Spain widens stamp duty exemption for mortgage-secured refinancings

In November 2022, the Spanish government introduced changes to the Stamp Duty exemption for certain modifications to mortgage-backed loans, ostensibly to widen its scope. However, doubts were created by the wording of the amendments which were introduced and the General Directorate of Taxes has now issued clarificatory guidance, confirming the widened scope of the exemption.

Background

Spanish Law 2/1994 is well known and relied upon in the Spanish loan market as it provides a Stamp Duty exemption on certain notarial deeds modifying mortgage loans (i.e. those affecting the interest rate or the term) as long as the lender is considered a financial institution. This means that, in most circumstances, modifications affecting the interest rate or the term of a loan will be exempted from Stamp Duty (which otherwise depending on the regional regulations usually varies from 0,5% up to 2%). Debt funds, however, are not considered financial institutions and therefore historically could not benefit from this exemption

The new regulation

In November 2022, the Spanish government approved a Royal Decree - Law 19/2022 - to broaden the scope of the application of the Stamp Duty exemption. Among other things, the new Law modified article one of Spanish Law 2/1994 and replaced the concept of financial institutions (until now the only beneficiaries of the exemption) with “real estate lenders”.

Real estate lenders are defined in Law 5/2019 as any natural or legal person who, in a professional capacity, carries out the activity of granting loans backed by mortgage guarantees or other rights of guarantee on a property for residential use where the loans are to be used for the purpose of acquiring residential property by the borrower/guarantor.

However, certain doubts have been raised in relation to the scope of Stamp Duty exemption based on the interpretation of the new Law.

The interpretation of the new Law

At first sight and, based on a literal interpretation of the new Law, it seemed clear that the scope of the application of the Stamp Duty exemption had been broadened: it seemed clear that a wider group of taxpayers may benefit from the exemption under the umbrella of the new concept of real estate lenders described in the Law. For example, individuals are included. However, at the same time, the scope of its application seemed to be restricted to the extent that the exemption is limited to entities granting mortgage loans only on residential properties. Other lenders whose purpose is different would be excluded. Therefore, the new Law could potentially have a significant negative economic impact for those financial institutions that, under the previous rules, had been applying the exemption for any novation of mortgage loans since they could no longer be beneficiaries of the exemption with regards to those loans not included in the Spanish Law 5/2019 (in essence, any corporate lending or even any other loans granted to individuals for the acquisition of real estate other than residential properties).

This interpretation did not appear either to take into account the purpose of Spanish Law 2/1994 (to lower the cost for all parties involved) nor be in line with the purpose of the amendment itself (to broaden the set of entities that can benefit from the exemption and therefore facilitate debt restructurings).

Bearing mind the lack of explanation from the Spanish government and the potentially negative effects for the Spanish loan market, there were industry calls for a more convenient and reasonable interpretation of the new regulation to bring legal certainty to the loan market.

The tax ruling issued by the Spanish General Directorate of Taxes

On 14 March 2023, the Spanish General Directorate of Taxes (GDT) issued a ruling which clarifies that Spanish Law 2/1994 and Spanish Law 5/2019 have different objectives. The first one seeks to lower the costs of refinancings, while the second one seeks to enhance legal certainty in accordance with European regulations. Following the tax ruling, it is clear that the ultimate purpose of the recent amendment is to broaden the beneficiaries of the exemption.

The GDT favours an inclusive interpretation of the new Law, confirming that the reference made in article one of the Spanish Law 2/1994 refers exclusively to the person or entity defined as a real estate lender, without taking into account the recipient or the purpose of the mortgage financing. Accordingly, any individual or entity who, in a professional capacity, grants loans as a real estate lender, will be considered to be included within the scope of the application of Law 2/1994, and any such lender will qualify for the exemption in respect of all loans granted, regardless of the status of the borrower and the purpose of the loan.

In addition, the DGT expressly confirms that the purpose of the amendments is to broaden the list of qualified lenders that can benefit from the tax exemption provided by Law 2/1994. This was previously limited to financial entities but can now include all professional lenders which grant loans to finance all types of real estate transactions.

Comment

The uncertainty around the interpretation of the regulation created a lot of instability in the Spanish market. In certain instances, it has even led to situations where some taxpayers provisionally paid Stamp Duty on transactions when in fact they should not have done so. These taxpayers are now entitled to a refund.

The tax ruling issued by the Spanish GDT brings clarity the regulation approved just a few months ago and will be welcomed by the Spanish loan market as it provides the necessary legal certainty and a clear interpretative framework for many mortgage-secured refinancing transactions with both corporates and individuals, involving commercial or other real estate properties as security. It also confirms that the new amendment does extend the stamp duty exemption to a wider set of restructurings with non-banks as lenders.