Background: one-employee rule
According to the Spanish Corporate Income Tax Act, an entity
that carries out real estate rental activities must have at
least one employee with a full-time labour contract to be
deemed an entity performing a 'business activity' (i.e. its
income is substantially derived from activities other than
passive investment).
In addition, Spanish companies are entitled to a
participation exemption on capital gains arising from the
disposal of qualifying entities. To benefit from this regime, a
company must have a holding for at least one year and a 5%
stake in the capital (or an acquisition value over €20
million ($24 million)) in a subsidiary which performs a
business activity.
Since 2015 when the new regime entered into force, certain
court and administrative pronouncements have reviewed the
fulfilment of the business activity requirement for entities
holding rental-generating real estate ('prop-cos') and have
delimited the so-called 'one-employee rule', particularly in
cases of participation exemptions on the disposal of prop-co
shares.
Sufficient condition?
In a case where it was examined if having one single
employee was a sufficient condition for a prop-co to be deemed
a business activity entity, the Spanish Supreme Court (judgment
of December 7 2016) concluded restrictively. For the court, the
relevant question was whether there was a 'minimum charge of
work' as regards the intensity of the activity of the employee
in relation to the management of the real estate asset.
Necessary condition?
On the contrary, according to several tax rulings issued by
the Spanish Directorate General for Taxes, there are situations
in which, based on economic reasons, an entity could manage
real estate assets without having employees, by subcontracting
material and human resources with a non-related professional
rental manager. Consequently, contracting an employee would not
be a necessary condition either. Please note that as the latter
is an extensive interpretation which moves away from the
literality of the Corporate Income Tax Act, future tax rulings
– including decisions from the Central
Economic-Administrative Tribunal – could amend the
criteria and conclude more restrictively.
In these cases, where the prop-cos referred to had no
employees and held properties in shopping malls, hotels or
offices, some indicators of the activity of the real estate
manager (such as the number of leased properties and tenants or
the volume of income of the outsourcing contract) were compared
to those which would correspond to a full-time employee. And
when according to that evidence the substance of the rental
activity was relevant, the Directorate General for Taxes
concluded that the prop-co had performed a business activity
and thus, the participation exemption would apply in the case
of a transfer of that prop-co's shares.
What´s next?
Despite these permissive outsourcing criteria, the minimum
charge of work concept does not provide full tax certainty to
all investment structures in real estate implemented through
prop-cos, as the absence of a safe harbour rule may permit tax
authorities to reassess the situation according to the facts
involved in each particular case.
In addition, there is a precedent (tax ruling V2909-16) in
which the Directorate General for Taxes stated that a principal
purpose test – anticipating some BEPS provisions
– should be done in order to determine whether the
principal aim of a prop-co structure was to indirectly avoid
taxation on the disposal of real estate.
While new pronouncements do not clarify the situation, real
estate structures through prop-cos in Spain, including those
held by non-resident investors, should focus on strengthening
their economic substance, in accordance with new post-BEPS
taxation paradigms.
|
Javier Calatayud
Apellániz |
Javier Calatayud Apellániz (javier.calatayud@garrigues.com)
Garrigues Valencia – Taxand Spain
Website: www.garrigues.com