Profit participating loans (PPL) granted to companies are usually defined as a transfer of money to a company by which the lender is rewarded by variable interests rates usually depending on profits. In early anticipation events, such loan is rewarded with new shares following an increase of capital and in insolvency situations, for credit ranking positioning it is usually behind ordinary debts and in front of the shareholders.

The Andalusian Supreme Court decides on a case where a taxpayer deems that the PPL granted to a company must not be included in the tax base of his wealth tax since a PPL, given similarities with owning shares in a company, should be exempt from taxation following the Spanish Wealth Tax Law (WTL).

The Tax authorities state that PPL are not equal to owning shares in a company and therefore, this exemption would not apply since our tax system strictly forbids applying rules by analogy.

The Andalusian Supreme Court rules that the essence of a PPL indeed differs with share ownership since it does not grant the rights which are linked to ownership nor are bound by the transfer limitation. For all the above, applying a tax exemption to the PPL by analogy is not applicable and the taxpayer’s appeal is dismissed.