Spain’s Non-Dom Tax Scheme

Raymundo Larraín Nesbitt, July, 8. 2016

Regular legal-contributor Raymundo Larraín Nesbitt tells us about a relatively new tax scheme the Spanish Treasury quietly introduced last year that works similarly to the UK’s popular non-dom tax arrangement, and which could make Spain a more attractive destination for wealthy expats when word of this pilot scheme gets around.

Credit photo: Flickr, by Phillip Ingham

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of July 2016

 

 

Introduction

The Spanish Tax Office quietly, albeit boldly, introduced a tax scheme inspired by the popular UKs non-domiciled tax regime which has proven most successful at attracting foreign investments (particularly in the Greater London area). It is a lukewarm attempt to attract high-achievers and create wealth fostering job creation.

Surprisingly, this pilot initiative has flown under the radar as I do not recall having read a single article published on the matter. I believe it merits exposure and should be made known to our large expat community as the savings on taxes are quite significant for the privileged few who are lucky enough to qualify.

Right off the bat I should make it clear that the criteria to benefit from it is fairly restrictive and it is geared at high-earning individuals who plan to relocate to Spain for professional reasons. Which means that most expats will not qualify.

Without further ado I analyse succinctly what it consists on and how to benefit from it. I will structure it as a FAQ for ease of comprehension.

Who is it aimed at?

This law is tailored to cater for senior corporate individuals (think of a multinational relocating a top executive in Spain). These over-qualified individuals are the ones that will reap the tax benefits of the generous provisions set out by this law. But other cases, such as high-profile artists, are also included.

Exclusions

Professional athletes, such as football players, are barred from making use of it.

The Tax Benefits

In a nutshell, this tax scheme allows expat taxpayers to make spectacular savings on paying Income Tax in Spain. If you opt into this scheme you stand to benefit from both income derived in Spain as well as any other worldwide income.

  • Spanish Income. Unlike in the UK, where you negotiate with the HRMC to pay a fixed annual sum, in Spain the first €600,000 earned from a source within Spanish territory will be taxed at a flat rate of 24%. The remainder will be taxed at 45%. Under normal circumstances resident taxpayers in Spain pay 45% on earnings of €60,000 or above. As can be surmised, even for earnings whose source is in Spanish territory, the tax savings are huge.
  • Worldwide Income. But it is here where this tax scheme truly shines. Spanish Tax Authorities will only tax you on your income derived within Spanish territory. Any other source of worldwide income is tax-exempt (just like with the popular UKs non-dom tax scheme). Under normal circumstances, resident taxpayers in Spain should pay for their worldwide income. Moreover, other countries cannot tax you on your worldwide income as for all intents and purposes you have opted to become a Spanish tax resident. You can claim double-taxation relief which negates other countries’ claims. This advantage offers a hugely attractive prospect for those that hold substantial overseas earnings and interests.
  • Best of both worlds. On opting for the scheme, expats will be treated as if they were resident taxpayers but in reality it will be a legal fiction whereby they will benefit as if they were still non-resident taxpayers. So you in fact get the best from both worlds.
  • Five years plus one. It applies on the fiscal year of relocation as well as on the following five years (total up to six years).

 

Who can apply?

  • Expats relocating to Spain as a result of a professional contract. The contract is a sine qua non requirement to opt into this scheme.
  • High-earners.
  • Not to have resided in Spain within the previous 10 years.
  • No earnings derived from a Permanent Establishment in Spain.

 

When does it apply?

It is time-limited and applies on the fiscal year of relocation as well as on the following five years (up to six years).

Timeline to apply?

Six months as from the start of the economic activity or as from enrolling in Spain´s Social Security (equivalent to the UKs NHS).

Fall from Grace

Unfortunately, this initiative falls short from its UK counterpart for a number of reasons What keeps it from being great in my mind is the fact that the Tax Office requires that the relocation comes as a result of a job offer. This leaves out entrepreneurs which are hands down the greatest source of wealth and job creation through their drive and ingenuity. This, coupled with the fact that it is time-limited, and that the tax is not capped for income derived in Spain holds it back in my opinion from being stellar.

Conclusion

The Spanish Tax Office should be heartily congratulated on offering such tax incentives to high-achievers. This type of tax scheme attracts talented individuals, fostering wealth and jobs at a time where it is much needed in Spain.

It is most certainly a step in the right direction and I for one hope the AEAT continues to venture down this road. Kudos to them.

If you plan to relocate to Spain as a result of a work commitment and happen to earn a substantial amount you may want to look into this tax scheme. Unless you enjoy overpaying taxes that is; bless your heart.

If you fail to plan, you plan to fail.” – Benjamin Franklin.

Founding Father of the United States. Exceptionally gifted scientist, inventor, diplomat, writer, printer, postmaster and political theorist. Even politician in his spare time; nobody’s perfect.

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in conveyancing, inheritance, taxation, and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

 

Legal services Larraín Nesbitt Lawyers can offer you

 

Related articles

 

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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Non-Resident Taxes in Spain

Raymundo Larraín Nesbitt, December, 8. 2015

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

Article copyrighted © 2015. Plagiarism will be criminally prosecuted.

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 Lawyers
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 (applies once a year regardless on 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 Ayyub 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.

More on IBI Tax in our in-depth tax article: IBI Tax Explained – 8th of November 2018.

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!

 

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in taxation, inheritance, conveyancing, and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

 

Legal services Larraín Nesbitt Lawyers can offer you

 

Related articles

 

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. No goose was harmed on writing this article. VOV.

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Taxes on Buying Spanish Property

Raymundo Larraín Nesbitt, July, 8. 2015

This article, by lawyer Raymundo Larraín Nesbitt, summarises the taxes and fees a buyer can expect to pay when buying property in Spain today.

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
8th of July 2015

 

 

 

Introduction

The idea behind this article is to keep it short and simple. If you want details on a particular matter, just follow the blue links to delve further. I advise reading it in tandem with How to Buy Property in Spain Safely.

As a rule of thumb purchase costs add 10 – 15% over and above the purchase price. In some regions of Spain this figure may in fact be higher. I collate below the taxes and associated fees on buying.

I will split my article distinguishing between three property types for tax purposes:

I.     New-build (or off-plan).
II.    Resale.
III.   Commercial property.

Land Registry and Notary Public fees follow a sliding scale in relation to the declared value of a property, the number of pages in a deed and other factors I won’t go into. Examples:

  • €100,000 property would attract Notary Public fees of €700 and Land Registry fees of €400.
  • €250,000 property would attract Notary Public fees of €800 and Land Registry fees of €500.
  • €1,000,000 property would attract Notary Public fees of €900 and Land Registry fees of €600.

 

Be aware there are minor discrepancies from one region to the next as Spain’s seventeen Autonomous Communities have competence, within limits, over some taxes i.e. Property Transfer Tax (ITP) and Stamp Duty (AJD).

Buyers should be aware of the Complementaria or ‘Bargain Hunter Tax’. It is a supplementary tax the seventeen regional Spanish Tax Offices levy on buying property as a result of today’s low real estate values.

Take tailored legal advice on the region where you intend to buy. Request a full breakdown of taxes, fees and associated expenses. The tables below are a simplified approximation.

I. New-Build or Off-Plan Property

You can read further in my article Buying Off-Plan Property in Spain.

Taxes & Fees Rate
VAT (IVA) 10 %
Stamp Duty (AJD) 0.5 – 1.5 %
Land Registry fees 0.1 – 2 %
Notary Public fees 0.1 – 2 %
Lawyer’s fees 1 – 2 %
Mortgage & Gestoría fees (if finance is required) 1 – 2 %

 

II.    Resale Property

You can read further in my articles Buying Resale Property in SpainBuying Distressed Property in Spain and How to Buy Rural Property in Spain.

