Taxation and acquisition vehicles

Typical tax issues and structuring

What are some of the typical tax issues involved in real-estate business combinations and to what extent do these typically drive structuring considerations? Are there certain considerations that stem from the tax status of a target?

An SPV’s acquisition of a real-estate asset is subject to VAT if the following conditions are met.

The first transfer of non-residential properties is subject to 21 per cent VAT, provided that the sellers transfer them in the course of their business activity, while the first transfer of residential properties is subject to 10 per cent VAT.

Second and further transfers of built and finished properties by sellers in the course of their business activity are exempt from VAT, but are subject to transfer tax (which is nonrecoverable), at a rate of between 2 and 11 per cent (depending on the Spanish autonomous region where the asset is located and the applicable tax benefits). However, the seller and buyer can waive the VAT exemption provided that:

  • they are both VAT registered;
  • the latter is entitled to total or partial VAT credit allowance; and
  • the waiver is expressly made on or before the date on which the transfer is executed.

In this scenario, VAT (and not transfer tax) would be due.

When the VAT exemption is waived, the reverse charge mechanism applies, which means that the buyer is considered the VAT taxpayer, thus being obligated to charge the applicable VAT and declare it, which generates a neutral scenario for the buyer.

If the transfer of a property is subject to VAT, stamp duty also applies at a rate of between 0.25 and 2.5 per cent, depending on the Spanish autonomous region where the property is located.

Transfers of shares are normally tax-exempt. However, if the Spanish tax authorities apply the anti-avoidance rule (see question 1), the transfer is subject either to VAT or transfer tax, depending on the tax applicable to the direct transfer of the underlying property. If a share deal is carried out, the acquirer will be liable for any tax contingency of the acquired company.

In general, the Spanish SPV, which would be the acquirer, would be subject to Spanish corporate income tax (CIT), generally at a rate of 25 per cent of its net income (eg, rent income and capital gains realised on the transfer of a property). Interest (subject to specific limitations), amortisation and expenses are generally deductible if they are linked to the SPV’s business activities and transfer-pricing regulations are fulfilled.

Besides, an asset deal requires the seller to pay tax on the increase in urban land value (TIVUL). TIVUL is calculated by applying a particular tax rate (up to a 30 per cent) to the land, cadastral value (the building’s value should not count for these purposes), which shall be in turn adjusted by a percentage determined by multiplying the number of years that the land has been held by the seller (up to 20 years) by a coefficient ranging from an annual 3 to 3.7 per cent.

On the other hand, share deals imply an inheritance of the embedded gain in the transferred company due to the difference between the market value and the book value of the company’s properties. This gain would be taxed at the general CIT rate when the properties are transferred in the future.

The acquirer of the target company inherits other municipal tax liabilities (such as TIVUL). The parties take both issues into account when establishing the target’s purchase price.

Mitigating tax risk

What measures are normally taken to mitigate typical tax risks in a real-estate business combination?

The tax analysis of potential structuring methods is essential to minimise all tax costs and risks involved in the transaction. Apart from the potential impact of the business combination on indirect taxes, investors should emphasise determining whether it is in its interests to either purchase the company’s shares or its assets directly. Purchasers should also analyse whether tax losses and other deferred tax assets of the company may be carried forward in the future. Tax losses and deferred assets may be used in the future, especially if a change of control occurs, subject to certain limits.

Types of acquisition vehicle

What form of acquisition vehicle is typically used in connection with a real-estate business combination, and does the form vary depending on structuring alternatives or structure of the target company?

Using Spanish SPVs (which tend to be limited liability companies, since they generally give their owners more flexibility) through a double-tier structure to invest in properties is a common investment structure owing to the beneficial tax treatment applicable under certain circumstances.

Note that SOCIMIs are subject to zero per cent CIT if they fulfil some investment requirements (see question 35). Other special regimes are available for collective investment undertakings to invest in real-estate assets, which are subject to 1 per cent CIT if they fulfil the applicable investment and legal requirements, and for housing rental entities, which may benefit from 85 per cent CIT relief on rents deriving from the lease of dwellings.