Air Passenger Rights in Spain

Raymundo Larraín Nesbitt, June, 8. 2015

Spain is the third most-visited touristic destination in the world trailing behind France and the U.S., and many visitors are expats or second-home owners. 2014 saw another record-breaking year with over 65 million tourists visiting the country, consolidating a trend which remains unabated year-on-year in the last decade. The vast majority visit the country using an air carrier as transport. The purpose of this article, by regular legal-contributor Raymundo Larraín Nesbitt, is to do a brief overview of the rights air passengers have in Spain (in fact, throughout the European Union) such as compensation for flight delays or lost luggage.

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

Photo credit: © willypd / Fotolia

 

Introduction

In truth the bill of rights I quote is extensive to the European Union’s 28 Member States, not just Spain.

Depending on the type of contractual breach, it will give way to different passenger rights (compensation, reimbursement, care & assistance etc.).

Legal Framework

EU Regulation 261/2004 was passed in 2005 to enhance and enforce the rights of passengers who are subject to cancellations, delays, denied boarding and downgrading when flying. It was introduced to help compensate passengers for the loss of time and inconvenience suffered when you experience a flight delay or cancellation.

Annex to Regulation 889/2202 applies only to luggage (lost, damaged, destroyed).

I will purposely exclude Montreal’s Convention on Air Passenger Rights as it mainly applies to flights outwith the European Union which escapes this article’s scope.

Who Does EU Regulation 261/2004 Apply to?

This Regulation binds all EU-Member States, including Spain.

It applies to:

• All outbound flights from an EU country and which have as destination a fellow EU country regardless of the passenger’s age and nationality.
• It also applies to inbound flights to any EU-Member State chartered by an EU-licenced airline (regardless of point of departure).

I. Contractual Breaches

1. Denied Boarding (article 4).
2. Cancelled Flights (article 5).
3. Delays (article 6).
4. Delayed, Lost & Destroyed Luggage (Annex to Regulation 889/2202)

II. Passenger Rights

1. Right to compensation (article 7)
2. Right to reimbursement on re-routing (article 8).
3. Right to care and assistance (article 9).
4. Right to upgrade/downgrade (article 10).

 

I. Contractual Breaches

 

1. Denied Boarding

Will always give right to compensation unless there are health and safety reasons besides the passenger not carrying the appropriate legal documents to board a flight.

Most common causes of denied boarding are:

• Overbooking. Triggers right to care & assistance besides compensation (see section below for details).
• Unjustified reasons to deny passenger boarding.
• Abnormal passenger ID.
• Not making use of a single ticket on a return flight. These are known as “no-show” clauses on outbound flights; Spanish Mercantile courts have ruled them as consumer abusive clauses and therefor null and void. A passenger that missed his outbound flight can make use legally of his return ticket.

2. Cancelled Flights

Cancelled flights will always give right to compensation with only two exceptions that waive this right:

a. Air carrier gives advanced notice of a delay.

• The airline has informed with two weeks’ notice of the delay.
• Airline has informed between 2 weeks and up to 7 days before the scheduled departure. The airline must offer alternative re-routing transport.
• The airline gives notice less than seven days before departure. It must also offer alternative re-routing transport subject to more stringent regulation on departure and time of arrival.

It is the company’s onus to prove it has notified passengers in time in compliance with this Regulation.

b. Force Majeure

Is defined as an extraordinary and unforeseeable disruptive circumstance. The reason on why it is excluded from compensation is because it is not under an air carrier’s direct control.

Examples of unforeseen events: air traffic controllers’ strike, adverse weather (i.e. volcanic ash from an Icelandic volcano, blizzard), terrorist bomb threat.

Examples of causes which are not due to extraordinary force and would give right to compensation: technical fault or air carrier’s pilot strike.

3. Delays

As a general rule, delays give right to care and assistance.

• The right to care and assistance kicks in after two hours for flights up to 1,500km.
• After three hours for flights between 1,500-3,500km.
• After four hours for flights over 3,500km.

Compensation is ruled out with only one exception:

• If the delay is over three hours. In this case compensation is applicable.

4. Delayed, Lost & Destroyed Luggage

A different law applies, Annex to Regulation 889/2202. The passenger has a right to compensation (but not in the terms of regulation 261/2004). A passenger should contact the handling agent immediately in such an event to file a claim. The compensation is up to 1,131 Special Drawing Rights (Derecho Especial de Giro) per passenger which in 2.015 equates to approximately €1,400 (the IMF’s benchmark to which it is referred fluctuates in value). This amount applies to all three cases: delayed, lost and destroyed luggage i.e. luggage is mistakenly re-routed to Glasgow and we are on vacation in Ibiza. Luggage arrives three days later. In the meantime we’ve been forced to buy spare clothes etc. We are entitled, per passenger, up to €1,400.

