Spain: the participation exemption and solar project SPVs
New guidance confirms that the participation exemption can apply to sales of shares in an SPV which has not yet commenced construction of a solar farm.
The General Directorate of Taxes (GDT) has overturned previously published criteria regarding the application of the participation exemption (PEX) on the transfer of shares of an SPV engaged in the development of photovoltaic projects. The new guidance indicates that the fact that the entity has not yet commenced the construction of the relevant solar farm will not result in it being treated as a passive holding company subject to restrictions on the application of the PEX.
Background
In binding rulings V2931-16 of 23 June and V3707-15 of 25 November, the GDT allowed PEX applications in respect of the transfer of shares in companies prior to beginning the construction of the solar farm. However, importantly, those rulings did not analyse whether such entities could be considered as passive holding entities immediately prior to the construction of the solar farm.
Surprisingly, in the later ruling, V2265-21 of 12 August, the GDT limited the application of PEX on the transfer of the shares of an SPV engaged in renewable energy projects on the basis that, at the time of the transfer of the shares, only preparatory activities had been carried out (i.e. processing and obtaining the necessary permits). The reasoning of the GDT was that, to the extent that the main business activity (the construction and exploitation of the solar farm) had not materially commenced, the SPV qualified as a passive holding entity, subject to restrictions in the application of PEX. Such restrictions are very important, since, in these scenarios PEX is only available for the undistributed gains made by the SPV, which at the time of the transfer of the entity developing the solar farm is nil.
These criteria were reconsidered in ruling V0863-23 of 24 April, in a case concerning gaming licenses. Basically, in that ruling, GDT accepted that the obtaining of the relevant licences and permits amounted to a business activity, so the entity was not to be considered a passive holding entity for PEX purposes.
Now, most recently, the GDT has again returned to the question of the correct criteria to apply to an SPV engaged in renewable energy projects. The ruling, V2200-23 of 26 July, confirms that an SPV whose activity has been limited to obtaining the relevant permits and licences to develop the solar farm is not a passive holding entity, and as such, the PEX applies to the entire capital gain made (95% of the capital gain under the general rules).
Comments
The change of criteria applied by the GDT is very welcome, especially in the renewable energy sector and in the greenfield investment sector in general. This ruling ends the uncertainty (in our view, unfounded) which originated with the ruling issued in 2021 and allows the application of the PEX to the full capital gain made on the transfer of shares of SPVs which are developing, but not yet operating, a business, such as a solar farm.
The transfer of entities whose activity has been limited to obtaining relevant permits and licences at the time of the transfer has been quite common in Spain as a consequence of delays in the granting of concessions for such activities.. Spain is an advantageous jurisdiction for the development of renewable energy projects (in particular photovoltaic projects) and significant profits have been made in the transfer of these kinds of SPV. Now, with more certainty on the tax treatment, investors can focus on the viability of such businesses for the economy and for the climate goals.