Taxes & Fees Rate
Property Transfer Tax (ITP) 7 to 10 %
Land Registry fees 0.1 – 2 %
Notary Public fees 0.1 – 2 %
Lawyer’s fees 1 – 2 %
Mortgage & Gestoría fees (if finance is required) 1 – 2 %

 

III.    Commercial Property

This includes storage rooms (trastero) and car parks (plaza de garaje) sold individually and legally separate from a dwelling. You can read further in my article How to Buy Commercial Property in Spain.

Tax Buying from Private Individual Buying from Developer or Professional
Property Transfer Tax (ITP) 7 to 10 % N/A
VAT (IVA) N/A 21 %
Stamp Duty (AJD) N/A 0.5 – 1.5 %
Land Registry fees 0.1 – 2 % 0.1 – 2 %
Notary Public fees 0.1 – 2 % 0.1 – 2 %
Lawyer’s fees 1 – 2 % 1 – 2 %
Mortgage & Gestoría fees (if finance is required) 1 – 2 % 1 – 2 %

 

Taxes on Selling Spanish Property

 

I refer to my in-depth article Taxes on Selling Spanish Property for details.

A seller is liable for two taxes: Capital Gains Tax and Plusvalía Tax. Additionally, following new regulation, a seller may be required to produce an Energy Performance Certificate (couple of hundred euros).

I.    Capital Gains Tax

•    Non-EU residents: 24%
•    E.E.A. or EU-residents: 20% (in 2016 this drops to 19%)

II.    Plusvalía Tax

In most cases it is not significant, usually amounting to less than €1,000 but can be more in the case of villas with large plots of land.

 

Post-Completion Taxes and Maintenance Upkeep

 

I refer to my in-depth article Non-Resident Taxes in Spain.

Once you have purchased, you will face the associated running expenses. Make sure you have budgeted these expenses carefully so as to avoid unpleasant surprises! Some of the luxury gated communities with lush tropical gardens and beautiful infinity pools that dot the Spanish coastlines have pretty steep maintenance expenses (tallying several hundred euros a month!).

1. IBI tax: 0.4 – 1.1% of cadastral value per annum.
2. Rubbish collection tax.
3. Community fees (if you buy into a Community of Owners).
4. Imputed Income Tax: 0.22% – 0.48% of a property’s cadastral value per annum (for 2015).

Distinction is made between EU and non-EU/EEA-residents as well as revised/unrevised cadastral values on calculating Imputed Income Tax. Revised cadastral values are those for properties acquired post 1994. The cadastral value of a property appears in your annual IBI tax invoice.

a. EEA/EU-residents

• Revised = 0.22%
• Unrevised = 0.4%

a. Non-EEA/EU-residents (rest of the world)

• Revised = 0.26%
• Unrevised =0.48%

Conclusion

Take thorough legal advice to budget your purchase carefully before you commit. Initial reservation contracts, that strike the property off the market, are normally non-refundable. So if finance fails the real estate agency and/or seller are entitled to withhold the initial reservation deposit unless specific wording is added to the reservation contract to safeguard against this event.

Attaining finance from a lender should not be taken for granted. Spanish lenders are risk-averse these days and expect a non-resident buyer to come up with a 30 to 40% deposit. This will likely change in the near future, as credit begins to flow again, requiring smaller down payments from borrowers.

I reiterate that buyers, in today’s market, should be mindful of the Complementaria or ‘Bargain Hunter Tax’ so they do not get caught out by owing extra taxes post-completion.

To close, we are in a buyer’s market. There is plenty of property to choose from so do not rush in or be pressurised to sign on the dotted line. Take your time to consider matters carefully and budget accordingly.

And last my shameless plug; hire a good lawyer.

Lo bueno, si breve, dos veces bueno; y aun lo malo, si breve, no tan malo.” – Baltasar Gracián y Morales.

Loosely translated as: “The good, if short, twice as good; and even the bad, if short, not so bad.”

Baltasar Gracián y Morales, S.J., was a 17th century baroque prose writer and philosopher belonging to Spain’s Golden Age.

 

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in taxation, inheritance, conveyancing, and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

 

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La Complementaria or ‘Bargain Hunter Tax’

Raymundo Larraín Nesbitt, May, 8. 2015

If after buying property you receive a letter from the Tax Office demanding payment of extra tax under the heading ‘Propuesta de Valoración y de Liquidación Provisionalyou have received what is known as a ‘complementaria’. Regular legal-contributor Raymundo Larraín Nesbitt explains how to avoid one, and how to appeal if you have already received it. You only have 10 days to appeal it.

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

 

Introduction

Spain’s unending appeal continues to attract buyers from all over the world. 2015 consolidates last year’s trend as a buyer’s market. Besides the traditional reasons to buy property in Spain, bargain hunters are smartly taking advantage of three one-time goldies:

  • Rock-bottom prices; on average 50% depreciation across the board after a prolonged eight-year property slump.
  • Historical ultra-low interest rates; the lowest on record on a fifty-year period due to the ECB’s Quantitative Easing monetary policy that’s shelling 60 billion euros a month in the money markets.
  • Sterling pound on a seven-year high against the euro. A strong currency empowers pound-holders to buy overseas at intrinsic ‘discounts’.

 

It is doubtful we will witness again such a propitious combination to buy real estate in Spain for the remainder of our lifetime.

British buyers in particular are in for a treat. Osborne’s bold pension reform allows unprecedented freedom to citizens (over the age of 55) to cash in on their pension pots as a lump sum, tax-free (only for the first quarter; income tax at marginal rates still applies on the remaining three-quarters).

For all these reasons buyers are flocking to Spain again to buy property at cracking prices. You can read the full list of taxes and associated buying costs in my article Taxes on Buying Spanish Property.

But it’s not all rosy for bargain hunters on the prowl as I explain below.

La Complementaria – Definition

Is a supplementary tax the Spanish Tax Office levies on buying property as a result of today’s low real estate values.

Knockdown prices are unwittingly drawing the attention of the Tax Office. So much so that over the last years many buyers have received a letter from Spain’s Inland Revenue normally one year after completion (at times even longer) demanding supplementary tax is paid plus delay interests on the property on having (allegedly) ‘underpaid’ ITP or Property Transfer Tax. This is known as “liquidación complementaria por comprobación de valores” in Spanish legal jargon or simply “la complementaria”.

La Complementaria – Root Cause

The spike in complementarias we are witnessing as a sign of the times does not relate to buyers under-declaring (to pay in ‘B-money’), rather it is the disjointedness between the Tax Office’s outdated valuations and today’s low property prices as a result of a prolonged eight-year property slump.

This can be explained because Regional Tax Authorities use standard value tables (bases de comprobación de valores) to determine the valuation of properties; each property has assigned a fiscal value in Hacienda’s books. Property Transfer Tax is a devolved competency and Spain’s seventeen Autonomous Communities, following article 46 of the Property Transfer Tax Law (ITPAJD), are empowered to review the declared sales price recorded in the Title deed before a Notary Public. Regional Tax Offices draw a comparison between the fiscal value of the property and the declared sales price at completion. Any meaningful deviation is taxed.

These rateable values are static and are reviewed from time to time (every decade on average). This was fine so long as there was a continuous capital appreciation but when the market grinded to a halt eight years ago these tables froze in time and do not reflect accurately in most cases the overall 50% depreciation real estate assets have undergone (speaking in broad terms). So basically these rateable values the tax authorities zealously use are, at best, outdated showing in most cases top-of-the-range pre-crash valuations which are logically not in line with today’s low market values. That is why bargain hunters are receiving these letters.

