Taxation of real estate held by foreign companies

The General Directorate for Taxes (GDT) has recently issued a binding ruling (V2070-21) analyzing whether a shareholder (non-resident individual) owning shares in a non-resident company holding a Spanish real estate should be liable with Wealth Tax (WT).

There are certain Double Tax Treaties (DTT) signed by Spain (such as with Germany, Belgium, France, Luxembourg, Norway, among other countries) which contain a WT provision according to which Spain is allowed to tax with WT individuals resident in the other contracting State over the shares held in companies where more than 50% of the assets are, directly or indirectly, properties located in Spain. According to Spanish domestic law, however, non-resident individuals are only taxed with WT on their directly-owned Spanish-situs assets.

The GDT had understood, in several binding rulings, that if the corresponding DTT contained the WT clause for Spanish real estate rich companies, then the non-resident individual holding the shares should still be liable with Spanish WT, even if the shares were of a non-resident company. This criterion was strongly criticized by practitioners and scholars on the grounds that the tax treaties are meant to distribute and allocate taxing powers between the Contracting States but they do not create new taxable events.

The GDT has recently changed its criterion concluding that a non-resident individual (resident in the UK) indirectly holding Spanish real estate, through a non-resident company (UK company), should not be liable with WT under Spanish domestic provisions because he did not directly hold any assets located in Spain or rights that could be exercised in Spain, irrespective of the existence of a WT provision for Spanish real estate rich companies in the treaty signed by Spain and the UK. The GDT makes no reference to the potential application of Spanish GAAR for structures lacking of any business purpose (there is no information in the ruling on the substance and/or business activity of the UK company).

In December 2020, the Court of Justice of the Balearic Islands judged a similar case where an individual (German resident) owning directly shares in a German company which, in turn, owned shares of a Spanish company where more than 50% of the assets was Spanish real estate. The judgment from the Court concluded that, as far as the owner of the shares in the Spanish company was the German company (and not the German individual), the latter should not be subject to Spanish WT.

Consequently, the new criterion of the GDT aligns with this judgement. They can both have a significant impact for non-resident individuals indirectly holding Spanish real estate through foreign entities and/or for structuring the acquisition of Spanish real estate, which should be analyzed on a case-by-case basis, including whether any WT refunds could be obtained.

Source: Private Wealth team LENER - Guadalupe Díaz-Súnico