Spain July 2012

RETT on share deals: The end of the story?

Once again the Spanish Real Estate Transfer Tax (“RETT”) rules on share deals involving
Spanish real estate rich entities hit the tax headlines. After the preliminary ruling issued in
2010 by the European Court of Justice (“ECJ”) confirming the compatibility of RETT
regulations with the Directive concerning indirect taxes on the raising of capital, the Spanish
Supreme Court is referring again a preliminary question to the ECJ to conclude on the
compatibility of such rules with the VAT Directive and with the freedoms of establishment
and movement of capital. Hopefully this time good news will come from Luxembourg.

RETT on share deals concerning indirect taxes on the raising of

The acquisition of shares in companies
whose underlying assets are directly or
indirectly mainly made up of real estate
located in Spain may be subject to Real
Estate Transfer Tax if the buyer acquires
more than 50% of the share capital or
increases his controlling stake in the
company.
RETT is payable by the buyer on the
market value of the underlying real estate,
typically at a rate of 7%. It should be noted
that these RETT rules were originally
introduced as an anti-avoidance
mechanism for cases where indirect
taxation on asset deals was intended to be
avoided through the implementation of
share deals.
2010: First preliminary ruling
capital allows Member States to
automatically impose RETT on share deals
without the need to demonstrate that the
transaction is tax driven, and (ii) whether
the said Directive allows RETT on the
transfer of the majority of shares in
companies mainly holding real estate
assets even though they are clearly
assigned and used for the purpose of a
different business activity.
In 2010 the ECJ concluded that the
Directive did not preclude legislation of a
Member State such as the Spanish RETT
rules on share deals, even in cases where
(i) there was no intention to evade tax, and
where (ii) the real estate rich companies
are fully operational and the immovable
properties cannot be dissociated from the
economic activity carried out by those
companies.

A preliminary question in connection with
RETT on share deals was referred by the
Spanish Supreme Court to the European
Court of Justice in 2009. The Supreme
Court asked (i) whether the Directive
The first round against Spanish RETT on
share deals was overturned at ECJ level.
Consequently the regulations remain fully
enforceable.
2 PwC
Real Estate Tax Services NewsAlert
Spain - July 2012
2012: A new preliminary
question
Now the Spanish Supreme Court is
referring new preliminary questions based
on the conflict between the Spanish RETT
rules and the VAT Directive and the EU
freedoms. In particular, the Spanish
Supreme Court is asking the ECJ to
consider the following questions:
 Is it a requirement of [the VAT
Directive] that transactions by a taxable
person involving the sale of shares
which amount to acquiring title to
immovable property be subject to VAT
and not be exempt, in view of the
exception made in respect of securities
giving the holder thereof de jure or de
facto rights of ownership or possession
over immovable property or part
thereof?
In summary, does the VAT Directive
require a taxpayer to „look through‟ an
acquisition of shares in a company to
the nature of the underlying assets of
that company?
 Does the [VAT Directive] permit a
provision in [Spanish Law] which
provides that the acquisition of the
majority of the capital of a company
whose assets essentially comprise
immovable property is subject to an
indirect tax other than VAT, namely
[RETT], without regard to the
possibility that the parties to the
transaction may be acting in a business
capacity, bearing in mind that had the
immovable property been transferred
directly, instead of transferring the
shares or interests, the transaction
would have been subject to VAT?
In Summary, does the VAT Directive
allow a tax authority to implement
legislation which replaces VAT with a
different indirect tax?
 Is it compatible with the freedom of
establishment...and with the free
movement of capital under [the Treaty
on the Functioning of the European
Union] for a provision of national law
such as [the Spanish RETT rules], to
provide that duty is chargeable on the
acquisition of the majority of the capital
of companies whose assets essentially
comprise immovable property situated
in Spain, without offering the
possibility of demonstrating that the
company over which the control is
obtained is economically active?
In summary, is RETT compatible with
EU principles on the freedom of
movement of capital?
Our View
 The VAT vs. RETT complex equilibrium
has historically created uncertainties in
the indirect taxation of real estate
transactions in Spain, not only in share
deals of real estate rich companies, but
also in respect of asset deals in
particular regarding the existence of a
going concern where the transfer would
be out of the scope of VAT and subject
to RETT.
 We understand that there are technical
grounds to expect that the ECJ may
conclude that share deals of real estate
rich companies should be subject to
VAT and not VAT exempt. This would
prevent RETT being applicable to
transfers of interests in such entities
between entrepreneurs.
 Under the scenario of a ruling
confirming the VAT taxation of share
deals, close attention shall be paid to
the wording of the preliminary ruling
and further developments, in order to
understand how the applicable
exemptions for certain real estate
transfers and the option to VAT may
work for share deals of real estate
companies.
 In addition, we cannot forget that
holding entities may not be regarded as
VAT taxpayers, and consequently their
activities fall out of the scope of VAT.
The review of the status of those
3 PwC
Real Estate Tax Services NewsAlert
Spain - July 2012

entities holding Spanish real estate rich

companies as a taxable person for VAT
purposes may become essential to
facilitate share deals in the event of a
ruling in favour of VAT taxation against
RETT.

 We cannot rule out that the current

RETT legislation may be amended in a
more VAT Directive friendly manner or
even abolished.

 PwC Spain recommends analysing any

past and potential deals in light of the
current circumstances and any further
developments. Regarding RETT on
share deals paid in the past, protective
refund claims should be considered for
those acquisitions close to the end of
their statute of limitations period, i.e. 4
years from date to date.
4 PwC
Real Estate Tax Services NewsAlert
Spain - July 2012

For more information, please contact your

local PwC real estate tax service provider
or one of the contacts below.
Global Nationally
Uwe Stoschek Spain
Global Real Estate Tax Leader
+49 30 2636-5286 Antonio Sánchez
uwe.stoschek@de.pwc.com +34 91 568 56 15
antonio.sanchez.recio@es.pwc.com
Europe, Middle East José L. Lucas
and Africa +34 91 568 56 07
David Roach jose_luis.lucas.chinchilla@es.pwc.com
Real Estate Tax Leader - EMEA
+352 49 48 48 3057
david.roach@lu.pwc.com

Central Eastern
Europe
Glen Lonie
Real Estate Tax Leader - CEE
+420 251 152 619
glen.lonie@cz.pwc.com

Americas
Paul Ryan
US Real Estate Tax Leader
+1 646-471-8419
paul.ryan@us.pwc.com

AsiaPacific
KK So
Real Estate Tax Leader - AsiaPac
+852 2289 3789
kwok.kay.so@hk.pwc.com

These New salerts are i ntended as general i nf or mation f or our clients. Concr ete acti on shoul d not be taken without ref erence t o the specific sourc es
giv en or advic e fr om y our usual PwC office. The c omments ab ov e do not purpor t to be sufficient inf or mati on to tak e a management deci si on.
Parts of this publicati on may not be c opied or otherwi se di ssemi nated without the written per mi ssi on of the publisher .

© 201 2 Pricew aterhouseCooper s. All ri ghts reserved. "Pw C" r efer s to the netw ork of member firms of Pricew ater houseCooper s Inter national
Li mi ted (Pw CIL), or , as the c ontext requires, indivi dual memb er fir ms of the Pw C netw ork . Eac h memb er fir m i s a separ ate legal entity and does
not act as agent of Pw CIL or any other memb er fir m.