If the Tax Authority detects a statistical meaningful deviation they will exact the difference in what they deemed a buyer has under-declared. In most instances this is simply not the case. Buyers have only shrewdly taken advantage of the opportunities a crashed real estate market has to offer. Albeit unbeknownst to them this draws the attention of Regional Tax Authorities which will do their best to recoup what they (wrongly) see as an under-declared sales price.

Take note that the complementaria I describe is the exclusive making of the 17 Regional Tax Offices as a result of devolved competencies; Spain’s Hacienda in Madrid (AEAT) or Centralised Tax Office abhors of this regional practice and is unrelated. And if anyone is wondering why this foul practice is done it’s because money is tight and some regions are cash-strapped. When the market picks up again it will cease to exist.

It is explained more clearly with an example:

A two-bedroom property overlooking an 18-hole golf course that used to fetch €200,000 is now selling at a bargain price of €100,000. A couple seize the opportunity and buy it signing at a Notary Public. One year later they receive from their local Tax Office a letter titled Impuesto sobre Transmisiones Patrimoniales y Actos Jurídicos Documentados (Property Transfer Tax) under the heading Propuesta de Liquidación (Payment Proposal). The letter goes on to explain that the value of the property, according to the Tax Office’s books, is €150,000. The Tax Office believes the couple have under-declared the shortfall of €50,000 and so demands the tax on the difference plus delay interests.

You can read further on this widespread phenomenon in the article: As house prices crash the “bargain hunter” tax becomes an issue for buyers.

Complementarias – The Positive Side

I may be alone on this, but I believe the perception on them ought to change as they are not intrinsically negative; and of course they can be challenged as I explain in the section below.

I find complementarias useful for the following two reasons:

  • From an individual perspective: the fact you have received one is a cast-iron guarantee you have purchased at a bargain price.
  • From a broader market perspective: they can be used as an investment indicator to pick up on an undervalued property market.

 

No one likes to be slapped with extra taxes – granted – but on the bright side you would not be receiving this letter if the taxman did not think you had bagged yourself a great bargain. Moreover receiving one is a surefire tell-tale sign you have done well for yourself on buying a below the market value property (BMV).

Additionally a surge on complementarias bears the hallmark of a market’s trough – a clear sign to buy. Complementarias may be used as an investment indicator signalling an undervalued market; with overvalued real estate assets complementarias simply cannot exist, by definition. It is precisely because bargains abound in a buyer’s market that complementarias have soared over the previous two years. They did not exist in the heyday of the property bubble.

I had already warned profusely about the complementaria in my articles How to Buy Property in Spain Safely and Buying Resale Property in Spain. And just to clarify, so there are no misunderstandings, I am not advocating them in any manner whatsoever as it is blatant; merely pointing out two aspects which I find positive on digging further.

Challenging La Complementaria

There are two ways to tackle this problem:

  • The first one is to take pre-emptive action to mitigate the chances of it happening or negating it altogether.
  • The second involves appealing a proposed payment once received.

 

I. Pre-emptive Measures

 

A lawyer may request from the Tax Authorities the book value of the property (valoración previa vinculante). This is the value a lawyer knows that if sold below will necessarily draw the attention of the Tax Office by way of extra taxes. It binds the Regional Tax Office on calculating Property Transfer Tax (ITP) on resales and may be attached to the Title Deed on completion in avoidance of ‘discrepancies’.

The Tax Office calculates property taxes using the cadastral value (which is below the market’s value). The cadastral value appears on your annual IBI tax receipt (akin to the United Kingdom’s Council tax bands and rateable values).

A cadastral value is static and is revised from time to time (every ten years on average). The way it works, in the majority of Autonomous Communities, is that Tax Authorities apply a coefficient that is published annually in the Official Law Gazette of each Autonomous Community. This is called Coeficiente Multiplicador del Valor Catastral (or CMVC, for short). I won’t go into detail on how this coefficient is obtained. A vendor needs to multiply the cadastral value by the CMVC and this will give the updated ‘real’ cadastral value of the property for tax purposes. The CMVC is different for every municipality (town or city) and is updated from year to year. Unfortunately this procedure is not followed by every Autonomous Community in Spain as they have devolved competencies.

The buyer now knows that, on submitting the tax information for the sale, he must pay Transfer Tax on or above said updated real value. Only then is he ensured the Tax Office will not demand any additional tax (article 134 of Spain’s General Tax Law or LGT). This is the minimum market value for tax purposes.

Following on my above example, the two-bedroom property located in the municipality of Marbella has a cadastral value of €115,000. The coefficient to be applied is 1.31 for 2014. This gives a ‘real’ price of €150,650. Transfer Tax should be calculated on this figure to avoid attracting the Tax Office’s additional tax request despite the property being sold for €100,000; that is irrelevant and beside the point.

You can check for yourself the assessed valuation given by the Regional Tax Offices. Each Autonomous Community has different procedures in place; in some valuations can be requested online, whilst others require a written form is submitted. I will only list those where non-residents frequently buy, not the seventeen that exist:

ANDALUSIA

BALEARS

CANARY ISLANDS

CATALONIA

VALENCIAN COMMUNITY

MADRID

MURCIA

 

II. Appealing the Payment Proposal

 

A buyer has two options on receiving a complementaria letter:

1. Passive. No lawyer is hired, no appeal is filed; proposed tax plus delay interests are paid lump sum.

2. Pro-active. Lawyer is hired and appeal is filed; revised (lower) tax is paid besides lawyer’s fees.

To file an appeal a lawyer may require the support of an external chartered surveyor (normally a technical arquitect known as aparejador) to draft a detailed report of the propertie’s value (tasación pericial contradictoria). The price for this report is in the region of €1,000. Hiring a lawyer to lodge an appeal is in the region of €1,500 to €2,500, dependent on the matter’s complexity.

So basically a buyer must run the Maths. Hiring a lawyer and a chartered surveyor has combined fixed fees in the region of €2,000 to €3,500. The combined fixed fees are the breaking point upon which a client starts to save money in taxes.

It stands to logic that if the Tax Office is demanding for example €1,000 as a Property Transfer Tax shortfall hiring a lawyer and a surveyor is out of the question. It’s put up or pay up, period.

Now if what’s being discussed exceeds the €2,000 to €3,500 threshold (as is normally the case) then it is reasonable to hire a lawyer (and surveyor) as their fees are offset with what a buyer stands to gain in saving themselves the supplementary tax (plus interests).

In practice these differences are larger and translate into much higher figures (as Regional Tax Offices takes their sweet time in sending these letters and meanwhile delay interests are accrued which are added on top and rolled over to what is owed by the taxpayer). A lawyer’s fixed fees are a bargain compared to what one stands to save in taxes. Particularly on buying high-end property lodging an appeal on a complementaria is a no-brainer. It is worth every penny in my professional experience.

Profile on the Appeals Procedure

If no pre-emptive action was taken, normally one year post-completion (but may take longer, years) the buyer, or his legal representative in Spain, will receive a Payment Proposal for Transfer Tax on the sales price shortfall. This payment proposal also includes delay interests for late payment on the lapsed time between completion and the day the letter is officially notified. The outline of the appeals procedure is as follows:

1. A buyer receives from their local Tax Office a letter titled Impuesto sobre Transmisiones Patrimoniales y Actos Jurídicos Documentados (Property Transfer Tax) under the heading Propuesta de Liquidación Provisional (provisional payment proposal). Example of a complementaria letter (source: El Confidencial).

2. He has 10 working days to register his interest upon the notification of the letter by recorded delivery. He can make allegations and submit documents to uphold his counter-arguments. Failure to comply within the ten-day window time-bars any option to file an appeal.

