutional investors or funds is typically structured through a Spanish SPV owned by a foreign company (see Section IV.i, below). The acquisition or incorporation of the SPV by the foreign company does not require prior authorisation, but must be reported to the Ministry of Economy and Finance by filing form D-1A within 30 days of the date the shares are acquired or issued. The purpose of this filing is to record for statistical purposes corporate information on the foreign company (corporate name, registered address, nationality), the Spanish SPV (corporate name, registered address, share capital and reserves, whether the foreign shareholder has the ability to appoint its directors) and the value of the transaction. If the foreign company is a tax-haven resident acquiring more than 50 per cent of the Spanish SPV's share capital, form DP-1 must be filed prior to the acquisition of the Spanish SPV (again, for statistical purposes rather than authorisation) followed by form D-1A as indicated above.
The very few exceptions requiring prior clearance for the acquisition of real estate concern investments in state defence-related properties (or properties located near defence sites), or investments from tax havens or by foreign sovereign bodies.