A significant share of Spanish real estate held by international investors is not held personally. It sits inside a company, often a Dutch or Luxembourg holding, sometimes a chain of two or three entities assembled years ago for reasons that made sense at the time. When that asset needs financing, the structure stops being a background detail and becomes the centre of the transaction.
Nothing about a foreign holding makes a Spanish asset unfinanceable. What it does is add a set of questions that a domestic file never reaches, and the transactions that go badly are almost always the ones where those questions were left until after a term sheet had been signed.
Security over the asset, over the shares, or over both
The first decision is what the lender takes. A mortgage over the property itself is the orthodox answer: it is registered, it ranks, and enforcement follows a known route. A pledge over the shares of the company that owns the property is faster to grant and often cheaper, but it puts the lender one step away from the asset and exposed to whatever else sits inside that company.
In practice lenders frequently want both, and the borrower should understand what each costs. The mortgage carries notary, registry and stamp duty on the deed. The share pledge is governed by the law of the company’s jurisdiction, not Spanish law, which means a second set of advisers and a second set of formalities. Where the shares are Dutch, the pledge is executed before a Dutch notary; the same applies with local variations in Luxembourg and elsewhere.
The combination also creates a sequencing question that is easy to miss: if the lender enforces the share pledge and takes the company, it takes the company’s liabilities with it. A clean company with one asset and no history is straightforward. A company that has traded for a decade is not, and the lender will want to know which it is dealing with.
What makes the Spanish mortgage hold
A mortgage granted to a lender in Spain does not exist as security until two things have happened. Article 145 of the Mortgage Law requires, for a voluntary mortgage to be validly established, both that it be granted in a public deed and that the deed be registered at the Land Registry. Article 130 then confines direct enforcement to a registered mortgage and to the terms of the deed that were carried into the registration, so what the registrar records matters as much as what the parties signed.
The deed also decides how the lender can enforce. Under article 682 of the Civil Procedure Act, the special procedure for mortgaged property applies only where enforcement is directed exclusively against the mortgaged assets and the deed fixes two things: the value at which the parties appraise the property for the auction, which may never be less than 75 per cent of any valuation made under the legislation that article cites, and an address, set by the debtor, for demands and notices. Article 129 of the Mortgage Law adds an out-of-court sale before a notary, available only where the deed provides for it, and then only for default in payment of principal or interest, only for obligations whose amount is determined from the outset, and subject to the other conditions that article lays down.
What a pledge over Dutch shares gives the lender
Where the holding is a Dutch BV, the formalities and the vote are set by Book 2 of the Dutch Civil Code. Article 2:196 requires a deed executed before a notary established in the Netherlands for the transfer of a share or the delivery of a limited right over it, which is what a pledge is. Article 2:198 allows shares to be pledged unless the articles of association provide otherwise, and leaves the vote with the shareholder unless the pledge provides, whether or not under a suspensive condition, for it to pass to the pledgee, or the two later agree so in writing. Where the pledgee is not someone to whom the shares can be freely transferred, that passing of the vote, and its transfer where another person steps into the pledgee’s rights, also needs the approval of the body the articles designate or, failing one, the general meeting, and the articles may depart from these rules on the passing of the vote to the pledgee.
Enforcement runs through Book 3 of the Dutch Civil Code. Under article 3:248, once the debtor is in default the pledgee may sell the shares and recover what it is owed from the proceeds, and article 3:250 provides for that sale to be held in public, according to local custom, with the pledgee entitled to bid. Unless otherwise stipulated, article 3:251 lets the preliminary relief judge order a different method of sale or, at the pledgee’s request, allot the shares to the pledgee as buyer for an amount the judge sets. Under article 3:251(2), once the power of sale has arisen, the pledgor and pledgee may also agree a different method of sale between themselves, with the cooperation of anyone holding a limited right or attachment over the shares. Article 3:235 makes void any clause allowing the pledgee to appropriate them. Article 2:198(6) then applies the company’s own rules on the transfer of shares to a sale by the pledgee or the allotment of the shares to the pledgee, with the pledgee exercising the shareholder’s rights and performing the shareholder’s obligations in that process.
Who can sign, and can they prove it
Spanish notarial practice is exacting about powers. A director of a foreign company signing a mortgage deed in Spain will be asked to evidence the company’s existence, its current directors, and the authority of the person appearing. That evidence generally arrives as corporate extracts and a power of attorney, legalized or apostilled, and translated by a sworn translator.
None of this is difficult. All of it takes time, and it takes considerably more time when the company’s own records are out of date, when a director resigned and the register was never updated, or when the shareholder chain includes an entity whose documents are in a third language. Two weeks is normal when it is planned. Six is normal when it is discovered at signing.
