Non-Resident Taxes in Spain

Raymundo LarraĆ­n Nesbitt, December, 8. 2015

Regular legal-contributor Raymundo Larraín Nesbitt explains which property taxes non-residents face on buying property in Spain (Non-Resident Taxes in Spain).

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of December 2015

 

 

 

Introduction

Unbeknownst to most non-residents, on buying property in Spain, you automatically become liable for a series of property-related taxes. No one will give you the heads up on them, so it is up to you to find out how much you owe and comply with the Tax Authorities.

Resident: to be or not to be – that is the question.

This article deals only with non-resident taxes. 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 which escapes the purpose of this article.

Are you married or in a joint property ownership?

For tax purposes couples or joint owners will be treated as separate taxpayers and be required to file separate tax returns. Property tax will therefore be split among co-owners.

Cadastral Value

Is the assessed value local Tax Authorities give to a property. It is usually well below the market value. This rateable value is used as the taxable base to calculate a series of taxes. You will find the cadastral value of your property in one of your local tax bills (i.e. IBI). Be aware that a store room or garage space may be regarded legally as a distinct separate entity from your main home and therefore subject to their own individual cadastral values.

 

Non-Resident Taxation Overview

 

I review below six taxes. Before anyone frets, in truth most non-residents on buying property in Spain will only be liable for the first three on an annual basis:

I. Non-Resident Income Tax (regardless of whether you let your property out or not)
II. IBI tax.
III. Rubbish Collection Tax.

However, for completion’s sake, I have added a further three:

IV. Wealth Tax: this will be paid by a small minority of people.
V. Special tax levied on real estate: this will be paid by even fewer people as it relates to offshore holding structures domiciled in tax havens.
VI. La Complementaria or ‘bargain-hunter’ tax: strictly speaking this is not even a separate tax. It is a consequence of today’s low-priced property in Spain. It is actually supplementary Property Transfer Tax. It is explained below.

I. Non-Resident Income Tax

 

The overview of this first tax is split depending on whether you rent the property out or not – either way you are going to pay it. It is strongly advised you hire a lawyer to file this tax on your behalf. Lawyers are covered by professional indemnity insurance in case of malpractice or negligence. Make sure that whoever files taxes on your behalf has insurance in place from which to claim from.

Calculation: the taxable base is 2% of the cadastral value of your property or 1.1% if the cadastral value was revised after the 1st of January 1994. This taxable base is then multiplied by the appropriate tax rate. The tax rate varies depending on whether a taxpayer is resident or not in the European Union or European Economic Area (Norway and Iceland):

•    Resident in E.U. or E.E.A.: 20% (19% as from 2016).
•    Non-resident in E.U. or E.E.A. (rest of the world): 24%

In truth on the 10th of July 2015 Royal Decree 9/2015 was passed reducing the tax rate for EU/EEA residents down to 19.5% as from the 12th of July onwards till the 31st of December 2015. From the 1st of January through to the 11th of July it remains set at 20%. The idea behind this article is to keep it short and simple so I will choose to ignore this amendment to avoid overcomplicating the examples below.

Worth noting is that EU/EEA residents now qualify for tax relief on renting out their Spanish property as from 2015 onwards. This is a result of a recent landmark ECJ ruling of 3rd September 2014 which forced the Kingdom of Spain to amend various key laws to put an end to discrimination between residents and non-residents on taxation matters. For a full comprehensive list of available landlord rental allowances, please read my article Spain’s Holiday Rental Laws (under the heading “II. Changes in Taxation Brought About by European Legislation”).

1. Not renting out property

Hang on, does that mean I get taxed on Income despite not renting out my Spanish property?

Yes. This is a frequent question. 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 authorities take the view an owner derives a benefit in kind from owning property irrespective of whether it is true or not and taxes it accordingly. It is a fixed annual fee.

i) Resident in E.U. or E.E.A.

Tax rate: 20%
Tax relief: not applicable.
Dates: to be paid before the 31st December of each year. If you buy a property mid-year, you are only liable to pay in proportion to the months you have owned the property (pro rata).
Tax form: 210.

Example E.U./E.E.A. resident: Mr. John Shepard owns property in Spain with a cadastral value of €100,000.

· Non-revised cadastral value: 2% = €2,000; 20% * €2,000 = €400. He will be liable for €400 as Non-Resident Imputed Income Tax.
· Revised cadastral value: 1.1% = €1,100; 20% * €1,100 = €220. He will be liable for €220 as Non-Resident Imputed Income Tax.

ii) Resident outside the E.U. or E.E.A.

Tax rate: 24%
Tax relief: not applicable.
Dates: to be filed and paid before the 31st December of each year. If you buy a property mid-year, you are only liable to pay in proportion to the months you have owned the property (pro rata).
Tax form: 210.

Example Non-E.U./E.E.A. resident: Mr. Salhadin ibn Ayy?b owns a villa in Spain with a cadastral value of €100,000.

