Real estate investment in Spain: asset deals versus share deals

An extract from The Real Estate Investment Structure Taxation Review, 2nd Edition

Asset deals versus share deals

i Introduction

Investments in real estate in Spain can be structured as asset deals (buying the real estate directly) or share deals (buying the real estate through the purchase of the corporate vehicle that owns it). Both structures are common and the choice is mainly based on the advantages and disadvantages of each option: the tax impact (considered on a case-by-case basis); the due diligence effort (more significant in the case of share deals); and the risk assumption, whereby the purchaser must assume risks related only to the property (asset deal), or related to both the property and the company (share deal).

ii Corporate forms and corporate tax frameworkLimited companies

When setting up a business in Spain, foreign investors generally incorporate or acquire a limited company. The two main types of limited companies in Spain are public limited companies (SAs) and private limited companies (SLs). Both have legal personality, separate and distinct from that of their owners, who are not personally liable for the company's debts.

The choice between an SA or an SL is mainly determined by the scale of the business, the legal requirements (only SAs can be listed), the future ability to raise capita, the rules on transferability that partners want to apply, and the flexibility offered by SL regulations compared to SA regulations. Traditionally, small and medium-sized companies have chosen the SL form because its characteristics are more suitable (lower capital requirements, statutory restrictions on the transfer of quotas are more stringent than for SAs, and there is more flexibility and greater autonomy in deciding on the company's structure and organisation). In contrast, SAs have traditionally met the needs of larger companies.

Branch or representative office

As an alternative, foreign companies can establish a branch or open a representative office. A branch is a secondary establishment operating permanently as a representative of its parent company. Although it has a degree of independence from its parent company and carries out all or part of that company's business activities, it does not have a separate legal personality. Representative offices mostly carry out ancillary, accessory and instrumental activities (including information gathering, market research and local support). Like branches, a representative office does not have a separate legal personality. This means that the parent company of a branch or a representative office will be liable for their obligations and debts.

Other alternatives

Another investment option is to associate through a joint venture with a business already established and functioning in Spain. Venture partners often create an equity joint venture by incorporating a limited company or acquiring a stake in an existing company. However, Spanish law contemplates other joint venture alternatives:

1. temporary joint ventures, with no separate legal personality besides that of its members, created to carry out specific projects or services, such as an engineering or construction project;
2. economic interest groups, which are frequently created to provide centralised services for a group of companies, and are aimed at facilitating, improving or increasing the economic activity of their members, who are held jointly and severally liable, albeit subsidiarily to the economic interest grouping; and
3. joint accounts agreements, under which investors hold an interest in a business they do not manage by making contributions of money or in kind, which are not capital contributions, but give investors the right to participate in the positive or negative results of the business.

Corporate tax framework

Corporate income tax is levied on the worldwide income obtained by companies that are resident in Spain for tax purposes, regardless of the source or origin of that income. It is regulated under Act 27/2014 of 27 November.

Tax base

The tax base for corporate income tax is calculated on the declared accounting results (profit-and-loss account) and is subject to the adjustments required by Act 27/2014.

In general, accountancy expenses are considered tax deductible if they are duly registered in the company accounts and documented in a corresponding invoice.

Specific tax deduction rules apply to the following accountancy expenses: amortisation and depreciation of assets and rights, bad debts, and financial leasing agreements.

Under Act 27/2014, depreciation is allowed in respect of all tangible fixed assets (except land) and intangible fixed assets, based on their normal useful life. Different depreciation methods are available and depreciation rates are contained in official tables. In general terms, a maximum 2–3 per cent rate can be applied to buildings. Depreciation applies from the date the relevant asset is in working condition.

Net financial expenses are tax deductible up to €1 million per year. Net financial expenses exceeding this amount are tax deductible provided they do not exceed 30 per cent of annual earnings before interest, tax, depreciation and amortisation. A limitation additional to the general one described above applies to interest expenses derived from debt used to purchase shares in cases of tax consolidation groups or post-acquisition mergers under certain circumstances.

Tax deduction of impairment losses of the value of fixed tangible and intangible assets is applied to the tax year in which the asset is transferred to third parties or in the event of the winding up of the company.

