Development, i.e. the transformation, construction and use of land is regulated in Spain by a complex variety of regulations set out by the State, Regional Governments and Local Councils.

State regulation is basically contained in RDLeg 2/2008 (approve the refund text of Law of the Soil). This is merely restricted to dealing with matters such as land classification, the general rights and duties of owners and the valuation of land, fundamentally for the purposes of expropriation.

As regards regional regulations, most of the Spanish autonomous regions (Comunidades Autónomas) possess planning laws containing extensive regulation covering aspects such as planning, land management and urban planning discipline.

The classification and grading of the use of land is basically carried out on the basis of the General Plan, while the execution or management of development land (or where relevant, urban land) is carried out through the process of the so-called “development plan”, i.e. through the use of the Zoning Action Programme (Programa de Actuación Urbanística), the Partial Plan (Plan Parcial), the Special Plan (Plan Especial), the Detailed Study (Estudio de Detalle), etc., or through the use of other similar regional planning structures. Urban discipline is manifest in the control exercised by the Local Councils through the grant of licences and also through the imposition of the relevant penalties when an individual party infringes any of the urban planning regulations. One should also remember that in spite of the above mentioned urban planning powers conferred on Local Councils, in certain cases the Regional Governments often reserve the power to supervise municipal development activity, as may be observed in their final approval of certain planning structures or even in their imposition of high financial penalties.

1.1 Taxable entities and taxable income

Companies resident in Spain pay Corporate Income Tax on all profits obtained as a result of operations both inside and outside the country at the general rate of 35%. A company is considered to be resident when it fulfils any of the following requirements:

• it has been formed pursuant to Spanish law;
• it has its registered office in Spain;
• its effective management headquarters are in Spain.

The taxable amount is made up of income derived from all sources (including income and capital gains resulting from real estate operations), less deductions, in general terms, for any costs incurred in earning the income. The income derived from the leasing of real estate includes rent received but does not include any deposits made by tenants.

1.2 Capital gains and re-investment

Capital gains (defined as any change in the value of the taxed entity’s assets which may arise in the event of some change in the composition of such assets) are not subject to a specific tax regime but are included in the normal taxable base as another item of Corporate Income for companies resident in Spain.

For the purposes of including any capital gain obtained when transferring fixed assets consisting of real estate (an increase is calculated as the difference between the value of the asset on disposal and the net book value, minus, where relevant, any costs and levies paid by the transferor as a result of the transfer) in the taxable income, one may deduct the amount of financial depreciation which has occurred since 1 January 1983 from the said capital gain, calculated in accordance with certain specific rules, up to the limit of such taxable income.

Capital gains arising from the transfer of fixed assets consisting of real estate will be included in the taxable income for the tax period in which the gain occurs, but a fiscal benefit will be applicable provided that the following requirements are met:

• the sale proceeds are re-invested in fixed assets (amongst them, real estate assets);
• a minimum period of one year ownership of the transferred elements is required.
• re-investment occurs during a period beginning in the year before the date on which the asset was handed over or made available and including the three years following this date, without prejudice to any possible special re-investment plans which may be approved by the authorities when justified by specific circumstances;
• a minimum period of ownership is fulfilled in respect of the elements in which the re-investment is made, as set out in Law.

This fiscal benefit consists of a deduction in the Corporate tax quote. The deduction basis will be constituted by the obtained capital gain in case the whole sale proceeds are re-invested, otherwise it will be constituted by the capital gain in a proportional basis to the re-invested sale proceeds.

1.3 Offseting negative results

Losses sustained during one financial year may be offset against profits obtained during the following fifteen financial years. With regard to newly incorporated companies, this period starts computing as from the first profitable year. Losses may not be carried back.

1.4 The withholding of amounts resulting from the leasing of urban properties

In certain cases (e.g. when the landlord is a Business Activities Tax taxpayer and the sum total of the cadastral value of properties owned by the landlord does not exceed one hundred million pesetas) the tenants of urban properties are obliged to withhold 15% of the rent paid to their landlord and to deposit this amount with the tax authorities on account of the landlord’s Corporate Income Tax or Tax on the Income of Non-Residents (please see Section 2.1.2 below).

