The 25-storey building, once the tallest in Spain at 117 metres (384 feet), will be sold to Spanish property developer Baraka Global Investment, a statement released from Wanda's Hong Kong-listed hospitality arm said.
The disposal was due to "the market and political environment in Spain and the resulting uncertainties on the... development potential of the Madrid property project," Wanda Hotel Development Co. said in the statement.
Wanda bought the historic Edificio Espana, completed in the 1950s under the dictatorship of General Francisco Franco, in June 2014 for €265 million ($277 million).
But its plans to develop the property into a hotel and shopping centre have encountered hurdles from the local government.
Madrid's new anti-austerity mayor Manuela Carmena has put investors on edge by vowing to sternly scrutinise big building projects approved by the former conservative council.
According to Spanish reports, city authorities refused to let Wanda, which has been on a high-profile overseas acquisition spree in recent years, demolish the building's facade before reconstructing it.
The company, owned by China's richest man Wang Jianlin, burst into the international spotlight in 2012 by buying US cinema chain AMC Entertainment for $2.6 billion.
Wang owns more than 200 malls, shopping complexes and luxury hotels across China.