· Non-revised cadastral value: 2% = €2,000; 24% * €2,000 = €480. He will be liable for €480 as Non-Resident Imputed Income Tax.
· Revised cadastral value: 1.1% = €1,100; 24% * €1,100 = €264. He will be liable for €264 as Non-Resident Imputed Income Tax.

2. Renting out property (without permanent establishment)

i) Resident in E.U. or E.E.A.

Tax rate: 20% on rental income for 2015 (19% as from 2016).
Tax relief: Yes, physical persons may deduct, for example, home insurance, mortgage loan interest payments, property maintenance expenses etc. Legal persons may also deduct rental related expenses.
Dates: collected annually or quarterly.
Tax form: 210.

ii) Resident outside the E.U. or E.E.A.

Tax rate: 24% on rental income.
Tax relief: no.
Dates: collected annually or quarterly.
Tax form: 210.

Rental related articles

Renting in Spain: Top Ten Mistakes – 8th of June 2011
Let-to-Buy in Spain: The Smart Choice – 8th of April 2012
Letting in Spain: The Safe Way – 10th of October 2012
New Measures to Bolster Spain’s Ailing Rental Market – 8th of July 2013
Tenant Eviction in Spain – 8th of June 2014
Spain’s Holiday Rental Laws – 8th of March 2015

II. IBI Tax (Impuesto sobre Bienes Inmuebles)

 

This tax applies to both residents and non-residents. In some parts of Spain, it is known as SUMA.

This is a local tax levied by the town hall where your property is located. It is paid once a year (normally due in August through to November). It is equivalent to the UK’s Council tax.  It varies from one town hall to the next. It is based on the rateable value of your property (0.4 – 1.1% of cadastral value per annum); for cheap properties it can be as low as a few hundred euros whereas posh pads, in sought-after areas, may command a couple thousand euros.

It is highly advisable you set this tax as a standing order. The reason is because failure to pay may lead to your property being seized and sold in a public auction. Town halls are becoming increasingly aggressive pursuing this local tax post-credit-crunch; particularly for high-end property.

III. Rubbish Collection Tax

 

This self-explanatory tax applies to both residents and non-residents.

It is a local tax levied by the town hall where your property is located. It is paid once a year. On average it is a few hundred euros a year. It is advisable you set this tax as a standing order.

IV. Wealth Tax

 

This tax had been suppressed but was reinstated because of the severe recession. It will likely be abolished – again – over the next years. More on its reintroduction in my blog post: Spanish Wealth Tax Reloaded. It applies to both residents and non-residents

If you own assets in Spain that exceed a net value of €700,000 you are liable for this tax. The first seven hundred thousand euros is a nil rate band and the excess is taxed following a sliding scale. If the property is mortgaged, this amount may be deducted as it is a liability. If you are liable for Wealth Tax, it is compulsory you appoint a fiscal representative in Spain. In truth, only a small minority of people qualify to pay it.

Tax rate: National scale is 0.2 – 2.5% of net assets. However, it varies from one region to the next in Spain as they have devolved competencies over it i.e. in Andalusia the scale is: 0.24 – 3.03%.

Tax relief: None for non-residents aside the nil rate band.

Dates: To be filed and paid before the 30th of June of each year.

Tax form: 714

More on Wealth Tax in my in-depth article: Spanish Wealth Tax.

V. Special Tax Levied on Real Estate (GEBI)

 

If you own property in Spain through a corporate offshore structure domiciled in a tax haven you are liable to pay 3% of the property’s cadastral value every year. A full list of what the Spanish Tax Office (Hacienda or A.E.A.T.) considers as tax havens can be found here. Appointing a fiscal representative is mandatory in this case for blatant reasons. Only a fraction of taxpayers is liable for it. Unbeknownst to many, a non-resident landlord may – exceptionally – offset this special tax to mitigate his own tax bill on, for example, renting out the property. A buyer will be held liable for a non-resident vendor’s tax liability going back four years.

Dates: To be filed and paid before the 31st of December of each year.

Tax form: 213

More on this in my article: Buying and Owning Spanish Property through Corporate Structures: Pros and Cons.

VI. La Complementaria or Bargain-Hunter Tax

 

Unlike the previous five taxes, this ‘tax’ is paid only once. In fact, it is not really an extra tax. It is more of a supplementary Property Transfer Tax on buying low-priced property in a rock-bottom market. Local Tax Offices make the (wrong) assumption that a buyer has under-declared the sales value to dodge taxes. So they tax the amount they believe was under-declared. It is highly unfair and should be put to an end. It applies to both residents and non-residents.

More on this matter and how to challenge it successfully in my article: La Complementaria or Bargain-Hunter Tax.

 

Frequently Asked Questions (F.A.Q.)

 

1. What happens if I don’t pay my property-related taxes?

You are breaking the law. Overdue taxes are lodged against the property at the Land Registry. Prior to the property being sold or bequeathed (inherited) these outstanding amounts must be settled. In addition late payment interests and penalties will be rolled up compounding the debt. You will not be allowed to change the name in the Title deed until any unpaid tax is settled in full. Additionally the Tax Office is empowered to seize your Spanish bank accounts securing the debt.

