Fiscal implications regarding options to purchase and the promise to buy or sell property

When one wants to sell a property and prior to completing the transaction at the notary’s office there are several ways to record the obligations of the parties to the transaction such as reservation documents, contracts of purchase and sale, option to purchase contracts or promises to buy or sell property.

However, which is the best way to document the sale and what fiscal obligations arise from the different forms of contracts that can be signed by the parties?

To provide further insight into the matter it is worth considering the general aspects of each different type of contract:

1.- A promise to sell or purchase property gives the parties the right to reciprocally claim the enforcement of the contract and an eventual transfer of the property. As such, upon signature of this type of document nothing has actually been sold or purchased but the parties may opt to demand the enforcement of the obligation to sell or purchase the property that the contract refers to.

2.- An option to purchase is a type of unilateral precontract by virtue of which one of the parties gives the other the exclusive right to decide whether he/she wishes to exercise an eventual purchase of the property within a determined time limit and in accordance with a set of conditions documented in the option. Upon signature of this type of contract, a premium may or may not be paid by the grantee to the grantor of the option.

3.- The most common type of contract regulating property transactions is a standard contract of purchase and sale with the penalty clause established in article 1.454 of the Civil Code by virtue of which the seller may withdraw from the contract by reimbursing any monies paid by the buyer plus an equivalent amount as a penalty and the buyer may withdraw forfeiting the monies paid on account of the purchase price.

Both the promise to sell or buy and the option to purchase contract are subject to taxation as they are presumed to be constituted in exchange for some form of consideration. This, in the case of the option to purchase contract is understandable as an option to purchase may be registered in land registry to guarantee the right of the grantee to exercise the option over the property. However, in the case of the promise to buy or sell it is more difficult to justify the taxation of the contract as its signature does not actually imply an immediate patrimonial transfer between the parties.

However, the tax office understands that the tax base of the promise to buy or sell or the option to purchase is calculated in accordance with the following criteria:

a) If a premium has been paid and if the premium amounts to more than 5% of the actual price of the property, the tax base will equate to the amount of the premium.

b) If the premium is less than 5% of the eventual price of sale of the property, the tax due will be paid on the basis of 5% of the eventual price of sale of the property.

Depending on whether the grantor of the option is an individual or a company/entrepreneur who is subject to V.A.T., the rates of tax applicable will either be a 10% transmission tax (in the Valencian Community) or V.A.T. and an additional 1.5% Stamp Duty in the case that the grantor is subject to V.A.T. and the option to purchase is constituted in a deed before a notary and is presented for registration in land registry.

From a fiscal perspective, both the promise to buy and sell and the option to purchase are transactions that are separate and independent from the eventual possible property transactions that they could be associated with.

This interpretation has been repeatedly upheld by the General Tax Directorate and as such, any tax paid on the constitution and registration of either the option to purchase or the promise to buy or sell cannot be deducted from the eventual taxes that are due if the property is eventually transferred between the parties as a result of the preliminary contracts conferring the right to buy the property.