Spain: The sale of SPVs of photovoltaic plants is exempt from Spanish corporate income tax: new change of criteria by the Tax Authorities

Binding ruling V2200-23 of the Directorate General for Taxation of the Ministry of Finance has changed its criteria once again: capital gains derived from the transfer of shares in special purpose vehicles (SPVs) dedicated to the development of photovoltaic plants are exempt from Spanish corporate income tax (CIT), even if the construction of the plant has not started or the relevant licences have not been obtained (i.e. before the plant is ready to build, RTB).

The Corporate Income Tax exemption of capital gains on the transfer of shares

When a company sells its shares in a subsidiary (share deal), it can obtain a capital gain (from the difference between the sale price and the investment originally made) which, in principle, should be taxed in the parent company’s CIT. However, this higher value of the transferred shares, revealed by its sale, will generally correspond to profits on which the subsidiary was already taxed when it obtained them, so taxing the capital gain would imply double taxation.

Hence, the CIT rules exempt, subject to certain conditions, capital gains arising from the sale of shares in subsidiaries. These gains may correspond to explicit reserves of the subsidiary (profits which the subsidiary actually generated and which were taxed in its CIT) or to hidden reserves (an increase in the value of the shares which has not yet been realised, but is usually due to the expectation of future profits for the subsidiary or to unaccounted goodwill). As a general rule, the exemption covers explicit and hidden reserves.

SPVs of photovoltaic projects as patrimonial (asset-holding) companies (or not)

On the other hand, when the subsidiary whose shares are transferred is a so-called patrimonial company (i.e. an entity whose assets are not mainly assigned to an economic activity that has already begun), only the capital gain corresponding to the explicit reserves of the subsidiary is exempt from CIT.

This is particularly problematic when the subsidiary being transferred is an SPV which is in the development phase of a renewable energy project, e.g. a photovoltaic plant or a wind farm. During this phase, the entity has not yet started the production and sale of electricity, and the facility may not even have been built, but the company is in the process of developing it, usually by subcontracting the necessary services to third parties or its parent company (land search and negotiation of rights of use, technical and economic feasibility analysis, obtaining grid access rights and processing licences).

At that stage, the SPV has not yet made a profit, so it has no explicit reserves. However, its value is much higher than its balance sheet value because of the investment made in the development of the project, which will be higher the more milestones have been completed at that stage. If the shares in the SPV were to be transferred at that time, the entire capital gain would correspond to hidden reserves, and therefore would not qualify for the exemption if the SPV were to be classified as a patrimonial entity.

The change in the criteria of the Directorate General for Taxation

Prior to 2021, the Directorate General for Taxation had considered that SPVs in the development phase were not patrimonial entities, so that the exemption of capital gains from their sale could be applied to its full extent. However, binding ruling V2265-21 stated that the preparatory activities, prior to the start of construction, could not qualify as an economic activity and therefore the SPV was a patrimonial company during the development phase. This widely criticised approach paralysed the market for share deals in PV projects.

With the binding ruling V2200-23, the initial criterion has been reinstated: the development activity of the photovoltaic plant is an economic activity, even before it’s RTB, so that SPVs that have not yet started construction can avoid being classified as patrimonial companies and, consequently, the capital gains generated by the parent company with their sale in this phase will be exempt from CIT. However, for this to happen, the SPV must be able to prove that it has initiated the development of the project and has allocated resources to it. As highlighted in the ruling, each case must be examined individually to verify that the requirements set out therein are met.                          

The criterion of the Directorate General for Taxation is binding for all bodies of the Tax Administration (including the Inspectorate and the Economic-Administrative Courts), and can be extended to other sectors with relatively long preparatory phases where early disinvestment by the developer is frequent (e.g. real estate and urban development).

Autor: Carlos Fernández