Buying a Company that holds a residential property is liable to transfer tax


3 Mar. 2013

Law 7/2012 to fight against tax fraud, approved last October 2012, has affected also to the taxes applicable to the transmission of securities (stocks, shares, etc.), modifying article 108 of Law 24/1998 on the Securities Market, which basically says that Transfer Tax is not generated, with some exceptions.

Previously, art.108 stated that the transmission of shares of a company which asset is mainly formed by real estate property (more than 50% of the assets), was considered as the transmission of the property itself in case the buyer acquired the control of the company (by means of acquiring more than 50% of the share-capital directly or indirectly). The common case of a couple buying 50-50 a company with a property fell out of the scope of Transfer Tax, as none  acquired the control of the company, so it has been widely used as option to acquire a property in Spain.

On the other hand, the former version of art.108 created a substantial tax burden for business transactions.

With the new redaction, in force since last 31st October, the transmission of securities will be considered as the transmission of the property and, therefore, subject to Transfer Tax (or VAT if applicable), in case that the sole purpose of the transmission is to avoid the payment of this tax, which is considered to be the case if the property is not for business use.

The concept “for business use” for companies renting the property must be put on equal to the concept of “business activity” for Personal Income Tax Act, which says that it is compulsory to have a premises and an employee running the rental business to consider the rent of properties as a business activity.

In conclusion: buying a property for residential use will be subject to Transfer Tax (or VAT) in any case, and the alternative of acquiring less than 50% of the shares in a company holding the property will not be efficient for that tax purposes.

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