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A Welcome Anti-Avoidance Provision Lacks Legal Certainty
Any company planning to acquire securities in an entity that owns real estate located in Spain should consider Article 108 of the Securities Market Law 24/1998 (Ley de Mercado de Valores "LMV"). While that Article provides a transfer tax exemption for transfers of securities and confirms the exemption established under VAT Law, it also levies transfer tax on transfers of securities that meet the following conditions:
1) the transferring entity's assets are at least 50% composed of real estate located in Spain
2) the acquirer obtains more than 50% of the capital stock of the entity.
If both conditions are met, the transaction will be subject to transfer tax at the rate of 7% or 8% (depending on the Autonomous Community) of the actual (market) value of the real estate owned by the transferring entity. Taxand Spain considers Article 108 of the Securities Market Law and looks at how multinationals can evaluate it under the anti avoidance provision.
Both the Preamble to the LMV and the Central Economic Administrative Tribunal and Supreme Court itself in various judgments have recognised that the aim of Article 108 is to prevent taxpayers from avoiding transfer tax on real estate transfers by interposing corporate concepts. It is, therefore, an anti-abuse provision aimed at preventing tax fraud.
Article 108 LMV's compatibility with the European Community regulations has resulted in a controversial debate, mainly because of the following:
a) its impact on VAT neutrality, since it does not allow the acquirer to elect to be taxed under VAT, which tax would be deductible and would not entail a tax cost of any kind
b) the risk of that provision being applied to transactions not aimed at avoiding tax but based wholly on business reasons, such as expansion or diversification of the acquirer's operations.
On 18 October 2011, the Supreme Court, after having submitted a question for a preliminary ruling to the European Court of Justice (ECJ) on which a decision was handed down through an Order dated 6 October 2010 upheld a cessation appeal where it recognised the anti-avoidance aim of Art. 108 LMV. The ECJ nonetheless considered that such provision applied to all transactions meeting the two conditions specified, without the need to evaluate the existence of an avoidance aim. It also held that as the Community Legislation does not distinguish between asset-holding companies and companies that perform an economic activity, transfers of a going concern are not excluded from taxation.
In a judgment dated 17 October 2011, the Supreme Court found in favour of the taxpayer, in a case of 100% acquisition of the shares in an entity whose assets included a hotel in Mallorca, the actual value of which, according to the tax authorities' calculations, entailed more than 50% of its assets. This led the tax authorities to assess transfer tax on the transaction.
The conclusive factor in the judgment was the need to compute as an asset, for purposes of calculating the 50% ratio, the actual value of an internal goodwill not recorded for accounting purposes that arose on the transfer of the shares. However, in this case, the Supreme Court examined the circumstances of the transaction and the nature of Art. 108 LMV as an anti-avoidance provision, and held that it was evidenced that the acquirer did not in any case intend to acquire real estate (the hotel) and commit fraud or avoid transfer tax. In other words, the Court evaluated the absence of an avoidance aim.
The ECJ's Order entails applying Art. 108 LMV literally, automatically and indiscriminately, resulting in an important increase in the tax cost of any transaction of this kind. A teleological interpretation would be more in keeping with its nature and would mean the application of transfer tax in cases where the direct transfer of the real estate would have been subject to such tax and also its application to those cases where the existence of an avoidance aim has been evidenced, as transpires from the judgment of 17 October 2011.
The contradictions resulting from the almost simultaneous judgments of the Supreme Court, bring to light a high degree of legal uncertainty in relation to this type of transaction. It is therefore necessary to consider a complete overhaul of the wording of the provision to afford an acceptable level of legal certainty through a more flexible and reasonable interpretation in keeping with the anti-avoidance aim recognised both by the law and by the administrative and court bodies.
In the meantime, it would be prudent that any transaction to acquire control of entities whether direct or indirect, that own real estate in Spain should be rigorously analysed and evaluated especially from an indirect tax perspective, to avoid surprises in relation to the taxable event contemplated in Article 108 of the LMV.
Your Taxand contact for further queries is:
Miguel Angel Serra
T. +34 971 227 114
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