Mallorca: Sale of company shares with real estate

Court ruling redefines tax requirements for the purchase of majority shareholdings

The sale of shares or participations in companies is exempt from VAT and ITP in Spain. Companies whose capital consists of at least 50 percent real estate assets are exempt from this rule.

Transfer of securities
The sale of shares or participations in companies is not subject to indirect taxation (it is exempt from VAT and ITP). However, in some cases, the sale may be subject to one of these taxes.In particular in the following cases:
When acquiring shares or participations that enable control to be exercised over companies whose assets consist of at least 50 percent real estate that is not used for commercial purposes.
Or if shares or participations are transferred (irrespective of the percentage of capital they represent) that the seller would have received following a contribution of real estate to the company in the previous three years.

In relation to the first case, a recent Supreme Court judgment has ruled on when and to what extent the applicable tax is payable.

Criterion
Specifically, the tax is levied when a percentage of direct or indirect participation of more than 50 percent is reached. This means when control over the company is obtained in the following way:As long as this percentage is not reached, no tax is levied. For example, if a shareholder holds 35 percent of the share capital and acquires a further 15 percent, the company remains exempt from tax as the total shareholding is not yet over 50 percent.

If the 50 percent shareholding is exceeded for the first time, the tax is levied on the total percentage reached. For example, if 45 percent was held and a further 20 percent acquired, the corresponding tax is paid on 65 percent of the value of the company's properties.

Once the 50 percent has been exceeded, each further transfer is taxed at the corresponding percentage. For example, if 65 percent is reached and a further 10 percent is acquired, tax will be paid on 10 percent of the property value.
This decision redefines the current legal situation with regard to the transfer of shareholdings. The Court itself points out that the previous legal situation - according to which only the transferred percentage was subject to taxation, even if it was higher than 50 percent - is no longer applicable.

The decisive factor is the value added tax

In order to determine whether the real estate is part of an economic activity (e.g. letting), the rules on income tax are not taken as a basis, but those on VAT are used. According to this tax, rented property is always considered an economic activity (regardless of whether it is rented out as apartments or commercial property), regardless of whether there is an employee who takes care of this rental.

Source
Supreme Court, judgment of December 18, 2018.
As long as the majority shareholding of a corporation is not reached, no taxes have to be paid. Only when the majority shareholding is exceeded must tax be paid on the entire shareholding achieved.

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