Some expenses are considered non-deductible and must be adjusted to the tax base, including:

1. remuneration on equity (dividends);
2. corporate income tax duly paid;
3. criminal or administrative fines and sanctions;
4. gambling losses;
5. donations, gifts and contributions to internal provisions or funds equivalent to pension schemes;
6. expenses deriving from unlawful activities;
7. expenses for operations performed, directly or indirectly, with individuals or entities residing in tax havens, except where the operation is proven;²
8. financial expenses (interest) from debt-financing borrowed from a lender entity or entities that comprise a group of enterprises used to purchase shares in third entities or shares in other entities that belong to the same group of entities;
9. remuneration exceeding €1 million per year paid to workers because of the extinction of the labour or commercial relationship with the enterprise;
10. expenses incurred in transactions with related entities that, because of a different fiscal qualification of those entities, do not generate taxable income, or generate tax-exempt income or income subject to taxation below a 10 per cent tax rate;
11. tax on stamp duty acts paid on signing a mortgage loan deed; and
12. impairment losses in participations in quoted and unquoted entities.

Reduction of the taxable base: capitalisation reserve

Taxpayers subject to the standard rate are allowed to reduce their taxable base by 10 per cent of the increase in their equity, provided that this increase is maintained over a five-year period, and a separate reserve is recorded in an amount equal to the tax reduction, which must not be released over the five-year period. As a general rule, the increase in equity has to come from the undistributed income of the previous year. Therefore, shareholders' contributions or variations in respect of deferred assets should not be taken into account to determine the increase in equity. The capitalisation reserve is limited to 10 per cent of the positive income for that year. The limit is calculated on the taxpayer's taxable income without taking into account the adjustments for deferred tax assets or the offset of negative taxable bases.

Offsetting negative tax base

A negative tax base must be carried forward and offset against positive tax bases calculated in the following tax years without any temporary limitation.

The maximum percentage of income that can be offset by negative tax bases is 70 per cent of the positive tax base of a given year. The limit is calculated based on the taxpayer's taxable income before making adjustments to the capitalisation reserve.

However, companies may use €1 million of negative tax bases annually to offset their positive taxable income without regard to the 70 per cent limitation.

Specific limitations of 50 per cent and 25 per cent of the tax base before adjusting the capitalisation reserve and before offsetting apply when offsetting a negative tax base in the case of taxpayers whose turnover in the previous tax year exceeds €20 million.

The following are the general and specific limitations for offsetting.

Maximum offsetting negative tax base calculated as a percentage of tax base prior to capitalisation reserve adjustment and prior to offsetting
Turnover less than €20 million	70%
Turnover between €20 million and €60 million	50%
Turnover exceeding €60 million	25%

These limitations do not affect the right to offset €1 million of negative tax bases annually.

Tax rates

The current corporate income tax rate is fixed at 25 per cent.

A 15 per cent reduced tax rate is granted to newly created companies for the first tax period they have a positive tax base and for the following period.

Tax credits

A full tax exemption for double taxation is granted for dividends, profit distributions and capital gains deriving from the transfer of shares in other qualifying companies, whether resident or non-resident. For the company to qualify for the tax exemption, the taxpayer must hold a stake of at least 5 per cent in the company that is the subject of the share transfer, or the extent of the taxpayer's participation must be greater than €20 million, and the taxpayer must have had an interest in the company for at least one year before the date on which the dividends are payable or before the date of the transfer.

Special rules apply for this tax exemption when profit distributions or capital gains from the sale of participations derive from entities where income from dividends or capital gains from the sale of participations exceed 70 per cent of their total return.

Dividends from foreign sources and capital gains from transfers in qualifying foreign companies may also apply for this tax exemption provided that the requirements set out above are met. In addition, the profit distribution or the capital gain deriving from the transfer should correspond to a foreign entity subject to an income tax that is identical or analogous to Spanish corporate income tax and that tax rate should be at least 10 per cent. (this taxation requirement is deemed to be met if the foreign entity is resident in a country that has concluded a tax treaty with Spain that includes an exchange-of-information clause).

Losses derived from transfers in qualifying companies are non-tax deductible except when the company is liquidated.

A similar tax exemption is provided for foreign income derived from a permanent establishment (PE). Losses derived from foreign PEs are not tax deductible in the tax year in which losses are incurred but are deductible when the PE is liquidated.

Specific tax credits are granted for some corporate investments, such as research and development and technological innovation investments, and investments in film productions, audiovisual series and live performances of scenic arts and music.

Generally, foreign tax credit may be claimed for any foreign tax paid on foreign source income up to the amount of the tax payable in Spain on that income.