1.5 Distribution of profits

Dividends distributed by a Spanish company to a non-resident parent company are subject in Spain to a general withholding tax at the rate of 21%, which is the same rate as that applicable to dividend payments between resident corporate entities. The rate of 21% may be reduced by the application of double taxation treaties. Dividends from a Spanish company paid to a parent company located in a EU members State are not subject to withholding tax in Spain provided that they meet the following requirements:

• the receiving company has a direct participation of 25% or more in the Spanish company; however, the Spanish tax authorities may allow this participation to be 10% under a reciprocal agreement;
• the aforementioned participation has been continuously maintained for one year prior to the date on which the distributed profits become payable (or this participation is maintained for the period necessary to complete one year, in which case the withheld amount will be reimbursed);
• the receiving company is subject to and not exempt from Corporate Income Tax or a similar form of tax;
• the distribution of profits does not result from the liquidation of the Spanish company.

1.6 Thin-Capitalisation Rules

Loans granted by non-resident companies to resident companies are subject to thin-capitalisation rules when the net indebtedness incurred, directly or indirectly, with an associated non-resident company or individual exceeds a ratio of 1:3 between fiscal capital and debt. Under these rules, any interest on this excess is considered as dividends for the lender company and may not therefore be deducted for tax purposes by the debtor company.

The taxable entities are companies which are not resident but which obtain income in Spain. A distinction should be made between two ways of earning income:

Income obtained through a permanent establishment

(a) Any company which is not resident in Spain will pay tax on all income attributed to the permanent establishment, which includes:

• income from activities or businesses run from this permanent establishment;
• income earned from assets belonging to the permanent establishment;
• the capital gains or losses resulting from assets owned by the permanent establishment.

Generally, a 35% tax rate will be applied to the taxable income. Certain deductions and allowances may be applied against the taxable income.

When the permanent establishment transfers income abroad, the non-resident company receiving such income will be liable to an additional 25% tax on amounts transferred, including payments made in respect of royalties, interest, commissions and technical assistance, as well as amounts paid for the use of other goods or rights, unless one of the following conditions applies:

• the head office is resident in a EU member country with a reciprocal agreement;
• the receiving party or company is resident for tax purposes in a country with which Spain has signed a double taxation treaty, unless the said treaty sets out otherwise.

(b) Income obtained without the intervention of a permanent establishment.

Non-residents which obtain income in Spain without the intervention of a permanent establishment must pay tax separately on each partial or complete item of income submitted for taxation (i.e. operation by operation) and there is no offsetting of capital gains or losses.

The taxable income will in general consist of the total amount earned (i.e. without deduction of costs).

The applicable tax rate will generally be 25%, although this will rise to 35% in the case of capital gains.

(c) Special tax on real estate owned by non-resident companies

Non-resident companies which own real estate in Spain are subject to a special tax, the taxable income being the cadastral value of the property and the rate being 3%.

This tax is a deductible expense for the purposes of calculating the taxable income under the Tax on the Income of Non-Residents.

This special tax will become due on 31 December each year and must be paid during the following month of January. Any properties transferred will be liable for this special tax and any failure on the part of the taxpayer to make payment within the aforementioned period will result in its becoming payable through a charge being placed on the property.

This tax is not applicable to the following:

• companies which are resident in a country which has signed a double taxation treaty with Spain containing an information exchange clause, provided that their controlling shareholders are resident in Spain or have the right to apply a double taxation treaty containing an information exchange clause;
• companies which are continuously or habitually active in business in Spain, other than through the mere tenancy or leasing of buildings;
• foreign states and public institutions and international bodies;
• companies quoted on officially recognised secondary stock markets
• non-profit-making companies of a charitable or cultural nature recognised under the laws of a State which has signed a double taxation treaty with Spain containing an information exchange clause, provided that the properties are used for activities set out in their corporate object.

