Article 314 of the Consolidated Text of the Spanish Securities Market Law (former Article 108)

Law 7/2012 has substantially modified the drafting of Article 108 of the Spanish Securities Act (Ley 24/1988, de 28 de julio, del Mercado de Valores); an article which has now become Article 314 with the consolidation of the Securites Market Law (Texto Refundido de la Ley del Mercado de Valores).

Law 7/2012 has substantially modified the drafting of Article 108 of the Spanish Securities Act (Ley 24/1988, de 28 de julio, del Mercado de Valores – “LMV“); an article which has now become Article 314 with the consolidation of the Securities Market Law (Texto Refundido de la Ley del Mercado de Valores – “TRLMV“). Perhaps, the first issue to point out is that the reform has not questioned the need for this Article, although its starting point is that profound changes were necessary. In a system, such as ours, where there is a significant difference in tax treatment between share transactions and real estate transactions, inevitably it will be necessary to provide for measures to protect against real estate transfers hiding behind apparent share transfers.

The drafting of Article 314 is a direct answer to demands that former Article 108 LMV should be structured as a real anti-avoidance rule. Thus, with the reform, the Article now requires that intent to elude taxation be proven, since the Article specifically refers to the intent to “circumvent the payment of taxes” (“eludir el pago de los tributos“). Moreover, the Article no longer imposes an automatic Spanish Transfer Tax liability. It now provides that tax (VAT or Transfer Tax) will apply in accordance with the underlying real estate transfer. There is no longer a description of objective factual situations, which will result in an automatic Transfer Tax liability. Instead, it will now be necessary to prove that there was intent to circumvent tax and the applicable tax will be precisely the tax eluded. In other words, the Article is now structured as a real anti-avoidance rule.

More concretely, Article 314 TRLMV contains a general clause, in accordance to which share transfers, excluding stock listed on the exchange and transfers carried out in the primary market, will be taxed as real estate transfers. The tax levied will be that which would have applied, had such real estate transfer been carried out directly and provided it can be proven that there was intent to avoid such liability. Under the general clause of Article 314 TRLMV, there is no need to analyse the assets in the company, the shares of which are being transferred. Neither does the Article require the transfer to result in the acquisition of a controlling stake. The general clause only focuses on the need for Tax Authorities to prove intent to avoid taxation.

The general clause is complemented with three scenarios, where it is presumed that the taxpayer has shown such intent to avoid taxation. The burden of proof is therefore shifted onto the taxpayer to dispel this presumption. These three scenarios are a direct reminder of the factual situations traditionally addressed by former Article 108 LMV. With the new wording, the intent to circumvent the taxation arising from the underlying real estate transfer is presumed (a presumption which the taxpayer can destroy). However, these presumptions do not apply where the share transfers relate to real estate, which is a business asset. Note that the new drafting does not completely exclude business assets transfers, since such assets are only excluded from the presumptions. The general clause, whereby Tax Authorities are required to prove intent to circumvent taxation, can equally apply where the real estate allegedly transferred is a business asset.

The wording of Article 314 TRLMV entails significant difficulties, since there are important uncertainties, which it does not resolve. As pointed out above, with former Article 108 LMV certain share transactions were automatically treated as real estate transfers, to which the same Transfer Tax levy was automatically applied, with the same rules as regards the determination of the taxpayer and of the tax burden. With Article 314, although a real estate transfer can also be presumed, the elements of such transfers are not defined. Moreover, it is now necessary to determine the proper taxation regime to apply to such transfer. Such taxation regime will determine, not only the tax burden of the transaction, but also whether the Article should apply. Indeed, in order to establish whether there has been intent to circumvent taxation, it is necessary to determine such taxation and the burden which would have applied.

In this context, the taxation regime of a real estate transfer will depend not only on the objective characteristics of the real estate and on its use, but also on the identity of the transferor and, eventually, also on that of the transferee. As pointed out, the Article itself offers no guidance. How should the underlying asset transfer be qualified? Should the real estate be considered as having been transferred by the company owning it? Or, on the contrary, should the transferor be deemed to be the shareholder taking part in the share transaction? Either choice can be decisive in terms of determining the taxation of the deemed real estate transfer and the results can greatly vary.

Additionally and with regard to the tax burden presumably avoided, which elements should be taken into account to compare the tax regime of the share transfer and that of the real estate transfer? A simple conclusion could be that there would always be a tax saving either in terms of Transfer Tax or Stamp Duty, or even in terms of a possible portion of non-deductible VAT (note that the deductibility of such VAT again is an issue, which the Article does not clarify). Is it enough with such simple theoretical exercise to determine that tax has been potentially circumvented and that the Article should apply?

It does seem that requiring proof of an intention to circumvent taxes should imply proving a certain subjective element, so that the theoretical exercise highlighted above should not be sufficient. However, proving the taxpayer’s frame of mind is so complicated as to warrant that certain objective elements will certainly serve as indications. Within such elements, the perceived tax burden of the underlying transaction will undoubtedly be an important sign. Such sign will inevitably carry more weight, the greater the amount of tax avoided.

Another item to take into account is how the tax principles contained in Article 314 TRLMV should be read in light of the wide definition now afforded under the Spanish VAT Law to a business unit. Should the underlying real estate fulfil the criteria to be deemed to amount to a business unit, it could be argued that share transfers in companies with such real estate would always lead to Transfer Tax savings. Aside from the fact that such transactions would undoubtedly become more expensive, would it be so easy to prove intent to elude tax in such a context?

As regards the need to prove intent and focussing on the way VAT operates, there is a mismatch between the taxpayer and the person actually bearing the burden of the tax, who could actually be presumed as attempting to circumvent taxation. Who should be considered as taxpayer for the purposes of Article 314 TRLMV? Should an audit take place, who should be considered as the “offender”? Moreover and as pointed out above, should the VAT be considered deductible?

Establishing the tax regime which should apply to the underlying real estate transfer is undeniably complex. For instance, it would be perfectly possible for the share transferor to be an individual or a company, not acting in the course of its business. Should the underlying real estate transfer be defined by focussing on the share transferor, it would be deemed to be subject to Transfer Tax. This would be the case even where, had the underlying company transferred directly the same real estate, such transfer could have been subject to VAT.

Conversely, should the conclusion be that the tax eluded is VAT, could it lead to a situation where the person charging VAT would not have been be able to be a VAT taxpayer? (This would be the case, for instance, with an individual not acting within the course of his or her business). How can taxpayers resolve the discrepancy between the different tax treatment given to the company owning the real estate or to the share transferor?

• Conclusion

As the above discussion highlights, the overall picture of the taxation of share transfers which may be deemed to cover real estate transfers has radically changed with Article 314 TRLMV. The new wording has potential far-reaching consequences, since it contains a general clause which in practice can operate as a default catch-all clause. Such general clause will give Tax Authorities the possibility to look at all those transactions not covered by the presumptions (i.e. the factual situations traditionally covered by former Article 108 LMV). For example, Article 314 TRLMV can now catch situations where the transfer has not implied the acquisition of a control stake; where the real estate does not amount to half of the assets in the underlying company; or where the real estate is artificially considered as a business asset. In all these cases, however, the Tax Authorities are required to prove that the taxpayer intended to circumvent taxation. Despite the obvious practical difficulties in the application of Article 314 TRLMV, this Article now provides Spanish Tax Authorities with a tool, the scope of which is, at least in theory, very wide. The Tax Authorities should now issue some much-needed guidance on how they intend to apply it.