3. These allegations are normally dismissed and the Tax Office sends a liquidación tributaria definitiva (Final Payment Proposal).

4.  Two options fan out on filing an appeal:

a) Recurso de Reposición: It consists on filing an appeal before the very Tax Office (Agencia Tributaria) that drafted the letter so they ‘reconsider’ their calculations and decision. Needless to say the chances are slim to non-existent. This appeal is optional. One can first file this appeal and if it fails follow the TEAR appeal explained below. Deadline is 30 days.

b) Recurso Económico-Administrativo: This files an appeal before the regional economic administrative tribunal (Tribunal Económico Administrativo Regional, or TEAR) which is independent from the Tax Office; though slower usually ends in success. Appealing through TEARs is your best bet (pun not intended). Deadline is 30 days.

5. If the appeal succeeds, the revised (lower) Property Transfer Tax (ITP) is paid.

6. If the appeal fails the lawyer may opt to file legal proceedings before a Juzgado Contencioso-Administrativo (it normally doesn’t reach this stage).

Focus on the Recurso Económico-Administrativo

The lawyer in his appeal will hunt down formal errors made by the Administration on making their case. He will also make reference to ample jurisprudence on cadastral values to support his arguments as well as making good use of the surveyor’s report.

Regardless of the outcome, a client will not recoup the expenses incurred on hiring a lawyer and a chartered surveyor. The appeal procedure takes over a year.

La Complementaria or ‘Bargain-Hunter Tax’ – Conclusion

A market awash with bargains, coupled with the exceptional pro-buyer circumstances highlighted in this article’s introduction, fostered a U-turn in 2014 as I pointed out in my article Buying Property in Spain Safely. The remarkably favourable buying conditions, sustained by a mortgage lending rebound, translate into a sharp increase of bargain sales which account for a surge in complementarias over the previous two years which may, in due time, lead to a steady rise in property prices.

The spike in complementarias can be pinned to an undervalued market, a buyer’s market by definition, as opposed to London’s seller’s market which is eye-watering overvalued. The widespread phenomenon of complementarias was largely unheard of in the boom days and will foreseeably cease to exist in the near future when the market gathers pace and momentum gently drives prices upwards across the board.

In my experience the Spanish Tax Office (Hacienda or AEAT) struggles understanding both a buyers’ and sellers’ plight in a buyer’s market. Given today’s bargain prices, below Hacienda’s rateable values, buyers will be demanded supplementary Property Transfer Tax and, by the same token, sellers will be demanded additional Capital Gains Tax as I explain in detail in my article Taxes on Selling Spanish Property; they are two sides of the same coin.

Planning ahead is key to mitigate tax exposure on buying or selling Spanish property safely. I strongly advise both buyer and seller hire a competent lawyer.

If you fail to plan, you plan to fail” – Benjamin Franklin.

Founding Father of the United States. Exceptionally gifted scientist, inventor, diplomat, writer, printer, postmaster and political theorist. Even politician in his spare time; nobody’s perfect.

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in taxation, conveyancing, inheritance and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

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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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Taxes on Selling Spanish Property

Raymundo Larraín Nesbitt, December, 8. 2014

Regular legal-contributor Raymundo Larraín Nesbitt explains the taxes a vendor faces on selling a Spanish property.

Credit photo: Flickr, by Phillip Ingham

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of December 2014

 

 

 

Introduction

A seller can expect to pay, by law, two taxes:

I. Capital Gains Tax (or CGT for short) and

II. Plusvalía Tax.

However it can be agreed in practice, and frequently is, that a buyer pays for Plusvalía tax. Confusingly you may find that some articles refer to both taxes as if they were one and the same; they muddle plusvalía municipal (town hall tax) with plusvalía fiscal (which is Capital Gains Tax in English). Needless to say this is a glaring mistake as they are two distinct taxes; the former is paid to the town hall where the property being sold is located and the latter to the state (whether as Personal Income Tax or Non-Resident Income Tax dependent on the taxpayer’s residency status).

Following new regulation, a seller may be required to produce an Energy Performance Certificate (couple of hundred euros) in addition to CGT and Plusvalía Tax.

The Spanish Government published in the Official Law Gazette (BOE) last Friday 28th of November a set of new tax laws which will impact on a seller’s taxation. Law 26/2014 amends both Personal Income Tax (IRPF) and Non-Resident Income Tax (IRNR). These changes will come into force as from the 1st of January 2015.

If you own property purchased before the 31st of December 1994, and plan to sell soon, you may want to take tax advice before the new rules kick in as from the 1st of January 2015. You stand to pay a much larger capital gains tax bill as a result of these changes. It may be in your best (fiscal) interests to sell ahead in 2014 in lieu of 2015. You can read further on these fiscal changes on following this link: New Fiscal Laws Will Hammer Some Property Vendors.

I had already covered in detail the taxes to be paid by a buyer in my articles Taxes on Buying Spanish Property and How to Buy Property in Spain Safely (which includes in-depth coverage on buying off-plan and resale among many other property types).

 

I. Capital Gains Tax

 

Capital gains is paid by residents of Spain on their worldwide assets and by non-residents on property that they own in Spain. Special attention has to be made on whether one holds resident or non-resident status as reliefs and allowances differ depending on the case. I highlight in each section below which applies.

1.- Definition

CGT can be defined as the tax applicable on the profit you make on selling an asset (art.33 IRPF).

I stress it is the profit that is taxed (the gains), not the amount of money you receive.

2.- Capital Gains Tax Rates (for Non-Residents in Spain)

In general, 24% for non EEA/EU-residents.

For E.E.A. and EU-residents the newly enacted tax laws progressively reduce CGT’s burden as follows:

• Up to 31st December 2014: 21%.

• As from 1st of January 2015 till end of 2015: 20%.

• As from 1st January 2016 onwards: 19%.

This amendment, from last week, is welcome news as only a few years ago CGT was a whopping flat rate of 35% for non-residents. The Spanish government, nudged by the ECJ’s landmark ruling of 3rd of September 2014, has decreased CGT to bring it on par with residents.

3.- CGT Mitigation

A seller can mitigate, within legality, the profit figure on selling to reduce his capital gains tax liability. This can be achieved threefold:

a) Abatement Coefficients: Reductions Relating to when the Property was Purchased

Depending on when the property was purchased abatement coefficients kick in reducing the taxable base by a given percentage on an annual basis. Unfortunately, after the new set of laws was passed last week, this has been partially scrapped as from the 1st of January 2015. You can read further following this link.

Notwithstanding it still applies to properties bought before the 31st December of 1994 with a capped limit of €400,000. This is a one-time credit, meaning it may be used only once. You can however use it across multiple sales providing the total sales value is below the €400,000 threshold (i.e. two property sales of 200k each). Any amount over and above will not benefit from it.

b) Indexation Allowances: Reduction on Inflationary Movements (Inflation Relief)

This allowance used to give relief for the effects of inflation in computing gains over time. This correction factor brought property values in line with today’s inflation. This has now been scrapped as from the 1st of January 2015.

c) Expenses to be Offset

Art 35.3 IRPF. These can be divided into two subgroups (purchase and refurbishment expenses):

I.- Purchase Expenses

For further details please read my article Taxes on Buying Spanish Property. All expenses incurred on buying a property can be offset, such as:

• Lawyer’s fees.

• Notary’s fees.

• Land Registry’s fees.

• VAT or Property Transfer Tax (depending on whether you purchased off-plan or resale property).

• Plusvalía Tax (only if it was agreed the buyer paid it)

• Estate Agent’s commission (the norm is that a seller pays it but can be agreed otherwise in which case a seller could offset it).

