The Supreme Court, in its Sentence dated 23 September 2009, has referred a question for a preliminary sentence to the European Court of Justice (ECJ) in relation to the application of Article 108 of the Spanish Securities Market Act (LMV), a provision that determines the rate for the Transfer Tax (TPO) on transfers of stakes in companies whose assets are more than 50% comprised of real estate.
Historically this provision has been the target of constant criticism because, while its purpose is to prevent the concealment of real estate sales (taxable by TPO or VAT) following the transfer of shares/stakes (fiscally exempt), in those cases in which the transfer of real estate is subject to VAT instead of TPO and such VAT is deductible for the purchaser, the application of the provision involves a cost of 6-7% for TPO which would otherwise not have existed.
To this respect, the purpose of such referral to the ECJ is to clarify whether the application of Article 108 LMV is appropriate in accordance with the European rules the following cases:
- When, following the direct transfer of the real estate (as opposed to the transfer of shares representing share capital in the company) TPO is not applicable, and VAT is instead levied on such transfer.
- In those cases of fully operational companies where it is impossible to disassociate the real estate from the business activity pursued on it.
In accordance with the foregoing, in practice the main cases in which taxpayers are obligated to pay TPO in the transfer of shares/stakes by application of the aforementioned provision could consist of the acquisition of stakes in the following types of companies:
- Those devoted to the activity of construction or real estate development in which the value of the plots and/or land amounts to more than 50% of the total value1 of the asset. Please note that while the general rule holds that in this type of companies, the real estate that forms a part of the current assets is not taken into consideration, land and plots are exempt from such rule and as such do form a part of this calculation.
- Companies for which, by virtue of their activity, it is customary for the valuation of real estate to surpass the aforementioned 50% threshold (case for example of hotel companies, or companies that operate technology, theme or renewable energy parks, as well as companies that lease/manage shopping and business centres, among others).
To this regard, consider that it is foreseeable that the aforementioned question for referral may be resolved within the course of approximately one year, and the ECJ may possibly understand that Article 108 LMV is not applicable in the cases of reference, and its resolution may be retroactive.
In such case, taxpayers affected by the resolution would be empowered to seek the refund of any TPO paid, providing that the statute of limitations on their rights has not elapsed by the time of the ECJ sentence, which is 4 years.
In accordance with the foregoing, the avoidance of the statute of limitations on the foregoing transactions is particularly important – particularly in those transactions with a duration greater than 2 but less than 4 years, which are those that run the risk of becoming final within the time it takes the ECJ to deliver its sentence – in order to be able to claim the amount of any TPO “unduly” paid, as well as the corresponding default interest.
This is why we deem it important:
- To monitor the sentence of the ECJ in order to, where appropriate, prepare any corresponding applications for refunds
- To act as quickly as possible on any appropriate legal actions in order to prevent the lapse of taxpayer rights during the time in which the ECJ makes its sentence.
Our tax department is at your complete disposal to monitor this procedure, undertake any legal actions necessary to suspend statutes of limitation and, as appropriate, file the documentation necessary to obtain the refund of the TPO.