(d) 5% withholding tax upon acquisition of property from non-residents

In the case of the transfer of real estate located in Spain by a non-resident, the acquirer will be obliged to withhold 5% of the agreed price and pay it to the tax authorities on account of the transferor’s Tax on the Income of Non-Residents.

The following real estate transactions are subject to VAT:

• the sale of new or refurbished buildings. The second and subsequent disposals of real property are in principle exempt from VAT, and consequently subject to Transfer Tax, although this exemption may be waived (and the transfer thus be subject to VAT) when the acquirer is a taxpayer exercising its professional activity and has the right to offset all the VAT paid in the operation;
• the sale of plots which have the benefit of the requisite planning permissions for development;
• the sale of properties for refurbishment or demolition. In this case the purchaser must invest more than 25% of the purchase price of the building in the refurbishment.

In other cases, sales and purchases of property will be subject to Transfer Tax as opposed to VAT.

The general rate for VAT is 21%, and in the case of housing the rate is 10%. Where a transaction is subject to VAT there is an additional 0.5% to 1.5% Stamp Duty, depending on the region where the property is located, provided that the transfer is executed in a public deed and can be registered in the Land Registry, as is normally the case.

The applicable tax rate is between 6% and 10%, depending on the region where the property is located.

Transfers of company shares or participations are, in principle, not subject to either VAT or Transfer Tax. However, to avoid the disguised transfer of buildings as tax-exempt operations, two important exceptions are established:

• transfers carried out on secondary markets and acquisitions on primary markets as a result of the exercise of preferential acquisition rights or the conversion of bonds into shares representing the capital or assets of a company where (i) more than 50% of the assets of such company consist of real estate located in Spain and (ii) the transfer allows the purchaser to gain control (i.e. holding of more than 50% of the shares in the company). Such transfers will be subject to Transfer Tax on the real value of the said real estate;
• a transfer of shares received in consideration of a contribution of real estate upon the incorporation or share capital increase of a company is subject to Transfer Tax if the share transfer takes place within the year following such contribution

Lease agreements for non-residential use (a category which includes the lease of commercial premises, offices and industrial units) signed under the currently prevailing LAU are basically governed by the covenants established by the parties, who may freely agree, among other things, the following:

• The duration and, eventually, extensions of the lease agreement;
• The initial rent and the system for its indexation and review. This may, in the case of commercial premises for example, be tied to the tenant’s sales figures or updated in line with the Consumer Price Index, or it may include review clauses in accordance with market rents or clauses allowing an increase due to improvements, etc.;
• Regime governing the tenant’s works at the leased premises;
• Reasons for the termination of the lease and the compensation to be paid in the event of termination due to breach of contract. Special care should be taken with regard to termination for breach because, in the event that the landlord opts to terminate the agreement on the basis of the tenant’s breach, if compensation is to include the rent outstanding to the end of the agreed period in addition to damages actually caused, this will have to have been expressly agreed. In any case, the courts have the power to moderate the amount of compensation paid, depending on the circumstances of each particular case;
• Costs to be charged to the tenant. It should be borne in mind that, unless the parties expressly agree which costs are to be borne by the tenant, any conservation and maintenance costs at the premises which are necessary in order for the premises to be used for the agreed purpose will be the responsibility of the landlord, except where deterioration is attributable to the tenant.

Mandatory rules, which cannot be waived contractually by the parties.

These include the following:

Non-mandatory rules which may be waived by the parties

When a corporate or professional activity is carried out in the leased premises, the tenant may sub-let the premises or assign its lease agreement without gaining the prior consent of the landlord. However, the landlord must be informed of this sub-lease or assignment, which gives it the right to increase the rent by 10% in the case of a partial sub-lease or 20% in the event that the agreement is assigned or the premises are sub-let in their entirety

The general regulations contained in the Spanish Civil Code in relation to reciprocal obligations apply here, to the extent that any substantial breach by one of the parties gives the party not in breach the right to require compliance with the obligation in the courts or, alternatively, terminate the agreement, with the right to compensation for damages in both cases.

