Today we are discussing a very special case that we are sure you’ll find interesting.
Suppose that we establish a company to construct one single house, and while we are building it a buyer appears who wants to take over the company, that is to say, they will be directly acquiring the company shares and indirectly acquiring the property. So, the question is, should VAT be applied to the sale of these company shares?
Let’s discuss regulatory development, because it is not simple.
Firstly, let’s look at the taxation of the sale of a company, which is the legal action we sign in a public deed when the time comes, that is to say, when the house construction is complete.
On the one hand, Spanish VAT Law 37/92 (Article20.One.18th.letter k) states that the following financial operations shall be subject to and exempt from tax:
“k) Services and operations, except deposit and management, relating to shares or interests in companies, obligations and other securities not mentioned in the aforementioned points in this section, excluding the following:
c’) Any securities that are not admitted to trading on an official secondary market, carried out on the secondary market, by means of which the transfer was intended to avoid the payment of the tax corresponding to the transfer of the property owned by the entities represented by such securities, pursuant to in Article 108 of the Spanish Securities Market Law.”
Consequently, share transfer operations shall be subject to and exempt from tax, unless one of the exemptions established in the Spanish VAT Law apply.
In particular, point c’) refers to the possible application of the anti-fraud clause from former Article 108 of the Spanish Securities Market Law 24/1988, of 28th July, currently Article 314 of the Consolidated Text of the Spanish Securities Market Law, approved by Royal Legislative Decree 4/2015, of 23rd October (hereafter TRLMV), which establishes the following:
“1. The transfer of securities, whether admitted to trading on an official secondary market or not, shall be exempt from Value Added Tax and Tax on Property Transfers and Documented Legal Procedures.
2. The transfer of securities which are not admitted to trading on an official secondary market carried out on the secondary market are exempt from the provisions of the previous section, which shall be taxed by the tax to which they are subject as onerous transfers of immovable property, when the transfer of such securities was intended to avoid payment of the taxes that would have been imposed on the transfer of the immovable property owned by the entities to which such securities represent.
Unless proven otherwise, and without prejudice to the provisions set forth in the previous paragraph, it shall be understood that you are acting in order to avoid payment of the tax corresponding to the transfer of immovable property in the following cases:
a) When control is obtained over an entity whose assets consist of at least 50 percent of properties located in Spain which are not subject to business or professional activities, or when, once said control has been obtained, the participation quota is increased.
b) When control is obtained over an entity whose assets include securities which allow the control of another entity whose assets consist of at least 50 percent of properties located in Spain which are not subject to business or professional activities, or when the participation quota is increased once said control has been obtained.
c) When the securities transferred have been received for contributions of immovable property made for the incorporation of companies or the increase in their share capital, provided that such assets are not affected by business or professional activities and that no period of three years has elapsed between the contribution date and the transfer date.”
It can be observed that Section 2 of Article 314 excludes the possibility of applying the exemption “when the transfer of such securities was intended to avoid payment of the taxes that would have been imposed on the transfer of the immovable property owned by the entities to which such securities represent”.
That is to say, the Law clearly states that if you try to avoid payment of taxes, VAT or TPO shall be due (whichever applies), in such a way that if the “intention” is to transfer properties and avoid paying one of these taxes, this Article directly penalises said practice, entering into the discernment of whether or not one is acting with “animus defraudandi” for any of the three subsequent cases.
The Article adds three cases in which it is presupposed that one is avoiding the payment of taxes, unless proven otherwise. The question is whether this list of three cases presupposing tax avoidance is a closed list or if other cases can be included, since the Article does not clarify this. However, the majority of the Spanish General Tax Authority’s Binding Consultations indicate that the list is not closed, but rather that there may be other cases. In any case, there is no doubt that “animus defraudandi” shall result in charging the corresponding tax.
Article 45.1.B.9 of the consolidated text regarding Tax on Property Transfer and Documented Legal Procedures (or ITP-AJD using its Spanish abbreviation), approved by Royal Legislative Decree 1/1993, of 24th September, establishes that:
“The tax benefits applicable in each case to the three types of encumbrance referred to by Article 1 of the present Law are as follows:
- B. The following shall be exempt:
9. The transfer of securities, whether they are admitted to trading on an official secondary market or not, in accordance with the provisions set forth in Article 108 of the Spanish Securities Market Law 24/1988, of 28th July.”