On selling, the 3% retention withheld by a buyer by law (on account of a non-resident seller’s Capital Gains Tax liability) will be used to offset any owed tax by a non-resident seller (tax model 211). Do NOT expect the Tax Office to refund you the difference on the 3%; if you owe property taxes the tax authorities will pocket the full 3%. To avoid this you must first pay in advance the owed property tax (up to the last 4 years, as the statute of limitation time-bars any tax exceeding the four-year limit) plus any penalties or surcharges for late payment. Only once the outstanding property tax is settled, will they refund you the 3% withheld in full. More on this topic: Taxes on Selling Spanish Property.

In some serious cases, i.e. non-payment of IBI tax, may lead to the property being embargoed and seized by the local authority (town hall). It will then be sold in a public auction to recoup the outstanding debt. This procedure is ‘surprisingly’ expedient in Spain (as in months). With the ongoing recession town halls are proving increasingly more resolute in pursuing this (aggressive) course of action. Pre-recession they were fairly lenient.

The statute of limitations for all taxes in Spain is four years and one day (notable exception is Spanish Inheritance Tax which is four years, six months and one day).

2. Can I be chased abroad for outstanding property taxes?

To be honest, I have never seen it happen nor have I heard of such a case over the past decade. As specified above, unpaid taxes will be lodged against the property at the Land Registry. You won’t be pursued abroad for them.

That said, there are scenarios in which Spanish creditors may chase you abroad (E.U. and E.E.A.) for outstanding debts on instigating European legislation: European Enforcement Order (E.E.O.). And vice-versa, British or Irish creditors may benefit from said legislation to pursue and secure assets held in Spain by a debtor (i.e. HM Courts & Tribunals Service EEO fact sheet). In practice Spanish creditors seldom chase you abroad unless the amounts are worth their while – but make no mistake, it can be done.

The following is an example list of scenarios where you may be pursued in the E.U./E.E.A. for money claims arising in Spain:

• Defaulting on Spanish Mortgage Loan instalments on a second home in Spain.
• Falling in arrears with your Community of Owners.
• Outstanding amounts owed to developers on Buying Off-plan Property in Spain (forced completion).
• Unpaid personal loans (Bad Debtor’s List).
• Pursuing negative equity abroad: post-auction shortfall on Spanish Bank Repossessed Property.

More on this matter in my in-depth article: Spanish Creditors Pursuing Debts Abroad.

3. Do I need to appoint a fiscal representative?

It is not compulsory (in most cases) but it is highly advisable that you do. This will assure tax compliance in a diligent manner and avoid nightmare scenarios like you losing your Spanish home because of non-payment issues or having your Spanish bank account frozen to secure pending debts. A frozen bank account means that any standing orders will bounce back compounding your problems i.e. unpaid utility invoices.

4. Do I get notified in my home country of any taxes/debts?

Sadly no. You will only be notified at your Spanish address. Which is why non-residents should seriously consider appointing a fiscal representative to be on the right side of the law and avoid incurring in late payment penalties or surcharges. Moreover, you could appoint the address of your fiscal representative to receive all tax notifications ensuring compliance and adding to your peace of mind.

What can a lawyer do for you?

Appointing a lawyer as your fiscal representative in Spain to file and pay on your behalf your Non-Resident Income Tax and Wealth Tax returns, if applicable, has the following advantages:

•    Mandatory Professional Indemnity Insurance which you can claim from in case of negligence or malpractice. Currently this cover stands at €800,000 with Larraín Nesbitt Lawyers.
•    Complete the tax forms in Spanish.
•    Ensure you do not overpay on calculating the tax due on your property based on its rateable value and the number of days you have owned it on a pro rata basis.
•    Apply for tax relief (where possible).
•    Submit the tax returns before the Tax Office in a timely manner (thus avoiding attracting penalties and surcharges on late payment).
•    Setting a fiscal representative’s address to deal with all tax-related correspondence generated throughout a fiscal year.
•    Reply to any tax notifications within the deadline ensuring tax compliance.
•    Appeal misunderstandings or material errors.
•    Up-to-date knowledge on fast-paced fiscal changes.

Conclusion

Lawyers are specially qualified to act as your fiscal representative in Spain ensuring all tax deadlines are met and complied with in time. This will avoid you falling foul of the law and making costly mistakes in the long run.

Blissful ignorance on which taxes you ought to be paying, on owning property in Spain, will not be accepted as an excuse to avoid payment (Article 6 of the Spanish Civil Code). Do not expect Tax Authorities to handhold you reminding or even explaining what your taxpayer responsibilities are. It is up to you to find out and comply with them.

If in doubt, just ask a lawyer to help you out – we don’t bite (usually).

 

L’art de l’imposition consiste à plumer l’oie pour obtenir le plus possible de plumes avec le moins possible de cris.” – Jean Baptiste Colbert.

French economist and Finance Minister under King Louis XIV.

Translated as: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” Plus ça change, plus c’est la même chose!

 

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