Transfer in Germany of a KG holding Spanish real estate to a Familienstiftung: outside Spanish transfer tax, with open questions (V0565-21)

The Spanish Directorate-General for Taxation (DGT), in its binding ruling V0565-21 of 11 March 2021, analyses the transfer, by a couple resident in Germany, of all their interests in a German Kommanditgesellschaft (KG) whose only asset is a property situated in Spain. The acquirer is a German family foundation (Familienstiftung), and the transaction would be executed before a German notary.

The DGT concludes that the transaction is not subject to any of the heads of Spanish transfer and stamp tax (ITPAJD), provided that the KG remains the registered owner of the property. It does not, however, answer the other two questions, which concern the anti-avoidance rule in article 314.2 of the Securities Market Act. And, since it was not asked, it does not deal with the non-resident income tax (IRNR) that the transferors’ gain may trigger.

The facts

The couple had acquired a property in Spain in equal shares. They later transferred it to a German KG of which the two spouses are the sole partners, in equal shares. The KG paid transfer tax (the TPO head of ITPAJD) on that acquisition, and the property is now registered in its name in the Spanish Land Registry.

The KG is the German form of limited partnership. According to the facts of the ruling, it has no legal personality of its own, separate from that of its partners, and could therefore be treated, for Spanish tax purposes, as a flow-through entity: its income is attributed to the partners and the entity is not taxed on it. The Familienstiftung, by contrast, is a foundation with legal personality, widely used in Germany to organise the succession of family wealth. Its members are the spouses themselves.

The couple plan to transfer all their interests in the KG to the foundation. The transfer would be for consideration but without payment of a price: the spouses would retain a credit claim against the foundation. The deed would be executed in Germany and no registration would be needed in Spain, because the property would remain among the KG’s assets.

Three questions are raised: (i) whether the transfer is subject to ITPAJD; (ii) whether article 314.2 of the consolidated text of the Securities Market Act, approved by Royal Legislative Decree 4/2015 of 23 October, applies; and (iii) whether, if the transfer were taxable, letter (c) of that provision could be applied so that 50 % of the interests could be transferred first and, after three years, the remaining 50 %, without tax.

The DGT’s answer: outside the scope of ITPAJD

Article 6.1.A) of the consolidated text of the ITPAJD Act, approved by Royal Legislative Decree 1/1993 of 24 September, subjects to tax transfers for consideration of assets and rights “situated, exercisable or to be performed in Spanish territory or in foreign territory where, in the latter case, the person liable to pay the tax is resident in Spain” (our translation). It expressly excludes transfers “which, being carried out in foreign territory, are to take effect outside Spanish territory”.

On that basis, the DGT concludes that, insofar as the KG is the legal and registered owner of the property and the transaction consists of transferring the interests in the KG to the foundation, “the transaction will not be subject in Spain to any of the heads of the Transfer and Stamp Tax, since it takes place outside the scope of the tax”. It adds a condition: “provided that this transaction has no effect on the legal ownership of the property situated in Spanish territory, the entity K[G] remaining its registered owner”. The original reads “KB”, an obvious typo.

In our view, the conclusion rests on a threefold disconnection from Spain: what is transferred are interests in a German entity, not the property; transferors and acquirer are resident outside Spain; and the transaction is executed in Germany without altering the Spanish Land Registry. The DGT does not set out this reasoning, but it follows from the provision it quotes.

What the ruling does not answer: article 314.2 LMV

The DGT does not answer the second or third questions. It may be inferred that, having placed the transaction outside the territorial scope of the tax, it saw no need to examine the article 314.2 exception, but the ruling does not say so.

That provision, now article 338.2 of Law 6/2023 of 17 March on Securities Markets and Investment Services, is an anti-avoidance rule. As a general rule, transfers of securities are exempt from VAT and ITPAJD. By way of exception, the transfer is taxed as if it were a transfer of real estate where it was intended to avoid the tax that would have been levied on a transfer of the entity’s properties. The law presumes that intention, unless proven otherwise, in three situations.

Letter (a) refers to obtaining control of an entity at least 50 % of whose assets consist of properties situated in Spain not used in a business or professional activity. The case could fall within it, provided that interests in the KG are regarded as “securities” and the KG as a “commercial company” for the purposes of the control rule, issues the ruling does not examine. Letter (c), for its part, requires the securities to have been received in exchange for a contribution of real estate on the incorporation or capital increase of the company, which does not appear to be the case: the couple transferred the property to the KG, which paid tax on that acquisition.

Note, moreover, that the exception only operates if the transfer is subject to ITPAJD. If the transaction falls outside the territorial scope of the tax, as the DGT concludes, the question does not arise. The risk would appear if the tax authorities considered, in an audit, that the transaction does take effect in Spain.

Nor does it deal with non-resident income tax on the gain

The ruling is confined to ITPAJD, but the transaction has another dimension. Article 13.1.i).3 of the consolidated text of the Non-Resident Income Tax Act (TRLIRNR), approved by Royal Legislative Decree 5/2004 of 5 March, treats as obtained in Spain capital gains derived from rights or interests in an entity, resident or not, whose assets consist mainly, directly or indirectly, of real estate situated in Spain. The transfer is for consideration —the spouses receive a credit claim against the foundation—, so any gain would in principle be subject to IRNR.

The Spain–Germany double taxation convention, signed in Madrid on 3 February 2011, allows under article 13.2 gains from the alienation of shares, interests or similar rights in a company at least 50 % of whose assets consist, directly or indirectly, of real estate situated in the other State to be taxed in the State where the property is situated, here Spain. This is a shared taxing right: Spain may tax the gain, and Germany, as the State of residence, must eliminate double taxation.

A separate question, which the ruling does not address, is whether a transparent KG is a “company” for these purposes. If it is treated as transparent, the gain could be brought within article 13.1 of the convention (immovable property), with the same result of taxation in Spain.

Our assessment

In our view, the ruling correctly answers the ITPAJD question but leaves relevant questions unanswered for the taxpayer. Anyone with a similar structure should not rely solely on the ITPAJD conclusion: the transaction also requires an examination of the article 338.2 risk under Law 6/2023 and of non-resident income tax on the gain.

The condition set by the DGT also has medium-term consequences. If the foundation, once holder of all the interests, were later to dissolve the KG and take the property, the change of registered owner would be a different transaction, with its own Spanish tax treatment, which this ruling does not cover.

Practical consequences

Before carrying out a transaction of this kind, the non-resident income tax on the transferors’ gain should be quantified and the acquisition value of the interests properly evidenced. Failing to file on the view that the transaction falls outside the Spanish tax system, relying on this ruling, would be a mistake with consequences from a compliance standpoint: surcharges and, where applicable, penalties.

It is also advisable to document the reasons for the transaction —the family’s succession planning through the foundation— in case the tax authorities were to raise the anti-avoidance rule. And to keep the KG as owner of the property for as long as the treatment described by the DGT is to be preserved.