A passenger can fill in a special form to claim more if the value of the luggage exceeds this threshold or else hire an ad hoc insurance.

 

II. Passenger Rights

 

1. Right to Compensation

• €250 for flights of up to 1,500 kms
• €400 for Pan-European flights of more than 1,500 kms. Remainder of flights between 1,500 and 3,000 kilometres.
• €600 for all flights that may not be included in the above two categories.

2. Right to Reimbursement on Re-routing

If your flight is cancelled then the airline may offer to put you on an alternative flight. If you miss your connecting flight then the airline might book you onto the next flight leaving for your intended final destination. If you are delayed overnight then the airline should put you up in a hotel room and pay for transport to/from the airport.

3. Right to Care and Assistance

Again, your right to care and assistance from the airline comes into play whilst you are actually being delayed. This right applies to delays, even if they are caused by what the Regulation calls an ‘extraordinary circumstance’. This entitles you to:

• Food and drink in reasonable relation to the waiting time.
• Hotel accommodation if you need to stay overnight.
• Transport between the airport and hotel (if necessary).
• Two telephone calls/telex/fax messages/e-mails.

4. Rights on Upgrade/Downgrade

a. If a passenger is upgraded (i.e. from tourist to first-class) the air carrier cannot request additional payment.
b. If a passenger is downgraded the air carrier will re-imburse:

• 30% of the ticket for all flights up to 1,500 kms.
• 50% of the ticket for Pan-European flights exceeding 1,500 kms.
• 50% of the ticket for all flights between 1,500 and 3,500 kms (overseas EU-territories are excluded).
• 75% of the ticket for all flights not included in the above, included those between EU-countries and their overseas territories.

 

F.A.Q.

 

How and Where Do I Claim Flight Compensation?

Monetary compensations deriving from article 7 of Regulation 261/204 should ideally be automatic. You should just fill in the form supplied by the air carrier at a handling desk to be compensated if you qualify.

However in practice some stubborn air carriers are reluctant (understatement) to pay any form of compensation and will push back. You should not be daunted. You may then need to exercise your rights to monetary compensation before any Mercantile court in Spain assisted by a lawyer.

How Long do These Claims Take on Average and What is The Success Rate?

They take nine months and the success rate is over 90%, on average.

Statutory Claim Period for Compensation in Spain

15 years.

This statute of limitations can be interrupted by judicial or extrajudicial notifications; meaning the timer is reset and the 15 years are counted anew as from the notification.

Conclusion to Air Passenger Rights

Because of economies of scale it makes sense to group passenger claims to bring a single case before a Mercantile court i.e. transoceanic flight that is over three hours delayed or cancelled without giving notice.

“I know the British people and they are not passengers – they are drivers.” – David Cameron.

David William Donald Cameron is a British politician and Leader of the Conservative Party since 2005. He has served as Prime Minister of the United Kingdom since 2010.

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.

Related articles

Volcanic Ash, Cancelled Flights and Passenger’s Rights – 19th April 2010

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.

2.015 © Raymundo Larraín Nesbitt. All rights reserved.

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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 Provisional‘ you 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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Supreme Court Rulings on Bank Guarantees

Raymundo Larraín Nesbitt, April, 8. 2015

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

 

Introduction

It has rained a lot since I first wrote my article on bank guarantees on the 12th of November 2008. At the time of writing it the property bubble had just collapsed and we were witnessing a tidal wave of litigation against failing developers. The property honeymoon, which lasted over eight years, had come to an abrupt end. Credit dried-up almost overnight with the banking crisis that originated in America’s sub-prime market leading us to an unprecedented global credit-crunch which aftermath we are still enduring.

When lenders pulled the plug they left property developers on free fall; reeling developers scrambled to makes ends meet and complete pending developments. Buyers, investors and property flippers in general frantically pulled out in baying hordes escaping a falling house of cards. The musical chairs game was over. Scores of off-plan buyers, which had purchased off-plan property in good faith, found themselves trapped in the ensuing mayhem. Most, not all, had their stage payments guaranteed by a safety net known as ‘Bank Guarantees’ which are ruled by Law 57/68 (for further in-depth information on what bank guarantees are, please read my revamped article Bank Guarantees in Spain Explained with an Example Document, from the 8th of April 2013).

Conveyance lawyers found themselves swamped left, right and centre by clients trying to execute bank guarantees as developers were teetering on the verge of bankruptcy with developments being stalled with no realistic hope of completion post-credit-crunch. However on trying to execute these, theoretically a straightforward matter, we found that we were forced to litigate against insurance companies and lenders which had guaranteed buyer’s new-build deposits despite Law’s 57/68 clear wording.

