Tax Considerations for Distressed Debt Transactions in Spain

Víctor Viana, Luis Suárez de Centi.

23/10/2008 Legal Week


1. Introduction

In the present global economic situation with a financial slowdown underway in Spain, the Spanish economy is expecting a proliferation of distressed debt transactions in the near future.  

The current economic situation in Spain could be a breeding ground for the distressed debt market in view of (i) the growth of the Spanish macroeconomic indices over the last decade, (ii) the low interest rates, which have led to the over-leveraging of the Spanish corporate market players in recent years, and (iii) the economic recession that Spain is currently undergoing, which is adversely affecting the solvency of Spanish market operators. Good investment high-yield opportunities may be available in the Spanish market for British investors with high cash liquidity. An in-depth analysis of the legal and tax implications involved in these types of transactions is essential for an efficient structuring of such investment opportunities. We outline below the main tax issues to be considered in these transactions.

2. Structures for acquiring Spanish debt and Spanish tax concerns

There are three basic structures for acquiring Spanish debt: (i) acquiring the loans through a Spanish securitisation vehicle; (ii) using a Spanish company which does not have an intermediate securitisation vehicle; or (iii) structuring the acquisition through an entity resident in a European Union (“EU”) Member State other than Spain (excluding tax havens, as defined in Spanish legislation).

a) Spanish securitisation vehicles

Spanish asset securitisation funds (Fondos de Titulización de Activos -“ASFs”-) lack legal capacity and are created for the sole purpose of securitising a dedicated portfolio of assets, including existing receivables accounted for in the balance sheet of the assignor, as well as future receivables. ASFs issue asset-backed securities that are acquired by qualified investors or are otherwise funded by means of loans (subject to certain requirements and limitations). ASFs are managed by a duly licensed managing entity (Sociedad Gestora de Fondos de Titulización).

The incorporation of ASFs is subject to certain strict requirements when the securities are to be negotiated on a regulated market. By contrast, when those securities are offered to institutional investors on a private basis, the only requirements are: (i) to communicate the transaction in advance, and (ii) to deliver a copy of the public deed of incorporation of the ASF to the Spanish Securities and Exchange Commission (CNMV).

ASFs are subject to Spanish corporate income tax at the standard rate of 30% on the financial income. However, ASFs often do not register a profit as interest paid to holders of bonds issued by the ASF (or lenders) in addition to the running costs offset the interest obtained by the ASF from its pool of assets (loans). There is no withholding tax on income paid to an ASF for loans or other credit rights and no withholding tax on payments made to EU tax residents by the ASF, provided that certain reporting obligations are complied with.

b) Spanish acquiring vehicles

The use of a Spanish acquiring vehicle does not offer any substantial advantage and could cause Spanish tax leakage. Income obtained by the Spanish entity is calculated based on the difference between the payments made by assigned debtors under the loans and the purchase price paid to the assignor together with interest on the loans. This income is taxable at a 30% Spanish CIT rate. In addition, dividend distribution from Spain may also be subject to taxation.

c) Foreign securitization vehicles

Non-resident investors usually make debt acquisitions through foreign securitization vehicles (“SPV”) established in an EU Member State in a tax efficient way. The most commonly used jurisdictions are Ireland, Luxembourg and the Netherlands.

Income triggered by the SPV (as defined above for the Spanish acquiring vehicle) is generally exempt from Spanish withholding tax, as long as the SPV is resident for tax purposes in an EU Member State and does not act in relation to the loans (i) through a permanent establishment located in Spain or outside the EU or (ii) through a tax haven jurisdiction, as defined under Spanish law. The “beneficial ownership” test must be applied on financial income received by the SPV. Interest paid by the SPV will not be subject to Spanish withholding tax.

d) Indirect taxation

Assignments of credit rights guaranteed by a mortgage are subject to a 1% stamp duty levied on the guaranteed amount (regardless of the price paid for the loans) if the assignment is notarised in a public deed, as would typically be the case. Thus, stamp duty may represent a substantial cost in this type of transactions. However, no stamp duty will be payable if the mortgage loans are assigned by the Spanish lender through the issuance of mortgage-backed securities (certificados de transmisión de hipoteca -“CTH”-).

A CTH is a negotiable security issued by a lender qualifying as a credit institution and represents a participation in the rights attached to an underlying mortgage loan. The original lender will remain the holder of record to the mortgage loan and will be vested with the duties to manage, administer and collect the relevant loans for the benefit of the holder of the mortgage securities. Notwithstanding this, the issuance of the CTHs will transfer all rights to the underlying mortgage loan, and such a transfer will be treated as a true sale.

Once issued, CTHs may be transferred to ASFs or placed among qualified investors, whether Spanish or EU resident.

In addition to stamp duty exemption, simpler registration formalities in respect of the mortgages, and the fact that the CTH holder would not be affected by the insolvency of the current lender are some of the advantages of using this instrument.[1]

In the event of an assignment of loans not guaranteed by a mortgage, no stamp duty issues should arise, except when loans are assigned through the granting of a public deed of assignment with access to certain public registries, for example, in the case of chattel mortgages and pledges without transfer. Stamp duty will not be due if the transaction is recorded in a private deed instead of granting a public deed.

Spanish VAT should not represent an additional cost except in certain cases related to the collection services agreement.

With regard to the subsequent enforcement of the mortgage, its tax consequences will depend on the timing of the assignment of the loans. In general terms, 7% Transfer Tax on the fair value of the real estate will be payable by the acquirer of the real estate. An appropriate analysis should be carried out for each particular case in order to avoid double transfer taxation scenarios.

3. Conclusion

There are various options for British investors to structure distressed debt acquisitions in Spain efficiently. Acquiring the loans through a Spanish securitisation vehicle may be a good alternative for several reasons: to simplify the acquisition and registration procedures, to avoid being affected by the insolvency of the current lender, or to minimise the tax burden of the whole transaction.

Alternatively, a more commonly used system by non-Spanish investors is to acquire Spanish distressed debt through foreign securitization vehicles established in an EU Member State. This can be very efficient in terms of flexibility and taxation.


[1] Assignments of mortgage loans made through the issuance of CTHs benefit from a favourable regime, by means of which the assignment will not be subject to any rescission action triggered by the insolvency of the lender, unless evidence of the fraudulent nature of the assignment may be provided on the contrary (article 15 of Law 2/1981 that regulates the mortgage market).