On 20 May 2020, the Supreme Court in appeal number 3696/2017 ruled on the taxation of the release of a debtor in a novation of a mortgage loan, determining that it is taxable for Stamp Duty Tax (hereinafter, AJD).
This ruling is a substantial change in the operation carried out to date and is already being applied by the Directorate General of Taxes (hereinafter, DGT), despite the controversy generated in this respect. It is therefore necessary to analyse it in order to be able to identify acts that are subject to taxation according to this ruling.
The case referred to in the Supreme Court ruling is a case of the extinction of a condominium in which one of the co-owners receives a property that is awarded to him and fully assumes the mortgage loan that encumbers it, and that subsequently to the act of the extinction of the condominium he formalises in a public deed with the credit institution, personally assuming responsibility for the loan in which he is subrogated, releases the rest of the debtors and extends the mortgage loan.
The Court’s reasoning is based on the fact that, although the mortgage guarantee on the property is not altered, there is a subjective modification of the responsible parties, who have access to the register and are benefited by this release, so that the legal requirements for subjecting the deed to tax are met. This release is what the Supreme Court understands to be taxed by AJD.
This occurs, even if it is due to the extinction of the condominium, releasing those affected by the extinction, respectively, from the liability for the mortgage loan, specifying their liability exclusively for the properties of which they are the successful bidders after the extinction.
The DGT, in consultations V3116-20 and V3397-20 already applies this criterion. In both cases there is a liquidation of community property in which one of the spouses is awarded a property, assuming the mortgage loan that encumbers it in its entirety, and subsequently the spouse who is awarded the property and subrogates the mortgage loan in its entirety, extends it and releases the other spouse from the debt and liability, intends to grant a deed with the credit institution.
Based on the Supreme Court ruling, the DGT in both cases ( resolves that the release in a notarial deed of a mortgage loan debtor of a property is subject to the modality of Stamp Duty of the Transfer Tax and Stamp Duty (Actos Jurídicos Documentados del Impuesto sobre Transmisiones Patrimoniales y Actos Jurídicos Documentados).
The taxable person will be the person requesting the execution of the notarial document, in these cases the spouse who is the owner of the property and who consents to release the other party from the liability for the loan.
The taxable base will be the total mortgage liability that is released, i.e. the capital plus interest and any other concept included in the same (such as costs or others).
According to the criterion adopted, it would not be subject to AJD if the release is carried out internally between the co-debtors, without it being formalised in a public deed or the bank being present. No express communication is made to the Registry and, therefore, there is no alteration in the applicable regime, as it would not meet the requirements for being subject to tax. Furthermore, taking into account that article 118 of the Mortgage Law allows for the release not only by express consent of the creditor, but also tacitly, the possible additional subjection to AJD would be excluded.
This is why we would like to remind you once again that it is very important to analyse the transaction before formalising it, in order to reduce the tax charge as far as possible, or at least to study alternatives, or simply to calculate whether the transaction can be economically assumed and avoid surprises or unexpected tax settlements.