Special corporate income tax regimes

Corporate income tax regulations include several special tax regimes for some companies or activities, such as companies intended mainly to provide rental housing, Spanish real estate investment trusts (SOCIMI)³ and foreign-securities holding companies (ETVEs) regimes.⁴

The special corporate income tax regime for companies intended exclusively to provide rental housing provides for an 85 per cent allowance on the tax due (an effective tax rate of 3.75 per cent) on the income (excluding capital gains) arising from the lease of dwellings, provided the following conditions are met:

1. the taxpayer's main business activity must be the lease of dwellings located in Spanish territory;
2. the lease must be for permanent dwellings (not short-term or seasonal leases);
3. at least eight dwellings must be leased or offered for lease at any time of each tax period;
4. dwellings must be leased or offered for lease for at least three years;
5. each dwelling must be recorded separately for accounting purposes; and
6. at least 55 per cent of the income obtained during the tax year must derive from dwellings or at least 55 per cent of the value of the company's assets must be able to produce qualifying income (i.e., income arising from the lease of dwellings).

Dividends corresponding with this income benefit from a 50 per cent corporate income tax exemption for double taxation. This special corporate income tax regime for companies has neither regulatory nor listing requirements.

Additionally, the corporate income tax regime provides for special tax deferrals for mergers, spin-offs, contributions of assets, exchanges of securities and the change of address of a European company or a European cooperative company from one EU Member State to another. This special regime is based on the tax deferral of the income obtained by all persons or entities affected in the corporate restructuring. The tax deferral regime will not apply if the transaction concerned is fraudulent or carried out with the intent to evade tax and, in particular, if the transaction concerned is not carried out for valid economic reasons but with the aim of obtaining a tax benefit.

iii Direct investment in real estatePre-existing tax liabilities

In general terms, the purchaser of Spanish real estate assumes liability for outstanding payments in respect of the following taxes (up to the value of the real estate), regardless of who owned the property at the time the taxes became due for payment:

1. certain local taxes levied on an annual basis, such as RET within the four-year statute of limitations period; and
2. certain taxes levied on previous transfers or acquisitions (such as transfer tax, inheritance and gift tax, and non-resident income tax) within the four-year statute of limitations period,⁵

This liability is dependent on the prior declaration of default of the main debtor and of any jointly liable persons. Moreover, the new owner will only be liable in respect of the acquired real estate (up to its value) and not personally in respect of all of his or her assets.

Therefore, when acquiring a property, it is advisable to carry out a due diligence process to detect these potential liabilities.

Additionally, according to the Spanish General Tax Act,⁶ a purchaser may be considered the successor of a seller if the acquisition of the assets (e.g., a property) allows the purchaser to continue with the seller's business activity. As the successor of the seller's business activity, the purchaser would be jointly and severally liable for any tax liability the seller incurs in connection with the business activity carried out.

This joint and several liability, in the case of the succession of the business activity, can be limited or even eliminated by requesting from the competent tax authorities a detailed certificate of debts, penalties and other tax liabilities deriving from the seller's business activity, in accordance with Section 175.2 of the Spanish General Tax Act. The purchaser must request the certificate, with the seller's consent, before completing the transaction.

Once the certificate has been requested, the purchaser's liability would be as follows:

1. if the tax authorities does not issue the certificate within three months from its request, or if the certificate states that the seller does not have any debts, penalties or other pending tax liabilities, the purchaser would not be jointly and severally liable for any tax liability related to the seller's business; and
2. if the certificate states that the seller has certain debts, penalties or other pending tax liabilities, the purchaser would be jointly and severally liable only for those stated in the certificate.

Indirect taxation of the transfer of real estate in Spain

The acquisition of real estate located in Spain may be subject to VAT or transfer tax, depending on the transaction's legal and material features, and on whether the seller is a VAT payer.

The main difference between these taxes is that, in certain circumstances, VAT is a neutral tax, whereas transfer tax is always a final tax. Depending on the purchaser's business activities, VAT paid on the acquisition of real estate may be recovered by offsetting it against VAT charged on other transactions or by directly claiming a refund from the tax authorities.

VAT

VAT is regulated under Act 37/1992 of 28 December (the VAT Act).

If the seller is a VAT taxpayer (company or individual) and the transaction is considered a business activity, the transfer will be subject to VAT (unless it involves an ongoing concern), although an exemption may apply in certain circumstances.

Transfer of land

The transfer of non-developed land or land not suitable for construction is exempt from VAT.

The transfer of developed land or land in the process of being developed for building purposes is not exempt from VAT (the VAT rate is 21 per cent).

