A recent binding tax ruling (V2200-23) issued by the Spanish tax authorities introduces a favourable change to the criteria to be met to apply the Spanish Participation Exemption Regime to capital gains arising from the transfer of shareholdings in greenfield or RtB (Ready to Build) project companies.
In general terms, the transfer of shares by a Spanish tax-resident entity is subject to CIT at the general 25% rate, unless the Spanish Participation Exemption Regime applies. Spanish tax-resident entities that dispose of their stake in subsidiaries may qualify for the Spanish Participation Exemption Regime (95% exemption; 1.25% effective taxation rate – 25% standard CIT rate on the 5% non-exempt income) provided that they had a qualified holding (i.e. a minimum 5% stake held uninterruptedly for one year as at the divestment date) and the subsidiary is not considered a passive entity for Spanish tax purposes (in other words, it carries out a business activity and has sufficient human and material resources in place to do so). The verification of the latter is one of the most controversial issues when applying the Spanish Participation Exemption Regime to capital gains on the transfer of shares in early developers, including Spanish entities developing photovoltaic projects, specifically during the RtB phase or earlier stages.
The background to this issue is marked by a series of conflicting rulings. In a tax ruling (V2931-16) issued in June 2016, the Spanish tax authorities initially granted the exemption in relation to the disposal of shares in an SPV engaged in preparatory activities to set up a photovoltaic plant, even before it reached RtB status. However, a tax ruling (V2265-21) issued on 12 August 2021 in relation to a similar situation ruled that preparatory activities did not equate to carrying out a business activity, which meant that SPVs should be classed as passive asset-holding entities for tax purposes (to which the exemption is not applicable) during the pre-development phase.
Now, in a positive shift for investors and taxpayers, the Spanish tax authorities have returned in ruling V2200-23 to their initial approach and ruled that SPVs involved in preparatory activities for the development of photovoltaic projects are not passive entities for the purposes of applying the Spanish Participation Exemption Regime. The ruling considers that these entities engage in business activities during the pre-development phase, such as land searches, feasibility analyses, negotiations, and obtaining permits, which makes them eligible for the Spanish Participation Exemption Regime. In the case under review, the projects were in the early pre-development phase. The SPVs had no in-house staff for these tasks and instead outsourced every task, from finding suitable land to conducting economic and technical feasibility studies, negotiating lease and surface right contracts, connecting to the power grid, handling environmental impact assessments, and managing all the necessary permits for building the solar plant.
The tax authorities’ criteria shift is not explicitly acknowledged in ruling V2200-23, and the burden, as it is always the case with respect to matters of fact, is placed on taxpayers to justify SPVs’ active involvement in business activities by demonstrating the relevance of the preparatory activities. This is also aligned with the authorities’ latest decision (in April 2023) regarding preparatory activities for the purposes of the Spanish Participation Exemption Regime (V0863-23), in which they confirmed that the exemption applied to the sale of a Spanish entity that had incurred costs to acquire licences for online gambling activities, even though the actual business activity had not yet commenced, and the entity lacked employees at the time.
While this new tax ruling provides clarity and facilitates divestment in renewables projects through share deals, it also emphasises the importance of preparatory activities and an active involvement in business activities to qualify for the Spanish Participation Exemption Regime and the need for a case-by-case analysis of each scenario. In our view, the Spanish tax authorities’ forward-thinking tax ruling not only illuminates the path for renewables ventures but also signals a new era of opportunity in the ever-evolving landscape of green investments.