The notary and the bank are also looking past the person who signs. Notaries and credit institutions are both obliged entities under Spain’s anti-money laundering law, whose article 4 requires them to identify the beneficial owner, to take adequate measures to verify that owner’s identity and to determine the ownership and control structure of a legal person, and not to establish or maintain a business relationship with one whose structure could not be determined. For the bank, a link in the chain that nobody can explain is not a documentary delay. It is a legal bar to the loan.
The structure that was efficient to build is not always the structure that is efficient to borrow against, and the difference is usually discovered at the notary.
Guarantees from entities that have something to guarantee
Lenders routinely ask the parent to guarantee the borrower. That request has to be tested against the parent’s own position: whether its constitutional documents permit it, whether there is corporate benefit in giving it, and whether the directors giving it are exposing themselves. These are not Spanish questions, they are questions of the parent’s home law, and in the Netherlands they connect directly to what board members are actually responsible for.
There is also a pricing dimension that groups forget. A guarantee given by one group company for another is a transaction between related parties, and where the group operates across borders it should be priced and documented on arm’s length terms. We deal with that in our note on intercompany loans, guarantees and cash pooling. A guarantee that appears for free in the group accounts is a question waiting to be asked.
Tax friction the lender will ask about
Interest paid by a Spanish borrower to a foreign lender, and interest flowing up a group chain, raises withholding and deductibility questions that belong in the model rather than in a footnote. Where the group already relies on a European holding for treaty access, the financing should not quietly undermine the position that holding was built to support. Our notes on withholding tax on dividends, interest and royalties and on treaty access and beneficial ownership set out the tests that apply.
Two Spanish points deserve specific attention. Entities resident in a jurisdiction that Spain treats as non-cooperative may face an annual special levy on the value of Spanish real estate they own, which makes certain historic structures expensive to keep. And the substance of the foreign holding matters increasingly for its own sake, a theme we cover in Dutch substance requirements. A lender does not assess these as a tax authority would, but it does notice when a structure looks fragile, because fragility is a refinancing risk.
Direct ownership, a Spanish company, and the special levy
Where the foreign company holds the Spanish property directly, without a permanent establishment in Spain, its Spanish income falls under the non-residents income tax, and how the financing interacts with that tax depends on where the company is resident. Article 24 of the non-residents income tax law taxes the returns such a company obtains on their gross amount as a general rule. A company resident in another EU Member State, or in an EEA state on the terms the article sets, may instead deduct the expenses deductible under the corporate income tax law, provided it shows that they are directly related to the income obtained in Spain and have a direct and inseparable economic link with the activity carried on there. Article 25(1)(a) sets the general rate at 24 per cent and at 19 per cent for residents of those states, while article 25(1)(f) sets 19 per cent, without that residence condition, for the items it lists, which include gains arising on the transfer of assets.
Where the property sits in a Spanish company instead, article 16 of the Corporate Income Tax Law allows net financial expenses to be deducted up to 30 per cent of the year’s operating profit, with net financial expenses of one million euros deductible in any case and the excess carried forward, and article 16(5) adds a further limit, on the conditions set out there, where the debt was used to acquire shares in other entities. The special levy mentioned above has its own mechanics. Article 40 applies it to entities resident in a country or territory considered a tax haven that own or hold Spanish real estate or rights in rem of use or enjoyment over it, and the tenth additional provision of Law 36/2006 reads references to tax havens as references to the non-cooperative jurisdictions determined by ministerial order under its first additional provision. Under articles 41 and 43 the levy is 3 per cent of the cadastral value or, where there is none, of the value set under the wealth tax rules. It accrues on 31 December, must be declared and paid in the following January under article 45, and is subject to the exemptions in article 42. For a lender the rules to note are article 45(2), under which a levy not self-assessed and paid by the January deadline is enforceable through the enforced collection procedure against the real estate, and article 45(3): when such an entity transfers Spanish property, the property remains charged with payment of the levy.
What to do before approaching the market
Map the chain from the Spanish asset to the ultimate individual owners, with current corporate documents at each level. Confirm who can sign and obtain the powers, apostilled and translated, before they are needed. Establish whether the holding company has liabilities beyond the asset. Decide, with advice, whether the transaction is better structured as a mortgage, a share pledge or both. And confirm that the tax position of the financing is coherent with the tax position of the structure.
Done first, this takes a fortnight and costs a modest fee. Done in the middle of a transaction with a deadline, it is the reason the deadline is missed.
Montclare structures and arranges financing secured on European assets, and prepares the corporate and tax structure that sits behind it. Our services are set out on our services page.
This article is informational and does not constitute tax, legal or financial advice. Lending and credit intermediation are regulated activities and the treatment of any transaction depends on its facts. Each engagement is subject to scope and applicable regulation.