Spanish Supreme Court ruling of 26 February 2020 confirms stamp duty exemption of amendments to the interest rate and/or to the term of mortgage-secured loans and credits.
Stamp Duty Taxation of Mortgage Loans
Under Spanish tax legislation, notarial documents whereby a novation of loans (which was extended also to credit facilities pursuant to some decisions by the Spanish Supreme Court) secured by a mortgage ("Mortgage Loans") is effected, are generally subject to stamp duty. This tax is triggered upon (i) the execution of public deeds (escrituras públicas and actas notariales), (ii) which object (x) consists of an amount or a valuable item, and (y) refers to acts which may be capable of being registered with a Public Register (e.g. Land Registry), irrespective of whether they are (i) ultimately registered or not and (ii) subject to other taxes (transfer tax, tax on corporate transactions or gift and inheritance tax).
Spanish stamp duty ranges from 0.5% to 1.5%, depending on the Spanish region where the relevant piece of land is located, and is levied upon the amount of the obligations secured by the mortgage (usually known in Spain as "maximum secured liability"). The maximum secured liability is calculated as a percentage customarily in the region of 130% of the loan amount (although that percentage is to be agreed upon between lender and borrower on a case-by-case basis) and includes principal, interest, late payment interest and expenses.
However, under Spanish law, a special stamp duty exemption (foreseen in article 9 of Spanish Act 2/1994, on subrogation and mortgage loans novation) is available for certain amendments to the conditions of Mortgage Loans extended by credit financial institutions (the "Stamp Duty Exemption"). This Stamp Duty Exemption applies to the execution of public deeds of novation of Mortgage Loans that entail changes to the interest rate and/or the term of the relevant Mortgage Loan as agreed between lender and borrower.
This Stamp Duty Exemption, which was aimed, since its inception, at facilitating the renegotiation of Mortgage Loans in a context of declining interest rates, has been quite controversial over the last years on its interpretation and application. In this regard, taxpayers and the Spanish Tax Administration have sustained different views.
The Supreme Court Ruling
Before the Spanish Supreme Court ruled on 26 February 2020 (the "Ruling"), the Spanish tax authorities considered the Stamp Duty Exemption applicable only when sole content of the public deed of novation was the change in the interest rate and/or of the term of the relevant Mortgage Loan i.e., the mere fact that other changes or any new provisions were included in the public deed, as in practice happens within any novation, may ultimately prejudice the availability of the Stamp Duty Exemption-.
With the Ruling, the Spanish Supreme Court overrode the understanding of the Spanish tax authorities and clarified that:
(i) firstly, novations of Mortgage Loans on interest rates and/or the term thereof executed through notarial deeds qualify for the Stamp Duty Exemption, notwithstanding the fact that, as customary, the public deed of novation might contain other amendments or new provisions governing the relationship between lender and borrower; and
(ii) secondly, sorting out the controversial issue at hand and in most Mortgage Loans novations, where such other provisions exist, it will be necessary to analyse, on a case-by-case basis, whether or not they meet the requirements to be subject to stamp duty (i.e. essentially that they refer to an amount or to a valuable item and that they are subject to registration) and, should stamp duty be triggered, whether the Stamp Duty Exemption applies.
This second point is further developed along the Ruling when it ruled how, at the case at hand, the following provisions should be treated (i.e. whether they trigger stamp duty, and, if so, whether the Stamp Duty Exemption applies to them):
(i) including a new repayment schedule included: this triggers stamp duty but is subject to the Stamp Duty Exemption;
(ii) including a provision not to make any further drawdowns nor renew the existing ones (thus, stating that the amount owed is that one already drawn): the court understands that this does not imply any amendment of the relevant Mortgage Loan since such provision is merely determining the outstanding amount; and
(iii) amendment of definitions and covenants, new contractual obligations and new conditions: in particular the Spanish Supreme Court, referred to information obligations; obligation to keep a certain share capital level and to satisfy the ratios stated therein like the EBITDA/financial expenses ratio; satisfaction of the undertaking not to grant in rem security over any other real estate assets; limitations regarding assets acquisition, etc. The court rules that the mere presence of these conditions does not trigger the stamp duty pointing out that these are provisions that would not trigger stamp duty if granted in public other than the public deed novating the Mortgage Loan.
In any event please note that any of the new provisions included in the agreement novating a Mortgage Loan should be analysed on a case-by-case basis.
The ruling also importantly states that if the novation is such that the pre-existing legal relationship is maintained ("novación no extintiva" under Spanish law) -so the relationship is not extinguished and replaced with a new one (which would be a "novación extintiva" under Spanish law)-, with no changes to the mortgage itself being made, the tax base in respect of any provisions of the Mortgage Loan which are not subject to the Stamp Duty Exemption may not be the whole amount of the maximum secured liability, as claimed by the Spanish tax authorities but, rather, the result of determining on a clause-by-clause analysis, the specific valuable content of each non exempted clause -which may, however, be difficult to conduct in practice-.
Today's market conditions both in the real estate and in the financing arena require, more than ever, clear and flexible tax and legal frameworks. Pursuant to the Spanish Supreme Court ruling, the need to assess the economic value of new clauses (other than those amending interest rate and term) rather than taxing (again) the entire value of the secured liabilities undoubtedly entails a more stamp duty friendly framework. This should facilitate completion of refinancing of Mortgage Loans.
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