Companies undergoing restructuring must pay tax on the creation of mortgages and pledges

Companies executing a judicially approved restructuring plan must take into account an additional tax cost when formalizing their guarantees. The Dirección General de Tributos (DGT) has clarified the tax status of mortgage and pledge deeds granted in this context.

What the DGT has ruled

The query sought to determine whether the creation of mortgages and pledges, carried out by a debtor executing a restructuring plan in accordance with the Insolvency Law, could benefit from an exemption in the Transfer Tax and Stamp Duty (ITPAJD). Specifically, it was asked whether it was possible to apply by analogy the exemption provided for debt write-offs or reductions within the insolvency framework.

The Administration's ruling is negative. The DGT points out that there is no specific exemption for the creation of guarantees within the framework of restructuring plans. Likewise, it has rejected the possibility of applying the exemption for debt write-offs or reductions by analogy, basing its decision on the General Tax Law, which prohibits extending the scope of exemptions beyond their strict terms.

What it means for you

For companies using the restructuring mechanisms of the Consolidated Text of the Insolvency Law to clean up their balance sheets, this pronouncement implies a direct impact on cash flow. When formalizing the guarantees necessary for the fulfillment of the plan, mortgage or pledge deeds will be subject to the payment of ITPAJD.

This scenario eliminates the expectation that guarantee acts will be treated fiscally in the same way as debt write-offs or reductions, which do indeed enjoy exempt treatment. The lack of an express exemption forces this tax to be integrated as an operating cost within the execution of the restructuring plan.

What should be done

It is necessary for companies facing restructuring processes to incorporate the cost of ITPAJD into their financial projections and the viability analysis of the plan. Given that the Administration's interpretation is restrictive regarding exemptions, the impact of this tax must be assessed at the time of formalizing the guarantees before a notary to avoid surprises in the tax settlement.