Global Tax Alert | 23 October 2013

Spanish Tax Authority issues ruling expanding capital gains tax to indirect transfer of Spanish real estate by Luxembourg entities

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The tax treaty between Luxembourg and Spain allows Spain to tax gains from the alienation of shares or similar rights in a company (either Spanish resident or nonresident) the assets of which consist principally of immovable property situated in Spain. Under Spanish domestic law, such gains are currently taxable at 21%.

The literal wording of the treaty seems to clearly indicate that only a direct transfer of the shares in the property-rich entity may be taxable in Spain. In other words, under such wording, a transfer by Luxembourg resident entity of a company holding shares in another company that owns the Spanish real estate (indirect transfer) would appear to be blocked from taxation in Spain.

Pursuant to the recently published opinion of the Spanish tax authorities, such indirect transfer of Spanish real estate by a Luxembourg entity is taxable in Spain under the provisions of the Luxembourg-Spain tax treaty. Real estate investment funds and other real estate investors in Spain with Luxembourg structures are advised to review their tax position in Spain in light of this opinion, which also will likely affect other real estate structures involving holding companies with tax treaties similar to the Spain-Luxembourg treaty.

It is important to note that as a result of on-going renegotiations of the current Spain-The Netherlands tax treaty, which protects capital gains on the transfer of Spanish real estate companies from taxation in Spain, a change in such treaty may be expected in line with other tax treaties signed by Spain, allowing Spain to tax gains on the transfer (both direct and indirect) of Spanish real estate companies.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Abogados, Madrid
  • Laura Ezquerra
    +34 915 727 570
  • José Luis Gonzalo
    +34 915 727 334
  • Rocío Reyero
    +34 915 727 383
Ernst & Young LLP, Spanish Tax Desk, New York
  • Cristina de la Haba
    +1 212 773 8692

EYG no. CM3901