On average, purchase costs add 10 – 15% over and above the purchase price. As we can see a great amount can be offset against the CGT bill on selling if done correctly. Original invoices (hard copies) must be kept for all the above as prove for the Tax Office. Your appointed lawyer will of course pre-empt this by submitting them beforehand to streamline the procedure and save time.

II.- Refurbishment Expenses

Remember that expensive parquet you brought all the way from Bali at your wife’s behest? Well you can now offset all major refurbishments costs against your CGT liability so as to reduce as much as possible the profit. Any extensions or improvements done to a property can be deducted. Do not confuse these with ongoing annual maintenance costs which are not tax deductible. In practice it may prove tricky to distinguish one from the other. Remember to keep hard copies of all the licences and invoices for justification purposes.

• Examples of deductible costs: glass curtains, double-glazed windows, parquet, marble floor, extension to property (outbuilding), tennis court, swimming pool, private lift.

• Examples of non-deductible costs: repainting over flaky paint, plumbing, debugging, tennis court green mold cleaning, swimming pool pump replacement, annual lift maintenance.

Word of Advice.

Needless to say, it can be surmised from both subgroups above that all invoices from professionals must have VAT on them. Do NOT supply to the Tax Office ‘invoices’ which lack VAT. You don’t want new problems. So when you are asked in Spanish by a builder or professional: “Con o sin factura?” (With or without invoice?) you always kindly reply: “con factura, por favor” (with VAT, please).

You only shoot yourself in the foot by trying to play ‘smart’ and avoid paying VAT (not to mention it is illegal) as these purchase and/or refurbishment invoices can be deducted in full on selling your property in the future. Planning ahead is key for success.

4.- Under-Declaring on Buying Property – Unadvisable Besides Illegal

Besides being illegal it is on selling your property when you lose big time.

The money you failed to declare on buying so as to save yourself one-digit in VAT or Property Transfer Tax, depending on whether you purchased Off-Plan or Resale property, comes back to bite you on selling.

Why? Because now the tax man believes you have made a larger profit (defined as the difference between the price you buy and sell) than what you actually did. And this ‘greater’ profit is now taxed at two-digits!

We can see it with a simplified example.

An off-plan property is acquired in 2005 for €250,000. The buyer (illegally) under-declares it by €50,000; ‘officially’, in Deeds or ‘escritura’, it shows as €200,000. The buyer saved himself 7% VAT on €50,000 which amounts to €3,500.

The buyer then decides to sell it in 2014 for €260,000 (figure in sales Deeds).

From a tax man’s perspective, the seller made a ‘profit’ of €60,000 (260 thousand less 200 thousand declared) when in reality he only made €10,000 (260,000 less the real 250,000). The seller is taxed 21% on the difference, which is €12,600 (21% of €60,000).

So basically the seller tried to save himself €3,500 on VAT in 2005 and nine years later, in 2014, he ends up over-paying €12,600 in taxes which practically negates his meagre profit of €10,000.

Following on the above, the seller has effectively over-paid €7,000 in tax. This is the difference between what he paid as CGT in 2014 (€12,600) and what he should have paid legally for both VAT in 2005 (€3,500) and CGT in 2014 (€2,100) had he come clean and declared the real purchase and sales price. The seller has wiped out in the process his profit margin. Not to mention you can get caught under-declaring leading to new problems. Not a smart move any way you look at it.

Bottom line, do not under-declare on buying property as you stand to lose money (on over-paying taxes when you come to sell later on). Besides, under-declaring is illegal.

5.- Non-Residents: 3% Withholding Retention on Selling

As a security measure, and to ensure taxes are complied with, a retention of 3% is practiced at completion on account of a non-resident vendor’s CGT liability. The obvious risk a non-resident poses is that they are bound to leave the country soon after the sale raising a question mark on their tax compliance. To avoid such a scenario unfolding, a buyer’s lawyer is forced – under law – to withhold 3% of the agreed sales price and pay it into the Spanish Tax Office (AEAT). The Notary public witnessing the sale will ensure this is carried out. You can read further on this retention on following this link.

Two scenarios unfold dependent on the profit made:

1. If a vendor has made a profit smaller than said retention then he is entitled to claim back the difference for which there is a deadline (three months). A vendor will require a lawyer’s service to claim back this money as it is not a straightforward procedure. A refund is taking on average several months (twelve to eighteen), a number of pre-booked visits to the Tax Office and compliance with tax models (211 from the buyer and 210 for the seller) which need to be meticulously completed so as to avoid the Tax Office giving any excuse to hand back the retention or part of.

During this time the Tax Office will be actively liaising with the appointed fiscal representative at the registered Spanish address set for communication purposes (i.e. they may require further documents are supplied). Which is yet another reason why non-residents should appoint a Spanish-based law firm to handle this refund as only a Spanish address will be accepted for communication purposes.

2. If the profit exceeds the 3% retention, a non-resident will be expected to pay the remainder within three months of the sale.

Additionally, on selling, if a seller owes property-related taxes (see my article Non-Resident Taxes in Spain) 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 models 211 and 210). 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.

6.- Selling at a Loss (No Profit)

Today’s market is exceptionally tough for sellers. Vendor’s frequently sell at a loss so as to secure the quick sale of a property. It may come as a surprise when the Spanish Tax Office then tries to tax CGT when in reality there has been no profit.

The AEAT calculates the value of a property following rateable values. It is their understanding there is always some profit to be made on selling and any attempt to ‘conceal’ it may be taken as under-declaring; which of course is not the case for most sellers nowadays. Regardless you will be expected to pay CGT on selling (at a loss).

7. Fiscal Novelty Law 26/2014: Over 65-Year-Old Residents

Any capital gains made by resident taxpayers over 65-years-old will go untaxed (art. 24 Law 26/2014) when the sales proceeds are:

1. Reinvested in pension annuities.

2. Maximum of €240,000.

3. Six-month deadline.

This is in addition to the below main home tax relief.

8. Residents: Main Home Tax Relief if Over 65 (Absolute Relief)

Over 65-years-old residents are CGT exempt on selling their main abode (‘vivienda habitual’). Art 33.4b IRPF and 41 RIRPF.

9. Residents: Main Home Tax Relief if Under 65 (Rollover Relief)

Just a quick reminder that art 38.1 IRPF allows a resident seller to be CGT exempt on selling their main home providing the following conditions are met:

1. The seller must be resident in Spain.

2. The dwelling must be his main home (must have dwelled in it permanently for the three previous years art. 41 bis RIRPF). It may be less than three years in certain personal circumstances when the taxpayer was forced to change home as a result of job change, marriage or separation.

3. The sales proceeds are reinvested in acquiring a new main home (in Spain or else in the EEA/EU). Any part of the sales proceeds not reinvested will be taxed pro rata.

4. Deadline of two years to reinvest the sales proceeds (in a new main home).

5. This rule applies to under sixty-five year-olds.

 

II. Plusvalía Tax

 

Is a local tax levied by the town hall where the property is located. Please read the Plusvalía municipal tax in Spain for more details.

1.- Definition

Plusvalía is a tax levied on the increase of value of the land from the date the owner acquired the property to the time of the present sale.

In Spanish, ‘Impuesto Municipal sobre el Incremento del Valor de los Terrenos de Naturaleza Urbana‘ (or simply ‘plusvalía municipal‘).

2.- Local Tax

This tax is a devolved (tax) competency to local authorities. Every town hall has competence to determine its own applicable rates within a scale. I cannot supply a chart with on-going rates as it varies significantly from one town hall to the next and is case-dependent. Lawyers need to liaise with the town hall where the property to be sold is located to obtain a final figure for the day of completion.

