Ground-breaking Supreme Court ruling in Spain impacting stamp duty on amendments to mortgages

Background

Legal basis for stamp duty on modification of mortgage loans

Law 1/1993, 24 September, on Transfer Tax, Capital and Stamp Duty Taxes, subjects to stamp duty tax (at rates between 0.5% and 1.5% depending on each Spanish region) all mortgage modifications when all the following conditions are met:

• the modifications must be documented through a notarial deed (escritura pública or acta notarial)
• the modifications must be “valuable” (ie capable of being financially measured)
• they must be eligible for registration with the Spanish Property Registry.

Article 30.1. of the same law provides that the tax base will be the total secured amount (ie the total principal amount guaranteed plus interest, indemnities, penalties for non-compliance or other similar concepts also secured by the mortgage). The law further provides that if the total secured amount is not expressly stated in the mortgage deed, the tax base will be the capital and three years of interest.

According to article 9 of Law 2/1994, 30 March, on subrogation and modifications on mortgage loans (Law 2/1994), there is an exemption from stamp duty tax when these modifications are made by mutual agreement between creditor and debtor, provided that the creditor is a bank or other credit institution and the modification refers to the conditions of the interest rate initially agreed or in force and/or to the modification of the term of the loan.

Administrative criteria and latest case law on stamp duty

Prior to this decision, several recent changes on the stamp duty applicable to mortgage loans have taken place in the recent past as a result of other ground-breaking administrative and case law developments. Most relevantly, after some inconsistent rulings within a very short timeframe, the SC finally ruled back on 06 November 2018 that the taxpayer of the stamp duty on mortgage loans is the borrower. This change of criteria led to an express modification of the law regulating such tax which now expressly states that the taxpayer is the lender.

Getting back to stamp duty developments specifically relevant to the modification on the mortgage, it should be remarked that currently it is generally accepted by both Administration and courts that the tax base of the stamp duty should not be calculated on the basis of the original total secured amount but only taking into account as tax base the outstanding balance of the total secured amount at the time of each modification.

Also, in relation to the “valuable” test, the Spanish General Directorate of Taxation (Dirección General de Tributos) -the administrative body in charge of issuing binding guidance on tax matters- has stated that meeting the “valuable” test in a novation of mortgage loan does not depend on whether or not the amount covered by the mortgage security is modified, but rather on the fact that such modification can be quantified. On this basis, amendments such as the inclusion of a grace period, the extension of the maturity of the credit available, modifications on the payment schedule or the applicable interest rate, even without causing a modification of the total secured amount, can be quantified and therefore can be subject to stamp duty.

Further, up to now the Spanish tax authorities have considered that in cases where the relevant amendments are not covered by the aforementioned exemption of article 9 of Law 2/1994 and these modifications are “valuable”, the tax base must be the entire outstanding balance of the total secured amount and not the value of the modification.

Analysis of the decision issued by the SC

The decision issued by the Supreme Court revokes a previous one issued by a regional court who had considered that the stamp duty paid as consequence of a novation of a mortgage loan deed, including amendments to the loan term, interest rates and other financial clauses were not covered by the exemption of article 9 of Law 2/1994, and that the tax base applicable to the stamp duty was the outstanding balance of the total secured amount.

The modifications to the mortgage loan in the case analysed included:

• Extension of the grace period
• Interest rate for the developer
• Variable interest rate clause
• Commissions
• Annual percentage rate of charge
• Changes to the clause dealing with expenses to be borne by borrower
• Early termination by the lender
• Subsequent provision of security
• Default interest.

In relation to these modifications, the SC ruling focuses on the following aspects:

1. Scope of the exemption of article 9 Law 2/1994

The SC confirms that when the relevant notarial deed includes modifications to financial clauses other than those relating to interest rates and term of the loan, any such additional amendments will not be covered by the exemption and therefore it needs to be analysed on a case by case basis whether the general requirements for levying stamp duty are met (ie if each specific amendment is eligible for registration with the Property Registry and valuable).

The decision expressly states that clauses related to commissions, subsequent expenses and expenses borne by the borrower also meet the requirements of the stamp duty and are not covered by the exemption.

2. The tax base

In case the relevant amendments are not covered by the exemption of article 9 Law 2/1994 but do meet the aforementioned tests (ie are registrable and valuable), the SC states that the tax base shall be determined by reference to the economic impact of each relevant amendment and not by the outstanding balance of the total secured amount.

What’s next?

The potential impact of this judgement is very relevant considering that from now on modifications on financial clauses of mortgages which are subject (and not exempt) to stamp duty will only pay this tax on the basis of the actual economic (financial) impact of each modification. Generally this should be much lower than the outstanding balance of the total amount secured by the mortgage. In some instances, the relevant changes will not be regarded as having a financial impact, in other words will not be valuable, so will remain outside the scope of the tax.

However, the approach followed by the SC in this ground-breaking ruling will also be suitable of bringing more litigation and legal debate since in many cases the economic impact of an amendment will not be easy to determine or quantify. By way of example, it may be complex to assess the specific economic content of amendments relating to the granting of a grace period, the change in amortization system or the clause relating the expenses to be borne by the borrower. There may also be certain mortgage amendments (e.g. change in financial covenants) where it may be controversial whether there is an economic content.

Given the amount of mortgage modifications that take place in Spain -more than 70,000 in 2018 according to the Spanish Statistic Institute-, this new case law will have a material impact not only on the amount of stamp duty raised by Spanish regions but also on existing taxpayers, who should be able to apply for tax refunds of excess paid during the latest four years (statute of limitations under Spanish tax laws).