It is evident that the transfer of securities is exempt in accordance with the VAT regulation and the ITP-AJD, therefore we must refer to the aforementioned Article 314 TRLMV (previously 108 LMV).
In the example given at the beginning of this post, the sale of shares would suppose that we are actually transferring a property, but did we do it with the intent of defrauding? The actual obligation to tax through VAT (in this case VAT would apply since it is the first transfer) will depend on if we are considered to be attempting fraud or not.
It is therefore evident in our case that the transfer of shares supposes the sale of the recently-constructed property. However, the Spanish Tax Office’s interpretation of the transfer of said shares cannot be elucidated until after the operation has been carried out.
- Consultation number V2198-17 of the General Sub-Directorate of Taxes, of 29th August, regarding the case of a company that transfers its shares and whose assets consist of more than 50% of properties “involved” in economic activity, says that:
”…it can be gathered from the transcribed precept that the exception to the general rule of exemption with regards to the transfer of securities subject to Value Added Tax or Tax on Property Transfer and Documented Legal Procedures requires that the taxpayer has attempted to avoid the tax corresponding to the transfer of the property owned by the entities that such securities represent, which the competent management authority must prove.
However, the precept establishes some “iuris tantum” presumptions of action with a view to avoiding payment of the corresponding tax, in which case the tax authority must only verify that the factual assumptions forming the objective element of the presumption are present, since, once the existence of such factual assumptions has been proven, the intention to evade is deemed to have been proven and the burden of proof is transferred to the taxpayer who, in order to avoid taxation of the transfer of securities as a transfer of immovable property, must prove that there is no intention to evade.
CONCLUSION: One: The transfer of securities through which control of a company is obtained whose asset is made up of more than 50% by immovable properties included in economic activity does not fulfil the requirements which render applicable one of the “iuris tantum” presumptions mentioned in Section 2 of Article 314 of the TRLMV. Therefore, the transfer of said securities shall be exempt from Value Added Tax and the Tax on Property Transfers and Documented Legal Procedures, unless the Tax Authority proves that said transfer involved an attempt to avoid the payment of taxes that should have been charged for the transfer of immovable property belonging to entities represented by such securities.
In accordance with Article 91 of the Spanish VAT Law, the first property transfers suitable for their use as a dwelling shall be subject to this Tax, specifically at the tax rate of 21%, including two annexes (garage and storage room).
This operation could probably not carry VAT and therefore the shares could be sold without any taxation, since it is obvious that the property being constructed is involved in the company’s economic activity. However, it would remain to be seen whether there is an attempt to defraud or not, therefore we should be aware of the full operation and its details.
For example, it is understood that if the construction of the corporate structure to build a single property and sell the shares has been carried out and the intention to sell those shares is known from the beginning and with a direct agreement with a buyer from the moment the construction begins, then it is likely that an inspector will determine that there is indeed an intent to defraud. If, on the other hand, we begin construction with the intention of selling and going on to construct more properties, but meanwhile a property buyer has appeared who would prefer to take over the company for some reason, then it could be defended that no VAT applies to the transfer (nor TPO), thus the operation would be exempt from taxes.
In any case, if it is decided that the transfer is to be exempt from VAT and TPO, it is important to clarify that it is the Tax Authority that must prove the “animus defraudandi” in the operation, because, given that the immovable property is involved in the business’s economic activity, the cases of exception established in Article 314 of the TRLMV would not be considered.
As you can see, this can be interpreted in many ways, all of which are acceptable, so, yet again, we highly recommend that you consult real experts in the field before carrying out any real estate operation.
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 At present, when we discuss Article 108 of the LMV, we are referring to Article 314 of the Consolidated Text of the Spanish Securities Market Law, since this article replaces the former one.
 TPO: Modality of Onerous Transfer Tax on Property Transfers and Documented Legal Procedures