The tax is calculated on following both the rateable values of property and the number of years it has been in the possession of an owner (until the time of sale).

In most cases it is not significant, usually amounting to less than €1,000 but can be more in the case of villas with large plots of land.

Taxation on Selling Spanish Property – Conclusion

In my experience the Spanish Tax Office (AEAT) would seem to struggle understanding sellers’ plight on selling at a loss in today’s market. Don’t be surprised if, despite making a loss, you are still found liable to pay CGT by the ‘Agencia Tributaria’. And by the same token buyers are requested extra tax on buying under valued property as I explain in my article La Complementaria or Bargain Hunter Tax; they are two sides of the same coin.

Planning ahead is key to mitigate tax exposure on selling Spanish property. I strongly advise a seller hires a lawyer; with even more reason if non-resident. This ensures a seller complies in full with Spain’s tax laws and, given the case, may even opt for a refund on the retention (or part thereof) practiced at completion before a Notary Public. I remind the three per cent withholding retention only applies to non-residents on selling.

If you fail to plan, you plan to fail” – Benjamin Franklin.

Founding Father of the United States. Exceptionally gifted scientist, inventor, diplomat, writer, printer, postmaster and political theorist. Even politician in his spare time; nobody’s perfect.

Larraín Nesbitt Lawyers, small on fees, big on service.

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Related articles

Capital Gains TaxAdvice by the Spanish Tax Office (Agencia Tributaria or AEAT)

How to Buy Property in SpainAdvice by the Foreign & Commonwealth Office

 

 

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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Fiscal Novelties Affecting Spanish Property Owners

Raymundo Larraín Nesbitt, December, 8. 2012

Spain’s Government continues to introduce fiscal changes that could have a big impact on you and your business if you live in or own property in Spain.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of December 2012

 

 

 

Photo: Red Squirrel taken at Montreathmont Forest, Angus, Scotland.

 

Introduction

Spain’s continued challenging financial situation has shifted the Government into overdrive mode whereby fiscal novelties are introduced almost on a daily basis in an attempt to shore up its beleaguered economy. It is beginning to be somewhat of a chore to keep up with the sheer amount of legislation being enacted.

For year’s end I have written an article to compile the most significant fiscal changes that have taken place over the last two months in bullet points.

 

Batch of Changes

 

The approval of Spain’s Antifraud law (Ley 7/2012, of 29th October) introduced the majority of the most significant changes over the last months. Other laws have also contributed to this. I will review only the main ones with special emphasis on non-resident taxation.

– Cash payment restrictions. Art 7 has capped the amount one can pay in cash to €2,500 (or its equivalent in foreign currency) when one of the two parties is a professional businessman i.e. car dealer selling you a car. This threshold includes VAT. For non-residents this has been increased to €15,000 (you need to demonstrate you hold a domicile abroad) so as not to curtail tourism. Applicable sanctions will be 25% over the allowed caps both to payer and recipient. Spain’s tax office is fostering through its website whistle-blowers. Those who first denounce the other party within the next 3 months will be sanction-free. But only if you are the first to denounce it; first come, first served. If the other party has already denounced you, you will be sanctioned regardless if you denounce it afterwards.

– Lottery winnings no longer tax-free. Previously accrued winnings were tax-free, only interests were taxed. Now all amounts over €2,500 will have a flat tax of 20% as from next year. This 20% will automatically be deducted on cashing in the winning ticket. This includes National state lotteries (such as el Gordo, la Primitiva) and from private institutions such as ONCE, Cruz Roja etc.

– Residence permits for houses. Popularly known as “investor visas”. Non-residents on spending €160,000 or more on a Spanish property will automatically qualify for residency in Spain. This will allow them unrestricted access throughout the European Union bypassing restrictive visa applications. This measure was specifically tailored to attract Chinese and Russian nationals but it has generated the most interest in other countries, such as Morocco. Other European countries have similar investor visas schemes in place, albeit with much higher caps: France requires ten million euros, UK has a one million pound threshold, the Republic of Ireland requires one million euros and Portugal requires half a million euros. You can read further in my article Investor Guide to Spain’s Golden Visa Law.

+ Residency in Spain for property investors

– Tax amnesty. This will be the third wave in Spain’s young Democracy. The PSOE put in place 1984’s and 1992’s and also proposed the third one in 2010 (Zapatero). It has finally been the PP – Spain’s ruling party – which has implemented it under great criticism by the PSOE (!). Tax evaders had until the 30/11/12 to regularise their financial position with the tax agency (AEAT). The measure was a moderate success and has helped to bring in 1,5 billion in tax revenues which would otherwise have gone untaxed out of a self-declared goal of 2,5 billion. Also a further 20 billion in assets have come to light which will be taxable in future fiscal periods. This measure mirrors fellow European countries recent proposals i.e. France, UK, Italy and Germany.

– Abolishment of statutory periods for undeclared assets. Spain had a statutory administrative period of 4 years on all undeclared income after which no taxes could be pursued by the tax office. After this significant change, any undeclared assets held by residents will no longer benefit from the statutory period, meaning they will permanently be fraudulent regardless of how much time has elapsed. This is highly questionable from a legal point of view. In any case this was approved to create an ‘incentive’ for tax evaders to come forth and benefit from last month’s third tax amnesty.

– ‘New’ punitive measures introduced on all undeclared assets held abroad. It has always been an obligation for tax residents to declare all their worldwide income and assets to Spain’s AEAT on filing their annual returns. The reason on why this measure is being labelled as something ‘new’ is because it is being specifically levelled towards the hundreds of thousands of Spaniards who have recently emptied their Spanish bank accounts and transferred all their savings abroad. As a result this has led, amongst other reasons, to the biggest credit crunch Spain has witnessed over the last 50 years following the Bank of Spain’s statistics (since 1962).

The Government has now increased penalties on all those who – being resident in Spain – fail to declare foreign-held assets with a value of more than €50,000. This applies to titleholders, beneficiaries, or even just authorised signatories. You will be fined a minimum of €10,000 on being discovered as well as €5,000 for every undisclosed financial detail recovered E.g. residents holding undeclared offshore accounts with €50,000 or more, or even accounts in other European member countries such as the UK.

– Bolstering Spain’s Criminal Code. These changes have been brought about to punish furthermore tax evaders. Spain had a statutory period of 5 years on committing a fiscal crime (defined as defrauding amounts equal to €120,000 or more). This has now been doubled to 10 years. Additionally one could be jailed one to five years for a fiscal crime. This has now been raised over to two to six years serving a prison sentence. This has been introduced in cases in which the amounts defrauded are in excess of €600,000 and/or the offender has set up specific tax avoidance structures such as offshore trusts, using ‘sham’ company directors (known as ‘Sark Larks’). Traditionally these types of white-collar crimes were difficult to detect because of the lack of resources and manpower. However the culture is now shifting to simply handsomely ‘pay-off’ disgruntled bank employees to gain access to these files as well as having Spain sign agreements with tax havens to tap into the interests of undeclared amounts held abroad. Tax offenders who denounce associates will now see the charges against them significantly reduced on collaborating with tax officers. The tax office is also fostering the public to anonymously denounce each other.

– Taxes may no longer be deferred in cases of insolvency. Companies and businessman which had filed for bankruptcy could previously benefit of a tax deferment of their obligations. This will no longer be the case.

– Preventive embargoes. The tax office may now pre-empt embargoes to secure its interests if it believes there is an insolvency risk.

– Modules declaration. For those self-employed (‘autónomos’) who declare under the fiscal figure of ‘módulos’ and invoice more than 50 pc of their income to other businessmen will no longer be able to benefit from this special favourable fiscal regime. They need a turnover in excess of €50,000.

