International Tax Review is part of the Delinian Group, Delinian Limited, 8 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Spain: Participation exemption for real estate rental entities

intl-updates

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.

calatayud.jpg

Javier Calatayud

Apellániz

Javier Calatayud Apellániz (javier.calatayud@garrigues.com)

Garrigues Valencia – Taxand Spain

Website: www.garrigues.com

more across site & bottom lb ros

More from across our site

An intense period of lobbying and persuasion is under way as the UN secretary-general’s report on the future of international tax cooperation begins to take shape. Ralph Cunningham reports.
Fresh details of the European Commission’s state aid case against Amazon emerge, while a pension fund is suing Amgen over its tax dispute with the Internal Revenue Service.
The OECD’s rules may be impossible for businesses to manage, according to tax experts from companies including Shell.
The UK government is now committed to replacing the ‘super-deduction’ with a 100% capital allowances regime to offset the impact of the corporate tax rise to 25%.
Corporate tax is set to rise in the UK for the first time in decades, but the headline rate remains historically low despite what many observers think.
President Joe Biden’s nominee is set to be confirmed as IRS commissioner for a five-year term.
British companies are waiting to hear the details of what will replace the 130% ‘super-deduction’ next week, while Spain considers stopping a major infrastructure company moving to the Netherlands.
President Joe Biden wants to raise corporate tax and impose a higher stock buyback tax on US businesses, but his budget proposal faces insurmountable obstacles in Congress, writes Ralph Cunningham.
EY is still negotiating the terms of the plan to split its audit and consulting functions, but the future of tax services is reportedly a sticking point.
Country-by-country reporting is the best option for safe harbour provisions under the global anti-base erosion rules, according to tax directors at companies including Standard Chartered Bank and Pernod Ricard.