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Restructure and sale of the financial sector’s assets - measures to stimulate the sale of real estate assets

14 May 2012

On 12 May 2012 Royal Decree 18/2012 was published, which rules the aforementioned restructure and introduces incentive measures to encourage the sale of real estate assets.

The RD law 18/2012 adopts measures that are complementary to those regulated by Royal Decree 12/2012 (which already introduced urgent measures designed to restructure the financial statements of financial institutions affected by the impairment of real estate assets).

1. Summarising, Royal Decree 18/2012 is aimed at isolating and bringing on the market real estate assets owned by financial institutions, for which the law provides that they incorporate asset management companies to which they will transfer all real estate from foreclosure or received in payment of debts related to land for real estate development and to buildings or real estate developments. RD law 18/2012 orders that:
2. On the outstanding balance at 31 December 2011 of credit facilities related to land for real estate development and to buildings or real estate developments, additional coverage should be made (which goes from 7% for a finished development, 22% for a development in course, and up to 45% for land, provided that there is a mortgage guarantee).

Foreclosed assets or assets received in payment of debts will be transferred to an asset management company at their fair value or, in the absence thereof, at their book value. This valuation will substitute that of an independent expert, which is required by the commercial code.

The fiscal regime will be as follows:

1. Regarding assets transferred, the regime on fiscal neutrality established in the Corporate Income Tax Law will be applicable.
2. The subsequent transfer of the representative shareholdings of these institutions will not pay Property Transfer Tax (the exemption exception in section 2 of article 108 of 24/1988 will not be applicable).

When referring to measures to stimulate the sale of real estate assets, the RD law establishes an exemption in Corporate Income Tax of 50% on capital gains derived from the transfer of real estate acquired between 12 May and 31 December 2012, which is considered a non-current asset or being considered as such is also classified as maintained for sale (except when the transfer takes place between persons who form part of a group according to article 42 of the Commercial Code). An identical exception is established for capital gains declared by individuals and non-residents in their corresponding Personal Income Tax and Non-Resident Income Tax.

Draft Bill to amend Law 11/2009, which regulates regulated real estate investment companies

Worthy of mention is that the package of measures to stimulate the real estate market includes the draft Bill to amend the Law 11/2009, which regulates regulated real estate Investment Companies. However, it should be noted that the regulation in force until today imposes certain requirements on their incorporation and development which, in practice, has led to the lack of use of this vehicle.

The draft Bill, given the inflexibility of the regulations on regulated real estate investment companies, proposes significant changes, such as:

1. Decrease in the share capital from €15 to €5 million, with at least 15% in circulation on the organised market (with a minimum of 50 members).
2. Diversification of assets is eliminated (it is feasible to own only one property).
3. Elimination of limits on indebtedness.
4. Decrease in the obligation to distribute dividends from 90% to 50% chargeable to fiscal year’s profits.
5. Increase in exempt income from 20% to 25%.

The tax rate of 19% is maintained, dividends received by non-residents being exempt.

Consequently, if the amendments pointed out prosper and other aspects (such as the obligation to be listed on an organised market) are corrected, the Regulated Real Estate Investment Companies regime (in combination with the exemption of capital gains derived from the transfer of real estate commented earlier), could become an attractive vehicle to channel leased real estate assets to attract investors.

© Copyright 2012 Osborne Clarke S.L.P

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These materials are written and provided for general information purposes only. They are not intended and should not be used as a substitute for taking legal advice. Specific legal advice should be taken before acting on any of the topics covered.