The LAU also contains a list of reasons which authorise the landlord to terminate the agreement legally and claim for compensation of damages, though this list is not all-inclusive and the parties may agree to include other reasons:

• Failure to pay the security deposit or its reviewed amounts.
• Failure to pay the rent or any amount which the tenant is obliged to pay under the lease.
• In the event that the parties have included in the lease a covenant whereby the tenant cannot sub-let the premises or assign the lease without the prior consent of the landlord, any sub-let or assignment which is carried out without such consent.
• Carrying out disturbing, unhealthy, harmful, dangerous or illegal activities at the premises.
• Carrying out works which affect the distribution, stability or safety of the premises without the prior consent of the landlord.

Please note that a unilateral early termination of the lease by either party would be deemed a breach of contract and would entitle the non-infringing party to claim for specific compliance before the courts or, alternatively, terminate the agreement, with the right to compensation for damages in both cases.

The parties may record the lease (or sub-lease) at the Land Registry, in which case the tenant’s rights will benefit from registry publication and will be additionally protected in the event of the sale of the leased premises to a third party, given that this third party will be obliged to assume the position of landlord.

The registration of lease agreements rarely takes place, in view of the imbalance between the costs that the registration entails and the protection surplus that it grants, which in general is not considered necessary by operators in the Spanish marketplace

Civil procedure law, including the judicial mortgage foreclosure procedure previously regulated in the Mortgage Law, was affected by Spanish Law 1/2000 dated 7 January 2000, Ley de Enjuiciamiento Civil (hereinafter “the Civil Procedure Law or LEC”). This new regulation came into force last 8 January 2001. This law has recently amended several times regarding mortgage foreclosure procedure

A creditor holding a mortgage as security would have the option to choose amongst four different possible procedures for enforcement of the credit.

• ordinary declarative procedure, “Procedimiento declarativo ordinario” (Art. 248 et seq LEC);
• executive procedure, “Procedimiento de ejecución dineraria” (Art. 517 et seq LEC);
• judicial mortgage foreclosure procedure, “Procedimiento de ejecución dineraria sobre bienes hipotecados o pignorados” (hereinafter “summary judicial procedure”) (Art. 681 et seq LEC); and
• extra-judicial mortgage foreclosure procedure, “Procedimiento ejecutivo extrajudicial” (“extra-judicial procedure”) (Final Disposition 9 LEC, amends Art. 129 of the Mortgage Law, and renders effective Art. 234 et seq of the Mortgage Regulation)

The ordinary declarative procedure requires a preliminary phase known as “cognición” (literally “knowledge”). Such phase is basically a process whereby the competent court verifies the actual existence of the debt and the creditor’s right to claim repayment. It would typically go through a preliminary review of the validity of any security provided.

Therefore, this procedure is not particularly advisable for mortgage creditors and, in practice, is not used by such creditors, which shall have the right to go through the specific procedure referred below.

Executory procedure does not require the “cognición” phase. However, the debtor will have the right to oppose the execution and, although the grounds for opposition are quite restricted by law, they will in many cases give the debtor a chance to delay the procedure. It is essentially for this reason that a mortgage creditor will typically try to enforce its rights through the procedure described below.

The summary judicial procedure is the type of foreclosure procedure that has been most used by mortgage creditors to date. In this procedure, provided the mortgagor’s title (i.e. the public deed of mortgage including the complete secured financial agreement and, in the event that the secured creditor is a financial entity, this financial entity is registered in Spain as such financial entity) has been granted and a number of formalities and requirements are complied with, the mortgage creditor shall request the competent court to auction the mortgaged real estate asset(s) in order to repay the secured debt. The role of the court is limited to basically guaranteeing that the debtor’s rights are fully protected and to monitor the sale of the asset(s).

The extra-judicial procedure involves the auction of the mortgaged property before a notary in satisfaction of a debt. The mortgage creditor takes the initiative for the competent notary to sell in auction the mortgaged property in order to repay the secured debt.

