Taxation in the assignment of a sales contract

The assignment of a contract in general is a legal figure that is not expressly regulated in our legal system. However, the definition of assignment of credits is included in the Civil Code, Article 1.526 et seq. This assignment of credits gives rise to the legal acceptance of assignment contracts of any type, all of which is fully accepted by doctrine and case law, based on the freedom of agreement set out in Article 1.255 of the Civil Code.

The assignment of a contract can be understood as the transfer made by a person (assignor) of the rights and obligations contracted by means of an agreement to a third party (assignee), who assumes these rights and obligations voluntarily. The assignment of these agreements is usually made in writing and signed by the parties, just as the initial legal transaction originated.

The assignment of purchase and sale contracts is known by the colloquial name of “pass” and during the real estate boom there were quite a few transfers that caused technical discussions about the taxation of these.

This transfer means that one person assigns to another (a third party) the contract of sale of a property that the assignor had previously signed, so that, in practice, a transfer is being made, without the rest of the clauses being modified. At first sight, this is a simple transaction with no further significance, as the seller continues to maintain his sole objective, which is to sell the property for a specific price, but the buyer has changed.

These legal practices have many more fiscal effects than are generally perceived, since the simple transfer of the contract gives rise to a taxable event whose taxable base is 100% of the value of the property. In other words, “passing on the property” can lead to double taxation. On the one hand, for the purchaser and subsequent transferor, it may entail the obligation to pay ITP for said transfer, as it is understood that the property is being transferred.

In fact, this tax operation also arises when someone signs a reservation of purchase in his/her own name and intends to deed the property in the name of a company, or in the name of him/her and his/her spouse, in the latter case he/she would be transferring at least 50% of the property, hence the importance of clarifying the reservation contract perfectly.

This same opinion is expressed by the Directorate General for Taxation in several binding consultations, a summary of which is set out below:

1. Consultation 0002-06 de 12/01/2006.

“the transaction whereby a person, the purchaser of a property under construction, has assigned to a third party the rights under the private purchase contract concluded with the developer, prior to the completion and subsequent delivery of the construction of that property, is a transaction subject to transfer tax and stamp duty (ITP and AJD), in the form of transfer of property for valuable consideration, in accordance with the provisions of Article 7. 1 of Royal Legislative Decree 1/1993, of 24 September, which approves the Consolidated Text of the tax, which provides that “transfers of property for valuable consideration by acts “inter vivos” of all kinds of goods and rights that form part of the assets of natural or legal persons” are subject to transfer tax”.

“As the contract of sale is a consensual contract that is perfected by the consent of the parties to the contract regarding the thing and the price, the day on which the private contract is concluded will be the date on which the taxable event is understood to have taken place and on which the tax becomes chargeable, in accordance with article 49.1.a) of the Consolidated Text”.

2. Consultation 1683-02 of 7/11/2002.

“It is considered that the transfer of 50% of the rights that the purchaser of the flat intends to make is onerous, i.e. it is effected by means of a price, given that, if this were not the case, such a transaction would constitute the taxable event for Inheritance and Gift Tax.

In accordance with the above premise, the transaction whereby a person, purchaser of a property under construction, has assigned to a third party 50% of the rights of the private purchase contract concluded with the developer, prior to the completion and subsequent delivery of the construction of said property, is a transaction subject to Transfer Tax and Stamp Duty, in the form of transfer of property for valuable consideration, as provided for in Article 7.1 of Royal Legislative Decree 1. 1 of Royal Legislative Decree 1/1993, of 24 September, which approves the Revised Text of the Tax on Property Transfers and Documented Legal Acts, which provides that onerous transfers by “inter vivos” acts of all kinds of goods and rights that form part of the assets of natural or legal persons are subject to transfer of property. According to Article 10.1 of the same legal text, the taxable base of the partial transfer of the rights of the private purchase contract is constituted by the real value of the property transferred or of the right that is constituted or transferred”.

3. Consultation 1494-06 of 6/12/2006.

“In addition to this general rule, Article 17.1 of the Consolidated Text establishes a special rule, according to which “in the transfer of credits or rights through the exercise of which certain assets are to be obtained and which can be estimated, tax will be levied on the same concepts and at the same rates as those carried out on the same assets and rights“.

In other words, in the case raised in the consultation letter, the real value of the property whose rights have been transferred by means of the transaction described above must be taken into account, since this is the property that the assignee of the rights in the private purchase contract will obtain when exercising them.

However, there are certain requirements set out in case law that allow the assignment contract to be considered valid if they are fulfilled, and these are the following requirements:

1. Acceptance of the assignment by the three parties involved in the equation.
2. That a contract with reciprocal obligations between the parties is created.
3. That in the contract that is assigned, not all the conditions foreseen with respect to the object of the contract have been fulfilled and finalised.

It is evident the need to pay the utmost attention in reservation contracts for the purchase of real estate, knowing perfectly well who the final buyers are and where the money comes from, in order to avoid surprises with the Tax Agency.