Under the exemption of Article 21 of the Corporate Income Tax Act, companies can transfer shares in other entities and benefit from an exemption of up to 95% of the profit. However, if the transferring entity has the status of an “asset-holding entity”, the exemption does not cover unrealised capital gains, resulting in higher taxation for the transferring shareholder.
In a September 2019 ruling, the Directorate General of Taxes (DGT) questioned the application of the Article 21 exemption to an entity incorporated for the promotion, construction and operation of solar parks. The DGT considered that the transferred entity had not started its activity at the time of the sale and should therefore be treated as an asset-holding entity.
This ruling had a major impact on photovoltaic projects, which are articulated through Special Purpose Vehicles (SPVs) linked to the development, promotion and construction activities, in particular in the real estate and photovoltaic sectors. In these structures, the projects are conveyed through individual entities, which are often sold before the actual construction of the project has started. Under the 2019 ruling, the Tax Authorities had arguments to consider that the activities prior to the start of the construction, which usually include prospecting, processing, and obtaining licences and permits, engineering services, etc., should be treated as merely preparatory activities, and since the main activity has not started, the transferred entity should be classified as an asset-holding entity.
Fortunately, in a ruling dated 12 April 2022, the DGT corrected its interpretation and brought it in line with other rulings issued before 2019. In this ruling, the DGT examines whether an online gaming company that has not yet commenced its activities, but has undertaken the procedures and actions to obtain the necessary administrative authorisations and licences, should be classified as an asset-holding entity for the purposes of applying the Article 21 exemption to its sale.
The DGT confirms that the aforementioned activities are not merely preparatory, but a link in the commercial activity aimed at the production and distribution of goods and services and, therefore, the transferring entity can apply the Article 21 exemption.
With all due caution, we believe that this new ruling helps to calm the nerves caused by the 2019 ruling and provides greater certainty for groups developing and promoting hotel, real estate or photovoltaic projects.
Notwithstanding the above, the Tax Administration is beginning to question the scope of the Article 21 exemption based on a much more economic than legal criterion: that of transfer pricing.
It is therefore essential to analyse this issue in detail if you have carried out or are planning to carry out the sale of such a project.