– Reduced VAT on off-plan properties scratched. Currently set at 4% this will be increased to 10% as from 2013.

– Publish a list of tax dodgers. The Government is mulling the idea of publishing a name and shame list with the largest tax debtors (still hasn’t defined the threshold); much as other countries have already done such as Greece which published a list of the 4,000 tax payers who owed more than €150,000 in taxes. From a legal standpoint this is highly questionable, unless current laws are amended to allow it.

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in taxation, inheritance, conveyancing, and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

Legal services Larraín Nesbitt Lawyers can offer you

 

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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Spanish Wealth Tax (Patrimonio)

Raymundo Larraín Nesbitt, November, 8. 2011

The Spanish wealth tax, known as patrimonio, might catch you buy surprise. It has been reintroduced during Spain’s financial crisis, but with a much higher tax-free allowance of €700,000 per person that also applies to non-residents.

The information for this article was provided by Blevins Franks, an international tax advisory service, and updated by Raymundo Larraín Nesbitt, a lawyer qualified to practise in Spain. This information is provided to help you do your background research, but not as a substitute for qualified legal advice.

 

 

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of November 2011

Spanish Wealth Tax History

1977: Introduced as a temporary tax, still going strong more than thirty years later.
2008: Suspended (set to zero) as of 01/01/2008
2011: Restored for tax year 2011 & 2012 (with important changes to the taxable base)
2013: Extended for the year 2013 & 2014

Never believe claims that a new tax is just a temporary measure!

The Wealth Tax (Patrimonio) in Spain

Most foreigners moving to Spain or buying property there understand that they will have to pay Spanish taxes like income tax, capital gains tax and inheritance tax. Not everyone, however, is aware that Spain imposes an extra tax, one with no equivalent in the UK and which is payable on top of the other Spanish taxes: The Wealth Tax in Spain.

Spanish Wealth Tax is payable by both residents and non-residents (if they own property in Spain), although the rules are different. Residents pay wealth tax on their worldwide assets but have quite generous tax-free allowances, whereas non-residents are only liable on net assets within Spain but miss out on some of the allowances.

Spanish Wealth Tax Legal Background

Wealth tax legislation is devolved to the autonomous governments, who can either use the national law, or pass their own laws on the following:

1. Tax-free allowances
2. Deductions and tax rebates
3. Levied tax rate

Some regions, like Catalonia, Valencia, The Balearics, and Andalucia, have passed their own laws. Others just use the national law. Now that the wealth tax has been re-introduced (September 2011), some regions are expected to review their laws.

Residents are subject to the laws of the autonomous regions where they live. Non-residents are always subject to the national law, regardless of where the property they own is located.

For residents, some regions apply a tax rebate of 100pc; meaning no wealth tax to be paid, whilst other regions apply no rebate, meaning the wealth tax must be paid in full. This disparity in laws leaves the door ajar for tax mitigation strategies for residents should the tax outlive its foreseen two-year period.

This guide only deals with the national law. If you live in Spain, and fullfil the conditions of residency, you need to consult a local tax specialist for more information.

Under this law, non-residents are also obliged to appoint a fiscal representative living in Spain, for example a lawyer or gestor. That will be an extra cost to bear in mind.

Timeframe

Its reintroduction, following the published law, will only be for a two-year period, 2012 and 2013, which corresponds to tax periods 2011 and 2012, respectively.

The reason, following the law’s own wording, is to “weather the financial storm which afflicts Spain at a time where those who own more have the moral obligation to contribute more to society following the legal principle enshrined by art 31 of Spain’s Constitution”. As from 2014 this tax will be abolished, in theory, again. Don’t hold your breath.

Wealth Tax in Spain – Deductions

Residents and non-residents are entitled to the following deductions per person:


– Individual deduction: €700,000 (previously €108,182.18 for residents, €0 for non-residents). Note that in Catalonia the deduction is €500,000.

 

Residents are also entitled per person to:


– Main home / permanent dwelling deduction: €300,000 (previously €150,253.03 for residents, €0 for non-residents)

 

Non-residents, by definition, cannot benefit from a permanent dwelling deduction

A married couple would each be entitled to the individual deduction as well as the deduction on their share of the main home owned in joint names (residents only).

So, for example, a married couple, resident and non-resident alike, has a combined tax-free allowance of €1,400,000 on their net estate. Taking into account a main home, a resident married couple has a total tax free allowance of €2,000,000.

Also note that this tax is on net assets, which means you can deduct mortgage debts (residents and non-residents alike)

Spanish Wealth Tax Rates

The wealth tax follows a progressive sliding scale, the larger the estate, the more you are taxed, with a cap set at 2,5pc for estates in excess of €10,7mn.

As stated above, the first €700,000 is the national tax-free allowance (for residents and non-residents alike).

The current rates under the national law for 2011 and 2012, applicable to net wealth on 31st December of each year, after all relevant deductions, are as follows:

Excess as from € 700,000 To € Tax rate % Total payable at
top of band €
Nil 167,129 0.2 334
167,129 334,253 0.3 836
334,253 668,500 0.5 2,507
668,500 1,337,000 0.9 8,523
1,337,000 2,673,999 1.3 25,904
2,673,999 5,347,998 1.7 71,362
5,347,998 10,695,996 2.1 183,670
Over 10,695,996 2.5

 

In Madrid, the tax rate for Patrimonio is currently set at 0%, so residents of Madrid do not have to pay any Patrimonio wealth-tax.

What’s Included in Your Estate

This tax is accrued on all your net assets held on the 31st of December of each year:

1. Real estate
2. Professional activities
3. Bank deposits
4. Insurances and temporary income sources
5. Luxury assets such as: jewellery, fur coats, racing cars, yachts, aeroplanes
6. Works of art and antiquities
7. Royal rights, administrative concessions and intellectual property rights
8. Contractual options and the remainder of economic rights

Assets Exempt From The Wealth Tax

Some assets are exempt from wealth tax. These include:

  • Household contents (but excluding jewels, fur coats, vehicles, boats, art, and antiques)
  • Owner managed small businesses
  • Family companies meeting certain conditions (shares in property investment companies are not exempt unless the company carries on a commercial activity – see below)
  • Pension rights
  • Intellectual property rights in the author’s ownership
  • Business assets. For the assets to qualify as business assets, the activity must be the taxpayer’s main source of income (i.e. the income from the business must constitute at least 50% of his taxable income) and the activity must be carried out by the taxpayer on his own account and on a habitual basis.

 

Where a rental/property development business is carried out, the following conditions must be fulfilled for the activity to qualify as a commercial activity. Provided these conditions are fulfilled, the properties used in a rental/development business can be exempt from wealth tax in Spain.

1.There must be premises used exclusively for the management of the business activity. Part of a building can qualify provided the part used is separate from any other activity and is used exclusively for the management of the property business. A shared office will not qualify.

2.There must be at least one member of staff employed on a full-time contract. This could be your spouse but he or she would need to be registered as an employee for social security in Spain and contributions would be deducted from their salary each month.

Shareholdings are also exempt from wealth tax provided:

1.the company is a trading company
2.you own at least 5% of the share capital (or at least 20% including shareholdings belonging to a spouse or other family members)
3.you carry out managerial duties for the company
4.you derive a salary for such activities which is at least 50% of your total net earnings

Spanish Property values and the wealth tax

When working out the value of all your eligible assets each year, you must value your property at whichever is highest of the following values:

1. Catastral value (this value is included in your IBI receipt, akin to the UK’s Council tax)
2. Assessed value by Tax Authorities on filing other taxes
3. Price paid in your Title deed

Liabilities in general reduce taxable wealth, but not where it is a loan used to buy an asset that is specifically exempt or covered by exemptions. So where a mortgage is for the purchase of the main home (the value of which for wealth tax is covered by the main home exemption) no deduction is available for that mortgage.

