COVID-19: Renegotiation of mortgage facility agreements and effect on transfer and stamp tax
Spain Tax Commentary
Halted economic activity and a continued decline in revenues in the business sector as a result of COVID-19 have, in the same way as in the 2008 crisis, compelled companies to refinance or renegotiate debts (secured by mortgages in a few cases) with financial institutions or other lenders. In this scenario it has again become important to analyze the potential effects of those mortgage novations in relation to the ad valorem stamp tax payment.
Generally, under article 31.2 of the Revised Transfer and Stamp Tax Law, any novation (i) that is stipulated in a public deed, notarized record or certificate, (ii) with quantifiable content, and (iii) eligible for registration at a public registry (the Property Registry, for example), is subject to stamp tax, unless it may be exempt under a provision of law.
Despite their apparent simplicity, there is no general consensus over how to apply the described rules, and there has been abundant discussion by tax commentators and in the precedents over a number of elements in relation to mortgage novations:
a) One concerns the existence itself of “quantifiable” content in the various types of novations, by reference to their contents and scopes, or of the nature as “eligible for registration” of the stipulated amendments; issues which need to be analyzed to determine whether the transaction is subject to stamp tax.
b) Another is, after it has been concluded whether it is subject to stamp tax, the analysis of what the taxable amount, or even, the applicable rate, should be in each case.
An analysis of existing tax commentary and precedents provides a few important issues in relation to the various amendments currently being stipulated:
1. Novations implying an amendment of term or interest rates
An amendment of the term or interest rate is a transaction that meets all of the requirements mentioned above to make it subject to stamp tax.
Although this issue is not exempt from debate, the taxable amount for stamp tax purposes in these cases may be said to consist of the whole of the outstanding mortgage liability payable by the debtor when the novation occurs.
Having said that, and exclusively within the scope of refinancing transactions where the lenders are financial institutions, article 9 of Law 2/1994, of March 30, 1994, on subrogation and amendment of mortgage loans, allows an express exemption from stamp tax for these types of transactions. It must be noted, however, that the precedents are unanimous over the restrictive nature of this exemption, to the effect that, if the novation deed contains any type of transaction other than a strict amendment of the term and/or interest rate for the mortgage loan or credit facility, the taxation of these other amendments must be analyzed separately and independently.
On this subject, the stated interpretation of the Directorate General for Taxes –“DGT”- (among others, in resolution V1236-09, of May 26, 2009) is that any grace periods granted in a mortgage refinancing must be treated as an alteration of the mortgage term, and therefore, are exempt from stamp tax if the other requirements laid down in Law 2/1994 are met.
2. Increase of the debt
An increase of the loan or credit facility amount is another transaction that meets the requirements laid down in article 31.2 of the Revised Transfer and Stamp Tax Law, although no exemption is applicable.
In this case, the taxable amount for stamp tax purposes consists of the amount by which the loan or credit facility is increased.
3. Amendment of the repayment system
The potential amount of stamp tax chargeable on changes to the repayment system of loans and credit facilities is a debatable issue.
The stated interpretation of the DGT (in its resolution V5438-16, for example) and of Madrid High Court (in a judgment on July 2, 2019) is to treat these novations as subject to and not exempt from stamp tax, and that they must be taxed on the whole outstanding mortgage liability when the novation takes place.
Having said that, supreme court precedents (judgments dated March 19, 2019, February 26 and March 4 de 2020) appear to convey (not wholly free from doubt) that amendment of the repayment system does not have to be subject to stamp tax (because it does not have “quantifiable” content); or that it must be taxed exclusively by reference to the substantive content of the taxable event, which, in the case of a simple novation amending a mortgage loan recorded in a public deed means the economic content of the quantifiable financial clauses determining the taxable economic capacity.
4. Amendment of the appraised value at auctions of mortgaged property
Although the tax on a mortgage novation amending the appraised values at auction of mortgaged properties was the subject of widespread debate among tax commentators and in court precedents, according to a precedent from the Central Economic-Administrative Tribunal, in its decision of October 1, 2017 (already accepted by the DGT, among others, in its resolution V1914-18, in which it changes its earlier interpretation) this agreement must be treated as not subject to stamp tax, because it does not meet the “quantifiable” content requirement.
5. Amendments stemming from the payment moratorium for mortgage debt to acquire a principal residence
It needs to be mentioned, lastly, due to being the only substantive measure concerning stamp tax to be introduced to date as a result of the health crisis, that Royal Decree-Law 8/2020, of March 17, 2020, introduced a new exemption for this tax in relation to novations of loans and credit facilities made under that decree law, concerning, exclusively, the cases relating to the moratorium for mortgage debt on the acquisition of a principal residence (defined in articles 7 through 16 of that Royal Decree-Law 8/2020), as clarified by Royal Decree-Law 11/2020 (view our alert ).