It should be noted that the extra-judicial procedure is a possibility contemplated in the Mortgage Law and the Mortgage Regulation. However, The Spanish Supreme Court has declared in several judgements that only Courts (Organos Jurisdiccionales) have executive jurisdiction (potestad ejecutiva). In addition, the Supreme Court also declares that regulations containing procedural rules shall be deemed null and void. Therefore, and although the recent Law of Civil Procedure (Law 1/2000, of 7 January) expressly amended the Mortgage Law to include the extra-judicial procedure as a foreclosure procedure, the judiciary might declare in the future that this procedure shall be deemed null and void.

The extra-judicial procedure is only available when the parties expressly agree in the public deed of mortgage to make use of it, and when the public deed of mortgage guarantees obligations for an amount determined ab initio. As a result, this procedure is not suitable when the debt secured by the mortgage is a credit line and the amount of the debt may not be known at the time of signing the public deed of mortgage.

Being a normal procedure, the role of the competent notary (a notary shall be deemed competent if the mortgaged property is located within his notarial district) is limited to basically guarantee that the debtor rights are fully protected and monitor the holding of one or more auctions for the sale of the property.

Enforcing a mortgage upon a real estate asset in Spain through any of the ordinary procedures (executive or, particularly, declaratory) may prove to be a very long process. Following the declaratory proceedings could take approximately 18 to 24 months in the first instance. The appeal would take around 12 to 24 months, while the appeal for reversal could take approximately 4 years. Subsequently executive proceedings could take approximately 6 to 12 months for the first instance.

A summary judicial mortgage foreclosure procedure may take around 12 months, although this may vary quite substantially from case to case since first instance courts in places tend to be overstretched. In such circumstances, the court would not always abide by the time scales provided by the relevant regulations. This situation may be exacerbated in those cases in which the debtor knows how to use the instruments that the laws give him to slow down the procedure.

The setting up of a mortgage requires, principally, the granting of the relevant public deed (in order for formalisation before a public notary) by virtue of which the terms and conditions of said charge are set out, as well as the registration thereof at the Land Registry.

There are some privileged creditors whose credits must be settled prior to the debt guaranteed by the mortgage. These privileged creditors are the following:

• Unpaid wages corresponding to the mortgagor’s employees for the last 30 days, provided that the amount of each monthly wage does not exceed twice the official minimum wage (“Salario Mínimo Interprofesional”);
• Tax credits corresponding to taxes that are periodically levied on properties recorded at a registry, for the period comprising the fiscal year in which the claim is made by the Tax Authorities and the year prior thereto;
• The payment of the service charges and common expenses relating to a property which forms part of a condominium, to the Owners Association and corresponding to the current year and year prior thereto (with priority over any of the other creditors of the owner of such property); and
• The unpaid insurance premiums with respect to the property accrued during the previous two years.

Pursuant to the Law against Usury, if the lender exceeds the interest rate according to such Law, the loan shall be deemed to be null and void. The consequences of the nullity are that the lender shall return the interest received from the borrower and bear the costs of the proceedings and the borrower shall return the principal borrowed.

Although there is an Act on Usury, of 24 July 1908, we do not consider it as being relevant for the purposes of this type of transactions.

Creditor-debtor rights are governed by the Spanish Mortgage Law (“Ley Hipotecaria”) and the regulations implementing it. According thereto, no rights in favour of the creditor as regards the mortgaged property exist until the mortgage is effectively enforced by the relevant proceedings. Meanwhile, ownership will be held by the debtor/mortgagee.

Should bankruptcy proceedings lead to the insolvency of the mortgagor, the mortgage shall have priority vis-à-vis the claims of third creditors with respect to any immovable property.

Without prejudice to the above, please note that the judge in charge of the bankruptcy proceedings may establish the retroactive effects of his/her judgement, and therefore, any disposal or management carried out by the debtor during the course of such specific period (as determined by the judge but usually a period between 6 months and 2 years) would be declared null and void. This could be important in the event that the mortgage in favour of the lender was set up during the relevant period.

Loans in Spain are generally recourse, without prejudice that non-recourse loans may exist.