Transfer of buildings

The first transfer of buildings by the developer is not exempt from VAT.⁷ The general VAT rate is 21 per cent; 10 per cent for dwellings.⁸

Subsequent transfers are exempt from VAT unless the purchaser intends to demolish or restore the buildings, provided certain requirements are met. If the purchaser intends to demolish the buildings, the transfer may be exempt, depending on the land's urban condition. The transfer is not exempt if the purchaser intends to restore the buildings, provided certain requirements are met. Under the VAT Act, works are considered restoration if:

1. at least 50 per cent of the works are considered structural improvements (specific rules apply); and
2. the total cost of the works qualifying as restoration exceeds 25 per cent of the acquisition price of the building (if the building was acquired in the previous two years) or, alternatively, 25 per cent of the building's current value at the beginning of the works (excluding the land in both cases).

Regarding the first requirement, the VAT Act specifies that the following will be considered structural improvements:

1. consolidation works or works that modify the building's structure, facade or roofing;
2. the following analogous works:
   • structural conditioning work that enhances the building's safety, guaranteeing its stability and mechanical resistance;
   • reinforcement or conditioning work on the foundations, as well as work affecting or involving the treatment of pillars or building frames;
   • the extension of built surface area, above or below ground-floor level;
   • reconstruction work on facades and courtyards; and
   • the installation of elevators, including those for use by persons with disabilities that are designed to save architectural barriers; and
3. the following works related to restoration (although the costs of these can only be taken into account if they are lower than the sum of categories a and b above):
   • masonry, plumbing and woodwork;
   • work carried out to improve and adapt enclosures, electrical installations, water, air conditioning and fire extinguisher systems; and
   • energy renovation work, namely work carried out to improve the energy performance of buildings by reducing energy needs, increasing the performance of heating systems and installations, or installing equipment that uses renewable energy sources.

When a VAT exemption applies, the seller can waive the VAT exemption if the purchaser is entitled to deduct (in whole or in part) the VAT invoiced by the seller when transferring the real estate, depending on the purchaser's business.⁹

VAT accrues at the time of transferring the real estate. Any VAT on advance payments will accrue at the time they are made.

As a general rule, the VAT payer is the seller, who issues an invoice plus VAT, and the purchaser has to pay the price plus VAT, recovering this by offsetting it against VAT charged in other transactions or by directly claiming a refund from the tax authorities. This mechanism has a financial effect as it may take a few months to recover the VAT.

In certain cases, the VAT reverse charge rule applies. This means that the seller does not have to invoice VAT; the purchaser includes the output VAT in its own VAT form, while deducting the same amount as input VAT, provided no pro rata rule applies. This mechanism means that VAT will not have any financial effect.

For transfers of real estate, the VAT reverse charge rule applies when the VAT exemption is waived; when there is a mortgage on the property at the time of the purchase (even if the seller redeems the mortgage at that time with part of the purchase price according to the Spanish tax authorities' criteria) or when there are urban liens registered and in force in the property registry;); or if the seller is in the process of bankruptcy.

Transfers of real estate subject to VAT and documented in a public deed will be levied with stamp duty as set out below.

Transfer tax

The Tax on Transfers and Stamp Duty Act is regulated under the Legislative Royal Decree 1/1993 of 24 September.

When VAT is not applicable (i.e., when the transfer of the real estate is not subject to VAT, or subject but exempt and the VAT exemption is not waived), the purchaser will pay transfer tax on the current value of the real estate.

The transfer tax is also levied on the acquisition of real estate property included in an ongoing concern sold by a VAT taxpayer as those transactions are not subject to VAT.

The general transfer tax rate is between 6 and 11 per cent; different rates and exemptions apply depending on the regions where the property is located and the property's features. There is no stamp duty if the transaction is subject to transfer tax.

Stamp duty

When VAT applies, the purchaser has to pay stamp duty on the public deed documenting the transfer of the real estate.

The stamp duty rate is between 0.5 and 3 per cent. Different rates and exemptions apply depending on the region where the property is located and the property's features. The stamp duty rate is often higher for transactions in which the seller has waived a VAT exemption.

Tax on increase in value of urban land

The seller of urban land (regardless of whether there are buildings on it) will have to pay a municipal tax for the increase of its cadastral value. The amount to pay is determined according to the cadastral value of the land and the number of years the seller has held the property. The applicable tax rate will depend on the municipality where the real estate is located. The Spanish courts have concluded that this tax does not have to be paid if no gain is obtained from the transfer under certain circumstances.

Local taxes levied as a consequence of real estate ownership in Spain

RET is levied annually on individuals and corporations that own real estate in Spain. The tax due is calculated based on the cadastral value of the real estate and the applicable tax rate, which depends on the municipality where the real estate is located.

