A sweet time for private equity in Spain - so let’s keep it going
Favourable conditions are supporting private equity activity in Spain right now, but for this situation to be consolidated certain measures must be taken – especially on tax
If 2017 was a record year for the private equity industry in Spain in terms of monetary volume (€5bn, an increase of 30 per cent compared with 2016) and number of transactions (715 – a 15.6 per cent rise) involving 596 companies (up 28 per cent), the forecast for 2018 is no less favourable. The Spanish private equity association, ASCRI, estimates investment in the fi rst semester to be in the region of €3bn in 334 deals.
Even though this figure is slightly lower than that recorded for the same period in 2017 the association expects to see a new record in 2018, considering the number of transactions already announced. International funds have been active in this period, accounting for 77 per cent of invested volume, showing the appetite for the Spanish market.
Although the period was marked by four mega-deals (above €100m in equity invested), mid-market transactions also hit an historic high. A lower level of intensity is being seen in fundraising and divestments, but a number of funds are on the home straight in closing the fundraising process, which will probably impact year-end figures.
All in all, the favourable market conditions (liquidity plus economic stability and outlook) support private quity and venture capital activity in Spain at maximum levels. But for this situation to be consolidated, certain measures need to be taken. Regulatory enhancements
Despite the fact that since 2014, with the enactment of the Private Equity Law and certain tax measures implemented by the government, industry players have been provided with the solid legal framework needed for development (as proven by the fi gures above), ASCRI
is still demanding a regulatory framework more in line with those of some neighbouring countries. The private equity industry is becoming more important every year to Spanish GDP and this has not gone unnoticed by the government, which is now focusing on enhancing it as much as possible.
For example, in the tax fi eld the government has recently approved a waiver for Spanish private equity funds from the obligation they had been under since 2016 to make payments on account of corporate income tax. This seriously impacted funds’ accounts as it required them to pay in advance a tax from which they are mainly exempt and which they could only recover months later.
Improvements in the area of taxation have been in place since 2012 when a battery of new rules were introduced into Spanish law placing upper limits on the deduction of interest, as in neighbouring countries. But it was the 2014 corporate income tax reform that made the most difference, introducing rules on the design of investment structures that were more precise.
The exemption on the sale of shares in subsidiaries has had a dual impact on the industry: first, the Spanish regime for regulated venture capital schemes has seen the advantages it offered in comparison with the treatment received by other unregulated operators (primarily related to the exemption on gains and dividends) diminish; and second, the inability to disclose for tax purposes the goodwill paid on purchases of Spanish companies has led to a more calm landscape when it comes to the implementation of neutrality rules in post-purchase reorganisation transactions such as mergers.
Although the two areas described above must be viewed as positive (due to greater precision in the rules in matters related to fi nancial cost and the reduction in lawsuits in the world of corporate reorganisation), there is still some way to go to achieve true stability and certainty in the tax treatment of private equity structures.
More stability required For the sweet moment the industry in Spain is currently enjoying to become a more permanent feature, the Spanish government should focus on lending more stability and general applicability to the rules, especially in the tax fi eld, so they can be implemented without risk. It should also set up mechanisms to allow certain interpretation policies to be put in place that apply to every taxpayer and every situation.