For a non-resident, only Spanish liabilities would be taken into account and there is no exemption to consider. To obtain relief it would normally have to be a Spanish mortgage attached to a Spanish property.

Spanish Wealth Tax – Bank Balances

Bank balances are valued at the higher of the closing balance on 31st December or the average balance during the 4th quarter.

‘Personal Portfolio Bonds’

Life assurance contracts (such as a ‘Personal Portfolio Bond’) are taxed very favourably in Spain, helping to legally reduce various Spanish taxes including wealth tax.

The Spanish tax regulations state that cumulative wealth and income taxes cannot exceed 60% of a resident’s total taxable income (there is no limit for non-residents), subject to a minimum of 20% of the wealth tax calculation. This is a major way that a wealthy person can avoid wealth tax as a resident of Spain.

If you are able to tie up your capital for five years, you can also set up your Personal Portfolio Bond so that the life assurance has no immediate ‘value’ at all and can therefore be excluded from your wealth tax return. All you need to do is agree with the life assurance company that the contract cannot be redeemed for five years and one day. This will mean that no withdrawals are possible for the first 5 years, so you will first need to ensure that this is the best option for you.

Joint Income Tax Returns for the Wealth Tax in Spain

If you are married and have opted to file a joint income tax return, then to calculate your wealth tax limitation you need to add together the total income tax due and each individual wealth tax calculation. If the 60% limit is exceeded, the reduction in wealth tax is pro-rated between your spouse and yourself in proportion to the amount of each of your taxable wealth.

Returns and Payments

Where there is a liability, the wealth tax form must be completed after the end of each year and the tax is payable between May and July. Husband and wife need to make separate returns reflecting their shares of any joint assets and liabilities in addition to any personal items.

Whether you are buying property in Spain as a holiday home or investment, or if you are planning to move there permanently, it is important to make sure you are informed of all the tax issues in advance. Many British people are caught out by rules they were not aware of and this can result in more tax being paid than necessary. Professional advice will prove invaluable, and in order to make sure you are fully informed and kept up to date with any changes, find an adviser who specialises in both Spanish and UK taxation.

+ The official decree bringing back patrimonio (pdf in Spanish)
+ Summary of the new conditions from the Spanish Tax Authority (Agencia Tributaria) pdf in Spanish


The information for this guide was provided by Blevins Franks and Raymundo Larraín Nesbitt (a Spanish-qualified lawyer).

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.

2007 © Blevins Franks and 2011 © Raymundo Larraín Nesbitt. All rights reserved.

 

Spanish Wealth Tax Rates and Conditions in the Past

The rates for 2007 returns (applicable to the net tax base of wealth owned on 31st December 2007) were as follows:

From € To € Tax rate % Total payable at
top of band €
Nil 167,129 0.2 334
167,129 334,253 0.3 836
334,253 668,500 0.5 2,507
668,500 1,337,000 0.9 8,523
1,337,000 2,673,999 1.3 25,904
2,673,999 5,347,998 1.7 71,362
5,347,998 10,695,996 2.1 183,670
Over 10,695,996 2.5

Wealth tax in Spain Deductions

Residents

  • Individual deduction: €108,182.18
  • Own home deduction: €150,253.03

 

A married couple would each be entitled to the individual deduction as well as the deduction on their share of the main home owned in joint names.

Non-residents

If you own property or other assets in Spain but are not resident there, you are not entitled to any deductions and have to pay wealth tax on these assets at the rates above. It may only amount to a few hundred Euros, depending on the value of the property, but you will always have some liability as a non-resident owner of Spanish property.

 

The information for this guide was provided by Blevins Franks and Raymundo Larraín Nesbitt (a Spanish-qualified lawyer).

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in taxation, conveyancing, inheritance and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

Legal services Larraín Nesbitt Lawyers can offer you

 

Related articles

 

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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Real estate conveyance and capital gains tax for non-Spanish residents

Raymundo Larraín Nesbitt, June, 1. 2005

Article published in Essential Magazine Marbella in June 2005.

Article copyrighted © 2005. Plagiarism will be criminally prosecuted.

The following article is out of date, it 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 Lawyers
Essential Magazine Marbella, June 2005

The system ruling taxation on income obtained in Spain by non-Spanish residents is governed by Decree 5/2004, a statute approving a previous piece of legislation, the revised Income Tax Law for non-residents. This statute groups regulations from many sources into one single law, though it doesn’t sufficiently alter the substance of the law as previously stipulated in Law 41/1998.

The most common taxes on conveyance (house purchase) transactions include the following:

1. Taxation levied on real estate sold by the owner, whether to an individual or a legal entity, to a third party

This category can be divided into the following scenarios:

  • Conveyance made by an individual who is a non-Spanish resident.
  • Conveyance made by an individual who is resident in one of the territories considered as a ‘tax haven.’
  • Conveyance made by a non-Spanish resident company.
  • Conveyance made by a company resident in one of the territories considered as a ‘tax haven.’

 

All the cited cases are subject to the payment of income tax for non-residents. Thus the capital gains or Plusvalia accrued in the conveyor’s net worth is taxable in Spain, at a rate of 35 per cent of the profit obtained. In order to calculate the capital gains when making the tax return, if the conveyance value is lower than the market value, the latter amount will be applied.

Any purchaser of real estate is obliged to withhold 5 per cent on account towards the income tax a non-resident seller is liable to pay. This amount must be deposited at the Tax Office. The seller then files the corresponding tax return, and if the deposit is higher than the payable tax (35 per cent of the capital gain), the seller may request that the difference be refunded. 

2. Taxation applicable to the transfer of shares of a company resident in Spain whose assets are mainly real estate located in Spain

This category can be divided into the following scenarios:

  • A share transfer by a non-Spanish resident.
  • A share transfer by a ‘tax haven’ resident.

 

In the former case, the capital gains obtained by the share’s transference are not always subject to Spanish taxation, but it will depend on the double tax treaty entered into by Spain and the seller’s country of residence (for example, if the shares’ transferor is a British of German citizen, according to the double taxation treaty between Spain and the said countries, the capital gains obtained from the sale of the shares shall be taxable in the United Kingdom or in Germany). In cases where the countries of residence have not ratified a double taxation treaty with Spain, the Income Tax Law for non-residents shall be applied and the capital gains is taxable in Spain. The tax rate in these cases is also 35 per cent.

In the second case, the applicable legislation is the Income Tax Law for non-residents, and, therefore, the capital gains obtained from the share’s sale will always be taxable in Spain at a tax rate of 35 per cent.

Finally, we must point out that the non-Spanish individuals who are Spanish residents may fall within the transitional regulation prescribed in the Income Tax Law for property purchased before 31st December 1996 and benefit from certain reduction percentages to the capital gains generated by that property, depending on the period of ownership, both in the case of shares and real estate.

On a side note, a lawsuit for fiscal discrimination, was recently brought before the European Authorities. The European Commission reacted by sending a resolution to Spain that establishes that Spain unfairly discriminates against non-residents. For Brussels, this leverage of a large fiscal pressure on non-residents, having to pay more capital gains tax than residents, is unconstitutional. They stated that due amendment of the law would ne necessary.

Non-residents with taxable income in Spain can therefore look forward to some beneficial changes in the law in the near future.

 

P.S. I am most grateful to Essential Magazine Marbella, and in particular to Sussane Whitaker, who went through the hassle and pain of sifting through several old editions to retrieve these old legal articles. Thank you, much indebted.

Please note the information provided in this blog post 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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