As the recession starts to bite, Spain is headed for a rise in debt transactions. This could create opportunities for international investors, say Victor Viana and Luis Suarez de Centi

Various factors suggest that the current global economic situation could lead to a proliferation of distressed debt transactions in the near future in Spain. These factors include the growth of the Spanish macroeconomic indices during the last decade, low interest rates – which have led to the over-leveraging of the Spanish corporate market players in recent years – and the economic recession that Spain is currently undergoing.

Good high-yield investment opportunities may be available in the Spanish market for UK 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 potential investments. There are, however, a number of key tax issues to be considered in these transactions.

Structures for acquiring Spanish debt and 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).

Spanish securitisation vehicles

Spanish asset securitisation funds (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.

When the securities are to be negotiated on a regulated market, the incorporation of ASFs is subject to certain strict requirements. 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 (CIT) at the standard rate of 30% of financial income. However, ASFs often do not register a profit because interest paid to holders of bonds issued by the ASF (or lenders) is offset against the interest obtained by the ASF from its pool of assets. 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.

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.

Foreign securitisation vehicles

Non-resident investors usually make debt acquisitions through foreign securitisation vehicles (SPVs) 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 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.

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 might represent a substantial cost in this type of transaction. However, no stamp duty will be payable if the mortgage loans are assigned by the Spanish lender through the issuance of mortgage-backed securities (CTH).

A CTH is a negotiable security issued by a lender qualifying as a credit institution. It 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. 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.

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.

Spanish VAT should not represent an additional cost, except in certain cases relating 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. An appropriate analysis should be carried out for each particular case in order to avoid double transfer taxation scenarios.

There are various options for UK investors to structure distressed debt acquisitions in Spain efficiently. Acquiring the loans through a Spanish securitisation vehicle offers several key advantages, chief of which are that it simplifies the acquisition and registration procedures and avoids the transaction being affected by the insolvency of the current lender.

However, foreign securitisation vehicles established in an EU member state allows flexibility and can be efficient in terms of taxation. Ultimately, the choice depends on the priorities of the investor.

Victor Viana is partner and Luis Suarez de Centi an associate at Uria Menendez.