Spain's tax authority allows tax exemption on renewable energy projects

A new pronouncement by the Spanish General Directorate of Taxes (SGDT) allows the application of the exemption provided for in the Corporate Income Tax Law to capital gains derived from the transfer of shares in subsidiaries dedicated to the development of photovoltaic energy projects, even though construction work has not yet begun.

The SGDT has recently published a binding ruling (CV 2200-23, dated 26 July) in which it put an end to the debate generated by the same consultative body in different rulings regarding the application of the exemption provided for in article 21.3 of the Spanish Corporate Income Tax Law in the transfer of company shares, when the transferred entity has only carried out preparatory activities, but has not effectively begun to carry out the activity.

In the ruling, the main activity of the holding company is the management, purchase and sale and technical analysis of all types of renewable energy installations, as well as the development, marketing and operation of photovoltaic energy projects. To this end, it holds a 100% stake in the share capital of several special purpose vehicles (SPVs) which are responsible for processing and promoting the photovoltaic projects in Spain. These are still in the promotion and development phase, although construction work has not yet begun. 

Photovoltaic SPVs

The SPVs carry out different activities ranging from the search for land suitable for a solar photovoltaic project to the analysis of technical and economic feasibility and the management of permits and licences necessary for the construction of the wind farm. However, in the case at hand, the SPVs do not have their own staff to carry out their activities, and their material and human resources are provided by their holding company and external suppliers.

Income exemption

In this context, and for the purposes of the possible application of the exemption, the SGDT considers that the SPVs would not be considered to be mere asset-holding entities, since their assets are assigned to the economic activity of promotion or development. In this regard, it clarifies that, to the extent that the activity carried out by the SPVs determines the existence of an organisation, on its own account, of its own or third parties' means of production or human resources, for the purpose of intervening in the production or distribution of goods or services on the market, the consulting entity may apply the exemption in respect of the positive income deriving from the transfer of its shareholding in the SPVs, even if the latter have not started construction work on the photovoltaic solar parks, if the other requirements are met.

In addition, with regard to the timing of the allocation of the income derived from the sale of the SPVs, the SGDT argues that the part of the income derived from the transfer of the shares in the SPVs that corresponds to the fixed part of the agreed price will form part of the tax base for corporate income tax purposes in the tax period in which it accrues, regardless of the date on which it is received. In relation to the part of the income corresponding to the variable component of the price, the amount of which depends on an uncertain future, it must be included in the tax base of the tax period in which the uncertain future events on which it depends occur, to the extent that at the time of the transfer of the shares of the subsidiaries it is not possible to make a better estimate of the variable price to be received.

Previous SGDT ruling

It should be remembered that the SGDT had previously ruled on a case very similar to the one under analysis in the binding ruling CV 2265/21 of 12 August (see our commentary in the following link) according to which the SGDT considered that the transfer of 100% of the shares of an entity owning land on which the necessary permits were being processed for the installation of a single plant was not exempt, insofar as the economic activity had not materially commenced.

Subsequently, the tax authorities of Navarre, in ruling of 17 October 2022, contradicting the criterion expressed by the SGDT in the binding ruling CV 2265/21, of 12 August, established that the exemption referred to in a case very similar to that previously analysed by the SGDT was applicable, on the understanding that the entity to be sold was not considered an asset-holding entity, because its elements were used to carry out an economic activity at least directly or indirectly in relation to the underlying global economic activity of the group.

And recently, the SGDT, in response to binding ruling CV 0863/23, of 12 April, (see our commentary in the following link) concluded that the income generated in the transfer of the shares of a subsidiary that had carried out the necessary activities to start operating in the online gaming market but had not materially started its activity, was exempt from Corporate Income Tax.

Osborne Clarke comment

In our opinion, this new ruling is clear and definitive, it provides some peace of mind to the renewable energy sector and closes the debate generated by different pronouncements issued by this same advisory body on the application of the exemption, provided that the conditions for this are met. Even so, we believe that the application of the exemption should be examined on a case-by-case basis.

Finally, and for practical purposes, once the possibility of applying the exemption to capital gains derived from the transfer of shareholdings in subsidiaries has been confirmed, we consider that it will be necessary to analyse the valuation of the services provided by the holding company or other group entities to the SPVs, which should always be carried out at market value. Thus, it seems appropriate to look at the group's transfer pricing policy in order to ensure that what is applied by the parties is correct.