Tax update in Spanish renewable energy sector: participation exemption regime in SPV sales

Recent years have witnessed a surge of investor interest in Spain’s renewable energy sector. Said projects have become a highly sought-after investment and it is common that they change ownership or are disinvested at some stage. Understanding the tax implications of capital gains arising from the sale of such projects is key for such investors.

In this context, the Spanish Corporate Income Tax Act (Spanish CIT Act) contains an exemption regime for capital gains stemming from the transfer of shares in Spanish companies. This is provided that the selling company holds a minimum stake of 5% in the capital or equity of the disposed Spanish company, subject to additional compliance requirements.

Whether this exemption can be applied to the acquisition and sale of a Special Purpose Vehicle (SPV) dedicated to developing and operating a renewable energy project has been a prominent tax issue.

Investors in renewable energy projects typically follow a model where each of the wind or solar farms is developed through a separate Special Purpose Vehicle (SPV). The development of each project will involve the following phases:

1. Initial development phase: In this phase, all the necessary permits, licenses, and authorisations required for the construction and commissioning of the wind or solar farm are obtained. Extensive technical and administrative work is undertaken, culminating in the project’s “Ready to Build” (RtB) status.
2. Construction phase: The second stage involves the physical construction of the plant and related infrastructure, continuing until completion.
3. Operational phase: Finally, the third phase involves the beginning of operation and production, with the generated energy being supplied to the grid.

The purchase and sale from one investor to another can take place at any of these three stages, and such transaction can be structured in various ways. However, one of the most common scenarios involves the acquisition through the purchase and sale of the relevant SPV during the early development phase, before entering the construction phase.

It is regarding those transactions occurring in the early stages of the project that the applicability of the exemption regime for capital gains described above generated discussion.

The issue was addressed in 2021 by the Spanish Directorate General for Taxes (DGT) through a Binding Consultation. It concluded that the corporate income tax exemption regime did not apply to the purchase and sale of the shares of an SPV dedicated to the development and exploitation of a renewable energy project which has not reached RtB status.

This conclusion was based on the opinion that such an SPV could not be considered to have effectively started to carry out its economic activity given that the construction of the plant had not begun. Understandably, this criterion raised much uncertainty and controversy within the renewables sector.

Fortunately, the DGT has recently revised its stance with Binding Consultation V2200-23, dated 26 July 2023. This new Binding Consultation adopts a different interpretation and confirms that the exemption regime is applicable to the capital gains derived from the sale of shares in an SPV dedicated to the development and exploitation of a renewable energy project, even if the transaction takes place before the project has reached RtB status. This is providing that the activities carried out during the development phase aimed at obtaining the necessary permits already represent the start of an economic activity.

The determination of compliance with this requirement should be made on a case-by-case basis. However, as a general rule, it hinges on ensuring that the SPV is organising means of production or human resources – whether its own or as a subcontractor for third parties.

The issuance of this new Binding Consultation provides investors much needed certainty and legal clarity, resolving one of the most recurrent tax questions surrounding these types of transactions.

This article was authored by Victor Alarcon, Partner and Head of Tax at Tribeca Abogados. Nicolas Groffman, our Head of International, leads this service for HCR and can be contacted by email.