Depending on the municipality and the specific circumstances, other local taxes may be payable (such as garbage collection tax, garage-entrance tax, etc.)

Direct tax on holding real estate and disposal without a PE

According to the Spanish Non-resident Income Act,¹⁰ investment in real estate directly by a non-resident without a PE in Spain will be taxed in general:

1. at a 19 per cent rate for EU, Norwegian and Icelandic tax residents on their net income – all rental expenditures are tax deductible, including interest; and
2. at a 24 per cent rate in all other cases (on gross income obtained in Spain).

Where non-resident individuals hold property (excluding unbuilt land) without leasing it, the tax base would be a 'presumed income' calculated annually (regardless of whether the property is used) on either 2 per cent or 1.1 per cent of the cadastral value, depending on whether the cadastral value has been updated.

A special tax of 3 per cent of the real estate cadastral value will have to be paid annually by non-resident entities resident in tax havens with some exceptions.

Non-resident individuals are subject to the Spanish wealth tax on the net value of assets and rights that are located or can be exercised in Spain. This tax has a progressive rate ranging from 0.2 to 2.5 per cent although an exemption for the minimum of €700,000 for all taxpayers is applicable. Certain regions have approved particular rules for wealth tax purposes (rates or allowances), which could be more beneficial. Under the Spanish Wealth Tax Act,¹¹ EU tax residents are entitled to apply the wealth tax provisions established in the region where the assets or rights concerned are located or exercised, instead of the state legislation, which tends to be more burdensome. The Wealth Tax Act provides that real estate must be valued at the highest of the acquisition price, the cadastral value or any other value confirmed by the tax authorities relating to any other tax.

Capital gains from the transfer of real estate will be subject to the Spanish non-resident income tax at a 19 per cent rate. Certain allowances may be applicable (such as a 50 per cent exemption for capital gains from the transfer of urban properties acquired between 12 May and 31 December 2012, subject to certain requirements).

When a non-resident without a PE in Spain sells a real estate property, the purchaser has to withhold 3 per cent of the price to be paid on account of the seller's tax due for the capital gain. If that 3 per cent withholding is not made at the time of transfer, the payment or debt is transferred to the property and the purchaser therefore becomes liable for this tax (see Section II.iii, 'Pre-existing tax liabilities').

Permanent establishment taxation

Under the Spanish Non-resident Income Act, a non-resident is considered to act through a PE when he or she usually performs all or some of their business from any kind of facility or work place in Spain or acts in Spain through an agent authorised to contract on their behalf, provided that the agent habitually exercises these powers.

If a tax double tax treaty is applicable, it is necessary to abide by the PE definition in that treaty, which is usually more restrictive than the definition in the Spanish Non-resident Income Act.

In the case of real estate letting, the Spanish revenue authority considers that a non-resident acts through a PE in Spain when the letting activity could be considered an economic one under Spanish Personal Income Tax Act,¹² namely when at least one person is employed with a full-time employment contract.

Spanish PEs are subject to Spanish non-resident income tax on their worldwide income attributable at a general tax rate of 25 per cent. The tax base would be determined according to Spanish Corporate Income Tax Act, with certain particularities (such as rules limiting the deductibility of certain expenses).

iv Acquisition of shares in a real estate companyPre-existing tax liabilities

In a share deal, a company retains its pre-existing tax liabilities after its sale and therefore the purchaser acquires these liabilities. It is advisable to carry out a tax due diligence check to review the vehicle's tax position with respect to the main applicable taxes that are not statute barred, to identify and quantify the relevant tax risks, and to check whether the vehicle has fulfilled its tax obligations during the statute of limitations.

Indirect tax on acquiring shares in a real estate company

In general, the transfer of shares is not subject to indirect taxation, whether VAT or transfer tax.

However, under Article 314 of the Securities Markets Act (SMA),¹³ a transfer of non-quoted shares in the secondary market that leads to the acquisition of or an increase in control over certain companies owning real property located in Spain may be subject to transfer tax or VAT where applicable if, by means of that transfer, taxation of the real estate transfer is evaded.

