Let’s imagine a company that is constituted for the promotion and construction of a house. The house and the plot are then assets of the company.
While the house is being built, someone decides to buy the house with the 100 % of the acquisition of the property shares of the company. In other words, “acquiring” the company through the purchase of the 100% of the property shares.
In this way, the buyers “buys” directly the company, although, indirectly, what he is doing is acquiring the property.
– In case the acquisition of the property occurred directly, VAT would be paid in the event that said property was linked to the seller’s business assets.
– However, the acquisition of the property would pay ITP (Transfer Tax) if that property was not affected to the seller’s business assets.
But, in the event that we are dealing with, the purchase of the company through the acquisition of all its shares, does it pay VAT or ITP? .
The VAT law expressly states that the acquisition of said shares or participations is EXEMPTED, provided that the «real will” or intention of said acquisition had not been to «avoid» the payment of the tax that had been generated in the assumption of the direct acquisition of the property.
Thus, there is an ANTI-FRAUD RULE in the Spanish tax system that expressly states the following (article 108 of Law 24/1988, of July 28, on the Stock Market, current article 314 of the Consolidated Text of the Market Law of Securities, approved by Royal Legislative Decree 4/2015, of October 23 (hereinafter, TRLMV):
«1. The transfer of securities/shares will be exempted from Value Added Tax and Tax on Patrimonial Transmissions and Documented Legal Acts (Transfer Tax and Stamp Duty).
But, the law also says:
The transfers that will be taxed by VAT or ITP when through such transfers the “real intention” it would have been to evade these tax payment.
Without prejudice to the provisions of the preceding paragraph, it shall be understood, unless proven otherwise, that the act is carried out with the “intention of avoiding” VAT or ITP payments in the following cases:
- When control of an entity is obtained whose assets consist of at least 50 percent of properties located in Spain, that are not related/affected to business or professional activities, or when, once said control is obtained, the participation quota in it increases.
- When control is obtained over an entity whose assets include shares that allow it to exercise control over another entity whose assets are made up of at least 50 percent of properties located in Spain that are not related/affected to business or professional activities , or when, once said control is obtained, the participation quota in it increases.
- When the transferred shares have been received by the contributions of real estate made on the occasion of the incorporation of companies or the increase of its share capital, provided that such assets are not affected by business or professional activities and that between the date of contribution and the transmission of a period of three years had not elapsed. «
When any of the above-mentioned cases occurs, the Spanish administration will immediately apply the Anti-Fraud rule, and will consider said cases subject to the corresponding VAT or ITP-AJD tax. It will be the purchaser who has the «burden» of proving that his true motivation was never the avoidance of the payment of such taxes.
In the example of this article, the sale of the shares would mean that parties are actually transferring a property, but what are they doing it with the intention of defrauding? – The true obligation to pay VAT (because in this case there would be VAT as the first transmission), will depend on whether we are dealing with an attempted fraud or not.
The key to do not pay VAT or ITP: The real estate must be «affected» to an economic activity of the company, whether in this case the promotion or construction of houses, or the purchase / sale of land, or rent, etc.
Therefore, the transfer of securities/shares to which control of a company is acquired whose assets are made up of more than 50 percent of real estate related to an economic activity does not meet the requirements for the Anti- Fraud rule to apply.
Thus, the transmission of such shares will be exempt from Value Added Tax and Tax on Patrimonial Transmissions and Documented Legal Acts (ITP-Transfer Tax), unless the Spanish Administration verifies that with such transmission it has been intended to evade the payment of the taxes that would have been levied on the transfer of the properties owned by the entities to which these values represent.
This transaction could probably not be taxed by VAT and therefore the shares can be sold without any taxation, since it is obvious that the property that is built is affected by the economic activity of the company, however, it would remain to be determined whether there is fraud or not, to we should know the complete transaction details.
- For example, we understand that if the construction of the corporate structure to build a single property and sell the shares has been carried out knowing from the beginning the intention to sell said shares and with a direct agreement with a buyer from the moment it begins construction, then an inspector is likely to determine that there is intent to tax evasion.
- If, on the other hand, we have started construction with the intention of selling and rebuilding more homes but in the meantime a home buyer has appeared who prefers to stay with the company for whatever reason, then it could well be argued that there is no VAT in the transmission (neither TPO), so the transaction would be exempt from taxes.
As you can see, the interpretations can be numerous and all of them acceptable, so again we strongly recommend that you go to real Spanish experts in the field before carrying out any real estate transaction.