Can a Spanish limited company (SL) claim the 99% ITP relief when buying a rural estate in the Balearic Islands?

Buying a rural property (finca rústica) through a company that carries on a farming activity can be taxed very lightly in the Balearic Islands, but only if strict requirements are met. They must also be correctly reflected in the public deed (escritura). Before signing, two questions should be analysed: whether the transaction is subject to VAT (IVA) or ITP and whether the regional relief can be applied.

VAT or ITP when buying a rural estate?

• If the seller is a private individual, the sale is always subject to Impuesto sobre Transmisiones Patrimoniales (ITP, Spanish property transfer tax).
• If the seller is a business or self-employed professional and the property is used in their business, the sale is subject to VAT, not ITP (art. 7.5 of the Consolidated ITPAJD Act).
• The supply of non-buildable rural land is VAT-exempt (art. 20.One.20 of the Spanish VAT Act). In that case ITP applies.
• If the buyer is a business entitled to recover VAT, the exemption can be waived (art. 20.Two of the VAT Act). VAT is then charged under the reverse charge mechanism and the deed is subject to Actos Jurídicos Documentados (AJD, stamp duty) instead of ITP.

The 99% relief in the Balearics

Balearic regional tax legislation provides a 99% relief on the TPO charge for acquisitions of rural land used in a farming business. The main requirements are:

• The buyer must be a professional farmer (agricultor profesional) who owns a farm, or an SAT, cooperative or agricultural partnership with a priority farm. It may also be the owner of a farm in which at least 50% of the members are professional farmers.
• The property must be used in the buyer's farming business.
• The farming or ancillary activity must be maintained for 5 years, except on death.
• More than 50% of the buyer's income must come from farming.
• Any ancillary dwelling must not exceed 130 m². Swimming pools and sports facilities are not considered ancillary.

Specific requirements for a limited company

According to the Balearic tax authority's position in a binding ruling, an SL can claim the relief if it meets the following:

• It must already own a priority farm before the purchase. Unlike the national reductions in arts. 9 and 11 of Law 19/1995 on the Modernisation of Farms, it is not enough to achieve that status as a result of the purchase.
• At least 50% of the shareholders must be professional farmers holding at least 50% of the share capital.
• If the property includes a dwelling of more than 130 m², the relief does not apply at all. There is no apportionment and it cannot be applied only to the part without the house.
• It does not apply if the property is contributed to the company as a non-cash contribution.
• If the transaction is subject to VAT because the exemption has been waived, a different AJD relief applies, governed by a separate provision.
• The national reductions under Law 19/1995 are applied before the regional relief.

An important point about share capital

Art. 6.b) of Law 19/1995 requires more than 50% of the capital to belong to professional farmers, whereas the regional ruling refers to "at least 50%". An exact 50/50 split carries risk. The prudent approach is for professional farmers to hold more than half of the capital.

Stating these requirements in the deed is essential, so the transaction should be reviewed before signing.