Unless proved otherwise, tax evasion is considered to exist in the following circumstances:

1. the purchaser obtains control of the share capital of an entity where more than 50 per cent (at market value) of the total amount of the assets on its balance sheet consists of real property located in Spain not linked to a business activity;
2. the purchaser acquires shares of an entity whose assets include securities that enable the acquirer to exercise control over another entity, more than 50 per cent (at market value) of whose assets consist of real property located in Spain not linked to a business activity; or
3. the shares transferred were previously subscribed by the transferor in exchange for real estate not linked to a business activity transferred to the entity under incorporation or capital increase of the entity, and the time elapsed between the transfer and the previous acquisition is less than three years.

If taxation takes place within the scope of Article 314 of the SMA, transfer tax or VAT may be levied. The tax base will be the market value of the real property owned by the company whose assets are transferred, or the value of the real property owned by the subsidiaries in which a control position is reached by the purchaser, pro rata to the percentage of ownership.

Direct tax on dividends and capital gainsTaxation of dividend distributions

The taxation of dividends paid by a Spanish company to its shareholders is as follows.

Spanish corporate shareholders

There is a corporate income tax exemption for double taxation if:

1. the Spanish corporate shareholder holds a participation of at least 5 per cent in the subsidiary company or the tax base (i.e., the acquisition value) in the participation is higher than €20 million; and
2. the participation has been held uninterruptedly for at least 12 months at the time the dividends are due.

Corporate income tax is payable and there is a 19 per cent withholding tax rate if those requirements are not met. Requirement (b) could be met after the dividends are due, in which case, the dividends would be exempt from corporate income tax.

Non-resident shareholders

If the shareholder is a company resident in another EU or EEA Member State, dividends are exempt from non-resident income tax, provided that:

1. the shareholder holds at least 5 per cent of the subsidiary company's share capital;
2. both companies, the shareholder company and the subsidiary company, are subject to, and not exempt from, tax in their state of residence and have one of the legal forms referred to in the appendix to the EU Parent-Subsidiary Directive;
3. the distribution of the profits by the subsidiary company does not derive from the liquidation of the company; and
4. the EU parent company's participation in the subsidiary company has been held for at least one year at the time the dividend is due.

This tax exemption would be subject to the Spanish general anti-avoidance provisions.¹⁴ Otherwise, dividends are subject to withholding tax in Spain at the general 19 per cent tax rate unless the shareholder is entitled to apply a double tax treaty (in which case the applicable withholding tax would be the lower of the reduced tax rate established in the tax treaty and the ordinary domestic withholding tax rate of 19 per cent).

Taxation of potential divestment

Any income derived by shareholders as a result of the transfer of shares in a Spanish subsidiary company – or its liquidation – would be taxable in Spain as follows.

Spanish corporate shareholders

There is a corporate income tax exemption for double taxation if:

1. the shareholder holds a participation of at least 5 per cent in the project company or the tax base (i.e., the acquisition value) in the participation is higher than €20 million; and
2. the shareholding has been held uninterruptedly for at least 12 months at the time the transfer is carried out.

If these requirements are not met, there is no exemption from corporate income tax. The exemption is neither totally nor partially applicable in other specific cases, such as passive or holding companies.

Non-resident shareholders

The proceeds from divestment would be subject to non-resident income tax at the 19 per cent tax rate under the Non-resident Income Tax Act, as long as the relevant subsidiary company qualifies as a real estate company, unless the shareholder is entitled to apply a double tax treaty¹⁵ under which Spain is not entitled to tax this capital gain.

Real estate companies held by non-resident individuals: wealth tax

As a rule, non-resident individuals are subject to wealth tax on direct (not indirect) shareholdings in a Spanish company unless an applicable tax treaty prevents Spain from taxing this event.

Although the Spanish Wealth Tax Act provides that only a direct holding in a Spanish company is subject to this tax, the Spanish tax authority has concluded in several tax rulings¹⁶ that the indirect holding by a non-resident individual of company shares is taxable in Spain if the company's main assets consist of real estate located in Spain.

The Spanish Wealth Tax Act provides that shares in companies must be valued depending on whether the companies have been audited. If they have been audited, they are valued at book value (i.e., the net equity value) of the most recently approved financial statements. If they have been not audited or the audit was not favourable, shares in companies are valued at the highest of the three following values: nominal value, book value of the most recently approved financial statements, or capitalisation at a 20 per cent rate of the profits obtained during the three financial years completed before 31 December of the calendar year in question.

However, the Wealth Tax Act sets out an exemption for shareholders who hold a stake in family-owned companies, subject to certain requirements. Moreover, it provides a general minimum €700,000 exemption for all taxpayers. As mentioned above, certain regions have approved specific rules for wealth tax purposes (e.g., rates and allowances) that could be more beneficial and applicable to EU tax residents.