Acquiring a touristic establishment in Canary Islands now: a checklist

Dec 11, 2020 | Lagares News

With a population of only 2 million, Canary Islands receives every year 14 million tourists. Well, did receive before this lockdown. That industry is now “frozen” and under stress, so it may be a good time to acquire a business that, unlike its competitors elsewhere in Europe, is opened all year round: for the price of a distressed asset, you may be acquiring the long-run value of a functional, profitable one.

If you are considering such a move, here´s a few hints from a legal point of view.

1. The name of the thing.

According to Canarian Law, there are six types of establishments:

  • Hotels.
  • Apartment/bungalows establishments.
  • Rural hotels.
  • Rural houses
  • Homes for holiday purposes (the Air b´n´b type).
  • Touristic property as purely residential.

Each of these categories has its subset of regulations, so you are well advised to study what particular legal status is applicable to your intended purchase.

For instance, a bungalow complex constitutes one single “touristic establishment” according to law, as there can be only one single operator at a time in a given resort. Another example: hotels have quality requirements attached to its category.

Lack of understanding of the particular legal regime applicable may result in problems: as heavily regulated, this industry is subject to inspections (and sanctions!) and the relevant authorities are particularly active on that.

In fact, since the regulation is so detailed -that is, it tells you what you can legally do or not-, the legal structure of your investment is a crucial part of the asset profile and valuation.

Yes: valuation. It would be wrong for you to assume a mere land or building value of your property, as value is rather tailored to the legal use you can make of it.

2. Beware of the zone.

Zoning and urban planning legislation is tricky everywhere, imposing yet another layer of limitations to property, one that you can only ignore at your peril.

All the more so in the Canaries Islands, where 42% of the land is protected one way or the other and the ratio of the norms is trying to avoid massification of constructions in touristic areas. Indeed: you will find that the Canarian law has made every effort to foster a “quality tourism”, and that goal permeates regulations not only concerning the carrying of operations, but also urbanistic or aesthetical criteria.

Consequently, there is literally a legal maze of detailed regulations you should sort out with a specialist.

So, if your expectations include developing or even modifying your establishment, you should better be aware of the exact zoning profile of the land and the building: this will tell you what you can or cannot do.

3. Asset or company?

As a rule of thumb, plain property purchase will be the most frequent scenario, whereas company acquisition will be reserved for those investors who are interested in operating, that is, in acquiring the business as a going concern so as to immediately perform in the touristic market.

But the lines are not that well defined, and a plethora of details should be considered in each of the scenarios.

With notable exceptions, the touristic industry in the Canaries operates with SPVs (Special Purpose Vehicles), that is: a single hotel and its activity (staff, goodwill, licenses) per company. Even big hoteliers will structure ownership that way.

So, it makes sense to purchase the company, as you do not have to disaggregate assets.

Company acquisition takes time and a toll of red taping, a process well known: MOI, DD, then SPA, closing operations. It is an expensive, slow process (6/9 months on average), but one that should grant certainty to the acquisition, and one that, once completed, is in no need of utter legal maneuvers: you are open for business, with your licenses, your staff and your goodwill.

In its turn, touristic business as an asset purchase is easier and faster. You do not have to make a full due diligence, right?

Well, arguably: at least a limited DD is advisable, as under Spanish Law if you acquire a performing asset you may be drawn automatically (by operation of law) to also inherit some debts and liabilities (labour, Social security and taxes). The risk is potential, but it should be reviewed and dealt with.

If the asset is idle, not performing in the market, the task is simpler. But then your focus will be on the seller, for if he/she/it is steps away from bankruptcy (a not uncommon condition these days), you may be affected by it (see under).

A third option is acquiring the business itself -the activity rather than the building-, but not the shares of the company. As you do not legally surrogate in the company´s positions (debts and liabilities), it is an option to consider.

A couple of provisos there, nevertheless: first, there should be careful drawing of the perimeter of the acquisition, as to include all you need (licenses) and exclude other elements; second, preposterous as it seems, you should give a thought as the state of the selling company after you acquire its business: if it files (or it is forced) for Bankruptcy in the following two years after acquisition, your purchase may be affected.

4. Fishing in troubled waters.

The industry is under stress, that is obvious. Even if furlough schemes, State-backed loans and normative alleviations as to bankruptcy filing obligations have made owners delay any decision and wait for happier times, the truth is a great number of companies and owners of establishments are in default and at the brink of bankruptcy, if they have not already filed for it.

There´s an opportunity there, but one that has to be addressed carefully. If you wish to acquire a company, and it is at the brink of bankruptcy or has already filed for it or if you wish to acquire a distressed asset, or a non-preforming loan (NPL) as an indirect mean to acquire the asset, then the logic of insolvency and restructuring law will apply.

This means you will have to look around, that is, amplify your focus of interests to include the legal implications of your acquisition beyond the mere operation itself, for instance examining the effects on other stakeholders (creditors, workers). For they have rights that may be enforced under an insolvency scenario.

This “insolvency DD” is crucial and must entertained at all costs.

5. Taxes and extra costs.

In the Canaries, direct taxation will go like this:

1. Property (mere asset) purchase:

1.1. Tax on property transfers: 6,5%.
1.2. If both the seller and the buyer are businesses, then IGIC (VAT) will be applicable, with a 7% (but is refundable, no economic impact). And the tax on property transfer, reduced then to 1%.
1.3. In both cases, the seller will have to pay an increase in value resulting in the operation, a lesser City council tax: he will try to transfer it to you, and you should resist.

2. Acquiring a company:

2.1. Particular or business: Exempt.
2.2. In both cases, you should be aware that if the sole asset of a company is a building (which may perfectly be the case, as the industry is organizes normally as SPVs), then it will be presumed to be a sell of the building itself, and #1 will apply.

3. Acquiring the business itself as an ongoing concern (but not the company): 6,5% as tax on property transfers.

As for costs, you should be aware than in Spain property transfer, be it of an asset or a company, takes place before a Notary (though preparatory documents, even SPAs need not), so his/her fees ought to be taken into account. Add registration costs, either in the Property Register (asset) or in the Corporate Register (company).

Anyway, careful tax planning and structuring of the operation may result in surprising savings -or otherwise, if not well thought of.

Ricardo Lagares
Managing Partner