Non-Resident Income Tax
Raymundo Larraín Nesbitt, December, 8. 2017
Lawyer Raymond Nesbitt gives us a year-end recap of the taxes non-resident landlords are liable for on owning and renting out property in Spain. Additionally, he walks us through the impact of the Common Reporting Standard.
The following article has been summarised to avoid unnecessary tax technicalities. The quoted tax rates are subject to change from one year to the next. Seek professional legal advice on your matter – see disclaimer below.
By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Abogados
8th of December 2017
I’m going to split this month’s contribution in two sections:
- I will kick off my article with the novelties introduced by the Common Reporting Standard as it marks an inflection point on non-resident taxation in Spain. This landmark agreement will force scores of non-resident taxpayers to think carefully on whether they come clean and become tax resident (in Spain) as this may have associated great fiscal advantages (listed below). The driving point I want to make clear in this article is that after this tax milestone becomes effective next 2018 nothing will ever be the same.
- The second part of the article acts as a gentle year-end reminder of the taxes non-residents have to pay on owning property in Spain. In my experience, the vast majority of non-residents are blissfully unaware of their tax liabilities on owning and renting property. This apathy has serious negative consequences as I care to explain below (i.e. losing substantial money on selling property in Spain; explained below).
I. The Common Reporting Standard and you
Whilst it is true the Spanish Tax Office (AEAT) traditionally adopted a blind eye towards non-resident non-tax compliance in the not so distant past, this is no longer the case by a long shot. The AEAT has dropped its paternalistic leniency and has been busy honing its claws and fangs on the wake of the Great Recession devising new methods to extort – apologies – I meant exact taxes. The widening public deficit in Western countries, led eagerly by care-free politicians obsessed with short-term opinion polls, has spurred taxmen to collect taxes in a more resolute manner leading to ‘creative’ solutions and burgeoning cross-border co-operation.
As an example of this budding trend, over 109 countries around the world, including all those belonging to the Organisation for Economic Co-operation and Development (OECD), signed three years ago a pilot initiative to automatically exchange fiscal information to combat tax evasion. As from 2018 Spanish Tax Authorities will automatically receive a great deal of fiscal information from non-resident owners, including UK and Irish nationals. This initiative is known as the Common Reporting Standard (CRS) and is a shameless mimic of the US’s wildly successful 2010 FATCA agreement which has proven adept at catching legions of non-compliant U.S. taxpayers.
In a nutshell, what the CRS does is to pull away the warm mantle of fiscal anonymity and make everyone lose their financial privacy. Its wide-reaching ripples have spilled over to multiple tax havens as well, namely UK overseas territories and the Channel Islands. Graphically, it is like the tideline receding all of a sudden, leaving ill-advised swimmers stranded and stark naked before the taxman.
All those expats who purposely – and sneakily – like gaming the system from a cosy hedge without declaring income (or paying taxes) in one country or another will have a problem going forward. You can no longer dwell and thrive in a grey area, in-between countries, to avoid paying taxes. If you own assets and receive rental income in one country but live in a second country, chances are both countries are going to know and act upon it, soon.
Leading up to this moment, the Spanish Tax Office slyly pre-empted this by requesting from resident taxpayers to comply with what is known as tax model 720 which discloses any assets tax residents in Spain hold abroad over €50,000. The Spanish Tax Office, after casting its own net and sniffing around, will now be able – for the first time ever – to cross-check tax declarations of hundreds of thousands of resident expats in Spain against the tax information supplied by fellow OECD tax offices in search of ‘discrepancies’. God forbid.
Fines for tax model 720 follow a sliding scale, but any ‘incongruity’ is fined starting at €10,000 and any data ‘omitted’ is fined starting at €5,000. Fines can lead up to a staggering 120% of the undeclared amounts you hold abroad on being resident in Spain. The afore does not preclude the fines for Income Tax which additionally can be up to 150%. In a classically fashioned pincer movement – coincidentally, no doubt – Spain’s Criminal Code was recently amended during the infamous Tax Amnesty to double the statute of limitations from 5 to 10 years in cases of tax evasion (defrauded amounts over and above €120,000). The cynic in me clearly sees a two-pronged strategy to nudge unwilling taxplayers (sic) to cross the line and become fully tax-compliant disclosing assets abroad or else face the risk of harsh penalties. Carrot or stick; it never ceases to amaze me how such a simple strategy is yet so very effective. In the spirit of full disclosure, Brussels has challenged the eye-watering fines of tax model 720, but for the time being they are very much enforceable by Spain.
