New tax ruling dealing with the taxation in the sale of renewable energy projects

Spanish General Directorate of Taxation (hereinafter, "GDT") in its binding ruling number V2265-21, issued in August 12th, 2021, has surprisingly concluded that the capital gain attributable to the transfer of shares of a company which is processing the necessary licenses for the construction and development of a solar plant is subject to Corporate Income Tax (hereinafter, “CIT”), that is, such capital gain is not eligible for the so-called “participation exemption regime” envisaged in CIT Law.

The facts referred in the aforementioned tax ruling have to do with a consulting company (hereinafter “Company A”) which holds a 100% stake in another company to be focused on the production, transport, and distribution of energy (“Company B”). This latter is processing all the necessary permits and authorizations for the construction and development of a solar plant. The project is divided into two phases: i) the first phase consists of processing and obtaining all the necessary permits for the construction of the solar plant and ii) the second phase consists of obtaining the necessary financing and the development and execution of the facilities.

The aim of Company A is to proceed with the sale of Company B as soon as all necessary licenses are obtained (after the conclusion of the first phase of the project), being likely that a period longer than one would have been already elapsed by that time.

Based on the information provided by Company A: i) Company B has no staff hired, ii) all work is invoiced by the parent company or, if applicable, by third parties, and iii) all the assets of the entity are assigned to the activity of promoting the solar plant.

Despite requirements such as a relevant holding interest (5%) and minimum shareholding period (1 year) at Company B are deemed met, GDT denies Company A the right to enjoy participation exemption regime on gains derived from the transfer of shares of Company B, based on the idea that this latter qualifies as a “patrimonial entity", that is, as a “pure holding entity” which does not develop any business activity. As this sort of entities are expressly excluded from the participation exemption regime and Company B has not started yet its energy production and distribution activity, GDT concludes that Company A would not be transferring an “active company” but rather a “patrimonial entity”, whose gain could not benefit from this exemption.

To reach such conclusion, GDT relies on the fact that Company B would not have materially started the development of the solar plant, not either shown the mere intention or will to carry it out, or even have implemented the simple preparatory actions or actions tending to start the effective development of the activity. By the time of the share transfer, only gathering documentation and applying for the necessary permits for the development of the installation would have been carried out.

Based on this, GDT concludes that such initial steps are not deemed themselves a business activity and thus Company B should classify as “patrimonial entity".
GDT does not, however, rule on whether the participation exemption regime would be applicable if the transfer of shares would take place after completion of phase 2. Nevertheless, based on their line of grounding, we might dare say that the conclusion could be the same for both phases, as the energy would not have started to be produced and transferred to the energy system.

This conclusion reached by GDT is more than debatable considering the company is in the process of obtaining licenses, permits and adopting other measures which are not freely implemented with no business reason but aimed as essential part for the further production and distribution of energy, actions them all that are part of the same business, that is, they cannot be analysed separately but instead wrapped as a whole unity. Certainly, the activity of electricity production requires the fulfilment of several compulsory administrative procedures that already involve, in themselves, a business activity. Considering these formalities alone, not linked to the subsequent phase, entails a fragmented vision of an activity that must be understood as a whole, so the conclusion cannot be other than that the preparatory steps are an extension of the energy production activity.

For the same reason, dismantling a factory or facility must be also deemed part of the business activity carried out therein, being the end of such activity the moment when its definitive closure takes place.

From our standpoint, running a business activity does not require the ability to invoice the good or service produced or to have such good or service available but rather to devote human and/or material resources owned by Company B or any Group company, to be able to do that after having concluded the necessary preparatory actions.

In line with this global business approach, VAT rules allow entrepreneurs to deduct VAT borne in these preparatory actions, although they have not started yet the production itself of the corresponding good or service or their subsequent sale.

We are aware that each tax burden is ruled by its different set of rules. However, we have considered convenient to stress out this VAT approach, as it seems incoherent that for VAT purposes there is no doubt that the entrepreneur does already exist from this initial preparatory phase, allowing him the enjoyment of all deductions envisaged for entrepreneurs, while denying such status for CIT purposes, as though this preparatory phase had nothing to do with a business itself.

Furthermore, we might anticipate other implications derived from this administrative criterion in other tax areas, such as Transfer Tax (hereinafter, “TT”).

Indeed, if the aforementioned administrative criterion were also enjoyed for indirect tax purposes and phase 2 would have been completed, being the solar panels already installed, the transfer of shares of Company B might be subject to TT. That is because solar panels are deemed real estate assets for this purpose, so whenever a real estate company is transferred, the anti-avoidance rule stated for cases where the aim is to transfer the underlying assets might apply, being thus levied the taxes applicable to the transfer of the real estate assets themselves and not the ones applicable to the transfer of a stake in the company itself [1].

Although it is clear that a case-by-case analysis needs to be carried out on each of the energy projects being sold, so as to carefully study the status of their respective preparatory measures and other surrounding circumstances, it seems to us that this GDT’s binding ruling might lead Tax Authorities to challenge the taxes settled by many Spanish corporate transferors who have enjoyed the participation exemption for CIT purposes. This circumstance would lead in turn to the corresponding appeals before administrative and judicial instances, where Court of Justice would have to say the very last word on this matter. Tax litigation seems unavoidable.

To access the aforementioned binding ruling, click here.

[1] This rule might apply, for instance, in the event of a second transfer of the assets/stake or in the case of the transfer of an on-going concern, whenever real estate assets are not devoted to a “business activity” and tax-payer has not proved that the aim of the transaction was to avoid taxes applicable on this sort of assets.