On 19 December 2008 the above bill was published in the official congress gazette, “Boletín Oficial del Congreso” with a deadline of 10 February 2009 imposed for amendments. The bill will regulate the operation and taxation of incorporated entities dedicated to the letting of urban properties. This type of entity, known as SOCIMIs, represents the establishment of a new type of corporate body in Spain benefiting form a special tax regime that already exists in other countries of the European Union, Real Investment Trusts, REITS. The primary purpose of SOCIMIs is to encourage the letting of urban properties. These are of particular interest because the income that these organisations earn is not taxed, or if it is, is taxed at a considerably lower rate than the standard Spanish Corporation tax.  

In Spain the rate of Corporation Tax payable on SOCIMI’s income will be 18% and will be taxed on dividends paid. As such profits will not be taxed until they are distributed to shareholders. However, the standard rate of Corporation tax will apply on those profits earnt that do not stem from the entity’s principal activity or that stem from rent of an associated company.  

The most significant requirements of these entities are that:  

  1. They should be organised as a limited company, a “Sociedad Anónima” with at least 85% of their assets being real property, own at least three properties and that these properties be rental properties. In this way it will be possible to invest in land in order to promote properties destined for letting, in other SOCIMI, or in foreign entities with similar social objectives;  
  1. They must be quoted on regulated markets both in Spain and the European Union or European Economic Area;  
  1. The properties let must be let for at least 3 years if they are purchased or 7 if they have been promoted by the company;  
  1. They must have a minimal capital of €15 million and loans that do not exceed 60% of the company’s assets;
  1. They must earn at least 85% of their income through their primary activity, the letting of properties;  
  1. They must distribute the majority of their profits to their members. More specifically, they must distribute at least 90% of those profits that do stem from the company’s principal objective and at least 50% of the profits that do stem from disposal of property or shares;  
  1. The dividends distributed to individual shareholders, and to non residents without a permanent establishment in Spain, are exempt, and those received by corporate shareholders, are to be taxed through a mechanism which permits tax to be charged only at the tax rate of a corporate shareholder;  
  1. They must declare in detail in their Annual Reports, the profits obtained and their distribution.  

Failure to comply with any one or more of these 8 requirements will result in the loss of the tax benefits applying to SOCIMIs.  

The special tax regime granted to SOCIMI is optional and should be adopted in a General Meeting of shareholders and be communicated to the national tax agency, the “Agencia Estatal de Administración Tributaria”. Although the special tax regime is incompatible with the other special regimes regulated by “Título VII de la Ley del Impuesto sobre Sociedades” it is compatible with the special regime relating to mergers, acquisitions, swaps and contributions, regulated by the tax law governing corporates, the “Ley del Impuesto sobre Sociedades”.  

Insofar as applicable deductions are concerned, it should be noted that such companies can benefit from this special tax treatment on disposals of assets or shares which is known as Extraordinary Benefit Deduction. Capital gains obtained on those transmissions will benefit from a deduction of 6%.  

Once a company has declared itself a “sociedad anónima”, the use of property to create or increase capital is only possible with a valuation of an independent expert appointed by the “Registrador Mercantil”. The draft law establishes that the expert appointed should be from a property valuation firm, a “sociedad de tasacion”, indicated in the legislation of the mortgage market.  

In this way, this draft law establishes that as soon as it is approved and published in the “Boletín Oficial del Estado” it will enter into force and will have retroactive effect as of 1 January 2009.  

We understand that this measure opens the possibility that those entities that currently dedicate themselves among other activities to the letting of urban properties may split their businesses and transfer the real property designated for letting to a SOCIMI. In doing this, the company can benefit from the fiscal benefits of the special tax regime of mergers and acquisitions without tax implications, because the transmission is associated with a restructuring or company reorganisation. Further, it will benefit from a future tax rate of 18%, considerably lower than the current standard level of 30% corporation tax.  

There also exist benefits for individual shareholders. In general, Corporation Tax is charged at 30% on standard Spanish companies’ profits and additionally individual shareholders pay 18% tax on any dividends distributed. SOCIMI however are charged Corporation Tax at 18% on the dividends distributed but the individual shareholder is exempt of taxation.  

When a company enters or leaves this special tax regime, it will be treated in accordance with the general corporate tax regime. Therefore, if a company leaves the special tax regime having accumulated a series of financial losses, the company may offset these accumulated losses against any future profits for tax purposes.