The Spanish Tax Office hasn’t been dithering over the last two years and has been busy leading a pro-active hounding of non-taxpayers clawing back taxes. With particular emphasis on those living opulently in lavish villas locked up in a string of shadowy holding structures which nominally belong to third parties without paying a monthly rental. They have also been actively targeting property owners who fail to declare their annual Non-Resident Imputed Income Tax. And recently, over the last year or two, regional Tax Authorities have also jumped into the fray actively chasing non-compliant holiday home landlords on the back of the new raft of holiday home regulations as has been widely reported by Spanish Property Insight and other high-profile media. As an example, in my blog post from last October, I explained how the region of Andalusia have begun to fine non-compliant holiday home landlords with fines which range from €2,000 up to €150,000: Andalusia starts fining holiday home landlords.
Bottom line, for your own sake, if you own assets in Spain, get your taxes sorted out pronto because it is a ticking time bomb and time is running against you.
Now that I have caught your attention, and perchance given more than one reader a stomach ache, I list the tax obligations of expat landlords in Spain.
II. Non-Resident Income Tax
Unbeknownst to most non-resident Spanish property owners, irrespective of whether you let your property out or not, you are liable for tax every day of the year.
- Non-Resident Imputed Income Tax (NRIIT) – You do NOT let property
On owning property in Spain, even if you do NOT rent it out you must nonetheless file and pay once a year NRIIT. It is a legal fiction whereby it is surmised that you derive some form of financial benefit from your Spanish home; that is why it is called non-resident imputed income tax as it is deemed. Spanish Tax Authorities take the view an owner derives a benefit in kind from owning property irrespective of whether it is true or not and is taxed accordingly.
On selling your property, the Spanish Tax Office will verify you are up do date paying NRIIT; otherwise they will simply pocket all or part of the 3% retention a property buyer is forced to withhold on buying your property and pay it into the Tax Office. Losing 3% of the sales proceeds is a large amount of money for most people. You can pre-empt this on being up to date with this tax. This tax is ultra-low, and its true purpose is to serve as 'control'.
This tax is collected once a year. To be paid before the 31st of December of the following year.
You can contact us until the 21st of December 2017 to file and pay your Non-Resident Income Tax (scroll below for our law firm's contact details).
Our law firm offers the following legal service to file this annual tax at a very competitive fee: Non-Resident Income Tax (Fiscal Representation).
Stragglers are welcome!
- Non-Resident Income Tax (NRIT) – You let property (long or short-term)
In addition to filing the above annual tax, when you rent out Spanish property, whether as a long or short-term rental (i.e. holiday home or seasonal let), you also need to file and pay quarterly NRIT in Spain. On the days a property is effectively not rented out (think short-term lettings) a landlord is still liable for Non-Resident Imputed Income Tax on a pro rata basis (see section one above). Put simply, one way or another, you pay tax on the property every day of the year.
Following the double taxation treaty between Spain and the United Kingdom (updated in 2014), non-resident landlords need to file and pay tax on their rental income in the country where the real estate asset is located. So, for example, if a British national owns property in Catalonia (Spain) and rents it out as a holiday home during the summer season, they must declare and pay tax on their rental income into the Spanish Tax Office. If this British landlord is declaring and paying his Spanish derived rental income only in the UK, where he is tax domiciled, he would in fact be breaching Spanish tax laws. Thousands of British make this glaring mistake and are going to get into trouble with the Spanish Hacienda. UK tax domiciled owners need to declare and pay tax on their rental income in both countries. Following the double taxation treaty, the HRMC gives tax breaks on any rental income tax paid in Spain, so you don’t have to pay tax twice.
This tax is collected quarterly, on the first 20 days of every January, April, July and October.
Generous landlord tax relief is available even if a landlord is non-resident in Spain (albeit EU/EEA-resident). This tax relief can greatly reduce a landlord’s taxable base. More details on this taxation and landlord tax relief, in my articles:
- Renting in Spain: Non-Resident Landlord's Tax Relief – 14th of January 2017
- Holiday Home Taxation in Spain – 8th July 2017
Our law firm offers the following bespoke accounting service to file this quarterly tax for a nominal fee: Holiday Rental Accounting Service (HRAS).
Resident: to be or not to be – that is the question
To ascertain whether you qualify as resident or non-resident the Spanish Tax Office applies the following criteria:
- You spend more than 183 days in a calendar year in Spanish territory.
- Your centre of financial interests is located in Spain.
- Your spouse and/or underage children live in Spain.
If any, or all three, above apply you will be regarded as resident for tax purposes.
Resident in Spain: tax advantages
Now that we have gotten out of the way that you can no longer game the system pretending not to be resident in Spain following the introduction of the CSR, you may be surprised to learn there are a great number of tax advantages on becoming tax resident in Spain.
Post-Brexit, many of the tax advantages that British could benefit from as members of the European Union will cease to exist. As an example, in a recent Spanish Inheritance Tax Assessment Report (SITAR) we completed on behalf of a UK-domiciled client, it resulted in him having to pay 2,300% more (two thousand three hundred pc) in IHT post-Brexit than if he were Spanish (or EU) tax resident. Food for thought.
I have collated a few tax advantages on becoming tax resident in Spain, but there are many more. Speak to us for more details.
- Income tax: landlords can benefit from lenient tax allowances which on average can reduce your tax bill by as much as 40%. Ideal for those with tourist rentals.
- Income tax: residents and EU-residents pay a much lower percentage as opposed to non-residents (approximately 25% less tax).
- Income tax: residents in Spain do not have to pay Non-Resident Income Tax.
- Inheritance tax: take advantage of generous tax allowances (national, regional and local) in place which make a majority of inheritors not having to pay ANY inheritance tax whatsoever in Spain.
- Inheritance tax: 95% of tax reduction on a heir’s taxable base on main home (up to 99.99% in some regions in Spain i.e. Andalusia). *
- Selling your property in Spain: pay no capital gains tax. **
- Selling your property in Spain: no 3% of the sales proceeds withheld by the Spanish Tax Office.
- Wealth tax: huge reductions available for residents (€300,000 on main home, per partner). A couple can apply for a combined €600,000 reduction.
- Spain’s Non-Dom Tax Scheme (for affluent expats)
*Subject to a cap.
**Subject to terms.
Following the CRS, Spain’s Tax Office will now have unprecedented access to fiscal information from your home country as from 2018. This will allow it to boldly cross-check fiscal information of thousands of expats, resident or not in Spain. And what’s better, they won’t even have to ask for it as it is automatically exchanged between OECD members.
The always divisive red line that separates tax avoidance (legally acceptable tax planning) from tax evasion (criminally pursuable) has grown ever thinner. Make no mistake, as from 2018 the net is closing in. There will no longer be a warm cosy grey area to shelter in. The question is if you will fall in line or remain out of line
If you choose the former, we can help you sort out your tax affairs regularising them for a nominal fee for your peace of mind. We only charge for our legal services; a pain-free stomach is gratis.
Act now, before it is too late. Contact us free of compromise on your tax matters, we are here to help.
“You never know who's swimming naked until the tide goes out.” – Warren Buffet.
Legendary American business magnate, investor, and philanthropist. Wharton School graduate nicknamed the ‘Oracle of Omaha’. CEO and Chairman of Berkshire Hathaway. Despite a reported net worth of $80bn as of 2017, true to himself, he still lives in the same house he bought in 1958.
Larraín Nesbitt Lawyers, small on fees, big on service.
Larraín Nesbitt Lawyers is a law firm specialized in taxation, litigation, conveyancing, and inheritance. We will be very pleased to discuss your matter with you. Please contact us for a free initial consultation. You can contact us by e-mail at email@example.com, by telephone on (+34) 951 894 675 or by completing our contact form.
Article originally published at Spanish Property Insight: Non-Resident Income Tax
Legal services Larraín Nesbitt Lawyers can offer you
- Non-Resident Income Tax (Fiscal Representation)
- Holiday Rental Accounting Service (HRAS)
- Spanish Inheritance Tax (IHT)
- Spanish Inheritance Tax Assessment Report (SITAR)
- Wealth Tax
- Tax Model 720
- IBI Tax (Town Hall Rates)
- Spain’s Wealth Tax Reloaded – 8th September 2011
- Spanish Wealth Tax (Patrimonio) – 8th November 2011
- Fiscal Novelties Affecting Spanish Property Owners – 8th December 2012
- Buying and Owning Spanish Property through Companies: Pros and Cons – 7th March 2014
- Taxes on Selling Spanish Property – 8th December 2014
- Changes to Spain’s Inheritance and Gift Tax Law – 21st February 2015
- La Complementaria or ‘Bargain-Hunter Tax’ – 8th May 2015
- Taxes on Buying Spanish Property – 8th July 2015
- Dispelling Spanish Inheritance Tax Myths – 8th August 2015
- Non-Resident Taxes in Spain – 8th December 2015
- Spanish Inheritance Tax for Non-residents (Part I) – 8th February 2016
- Spanish Inheritance Tax for Non-residents (Part II) – 8th March 2016
- Spain’s Non-Dom Tax Scheme – 8th July 2016
- Inheritance Tax Novelties in Andalusia. FAQ on IHT – 8th September 2016
- Renting in Spain - Landlord´s Taxation – 8th of January 2017
- Renting in Spain: Non-Resident Landlord's Rental Tax Relief – 14th of January 2017
- Which beneficiaries are hit worst by Spanish Inheritance Tax (IHT)? – 2nd June 2017
- Holiday Home Taxation in Spain – 8th of July 2017
- Andalusia to slash Inheritance tax for inheritances under 1 million euros – 21st September 2017
- Spanish Inheritance Tax Assessment Report (SITAR) – 8th of October 2017
- Non-Resident Income Tax – 1st December 2017
- Non-Resident Income Tax – 8th December 2017
Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.
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