The legal outcome of these litigation cases in first hearings were a mixed bag, to say the least, although most were won at second hearings (on appeal). A few cases were appealed to the Supreme Court, which is Spain’s highest court of law. These appeals take on average several years to be heard (five plus). The Supreme Court’s rulings bind all lower courts in the land as they set jurisprudence when a string of two or more rulings rule on a particular matter in an identical manner.

Seven years on the Supreme Court has now had the opportunity to release very interesting pro-consumer rulings on bank guarantees that are both protective and positive to off-plan buyers’ interests. The purpose of this article is to update what I had previously written on the matter in light of the recent high court rulings which open up new venues for litigation to off-plan buyers, irrespective of whether they were handed or not a bank guarantee; it no longer matters as I explain below.

EDIT July 2016: It is advisable this article is read in tandem with this other one:

Off-Plan Bank Guarantees and Supreme Court Rulings – Payback Time – 8th June 2016

Bank Guarantees – Definition

Bank guarantees are a legal tool devised to secure off-plan buyer’s stage payments (including the initial reservation deposit that strikes the property off the market) should a property not be delivered on time or should a developer file for bankruptcy.

A bank guarantee may take the form of an insurance policy or an ad hoc bank guarantee to safeguard buyer’s anticipated deposits until a property is built and deemed to be legally completed and fit for human habitation (when the planning department of a town hall issues what is known as a Licence of First Occupation, LFO for short).

Following article 4 of Law 57/1968, bank guarantees only become null and void when two conditions are met:

1. As from the time a developer attains a Licence of First Occupation from the town hall’s planning department.

2. The developer makes the new-build property available to a buyer (as in physically handing it over to him).

Artículo cuarto

Expedida la cédula de habitabilidad por la Delegación Provincial del Ministerio de la Vivienda y acreditada por el promotor la entrega de la vivienda al comprador, se cancelarán las garantías otorgadas por la Entidad aseguradora o avalista.

Bank Guarantees – Legal Overview

It is compulsory for developers to hand out bank guarantees to off-plan buyers to safeguard their deposits acting as a safety net. These obligations derive from two regulations:

I.    Law 57/1968, of the 27th of July of Anticipated Deposits paid in the Construction and Sale of Properties (popularly dubbed as the “Bank Guarantee law”).

II.    First Final Disposition of Law 38/1999, of 5th of November of Construction (Spain’s Building Act). This law amends Law 57/68; a buyer can claim his full deposit plus legal interest (but not the 6% interest that Law 57/68 mentions; this has been overruled by this new law).

 

Supreme Court Rulings

 

The following Supreme Court rulings are relevant because they establish pointers that change and shape the way we have known bank guarantees to work in practice. These rulings set jurisprudence, meaning all lower courts are bound by them.

•    STS 499/2013

Establishes that handing a bank guarantee is regarded as an essential element in an off-plan purchase providing two elements are met:

i.- The property isn’t finished yet; still under construction.
ii.-The property is not apt to be handed over and dwelled i.e. no Licence of First Occupation has been attained.

Handing a bank guarantee is essential to the point that is considered as just cause to cancel a Private Purchase Contract in its own right on non-compliance ex article 1.124 of the Spanish Civil Code (SCC, for short). Failure of a lender or insurance company in not handing them out allows a buyer to legally withdraw from the contract by cancelling it and claiming back his deposit plus all interests due in full (accrued up until the time he is effectively refunded the anticipated deposits).

Before these rulings it was unclear on whether a bank guarantee was regarded as an essential element of the contract with enough entity unto itself to actually justify suing for cancellation exclusively on the grounds of a lack of bank guarantees.

In my litigation article (first published in 2008), Ten Reasons Why Your Case Against a Developer can be Thrown out of Court in Spain, I specifically mentioned as the sixth point not to litigate on grounds of a lack of bank guarantee as the case could be dismissed (based in litigation experience). In light of the recent Supreme Court rulings this advice no longer holds true and one can indeed litigate against a lender requesting a full refund of deposits despite there being no bank guarantee. Additionally one can terminate an off-plan purchase if no bank guarantees are supplied by a developer.

Other like-minded Supreme Court rulings: SSTS 25th of October 2011, rec. 588/2008, 10th of December 2012 2012, rec.1044/2010, 11th of April 2013, rec.1637/2010, and 7th of May 2014, rec. 828/2012.

•    STS 2391/2014

The insured amounts are the full amounts understood as the initial reservation deposit you pay at the estate agency plus all the anticipated funds prior to completion at the Notary Public. The reason on why this is relevant is because even if an insurance policy or a bank guarantee stipulate that the amount guaranteed is less than what was actually paid by the buyer the Supreme Court upholds that it is in fact the full anticipated amount paid up until the time of completion that is guaranteed; in other words, all the monies paid prior to completion at the Notary Public. This is a consumer right enshrined by article 7 of Law 57/68.

This is particularly relevant because often lenders or insurance companies actually guaranteed less than what was actually paid for by a buyer. So there were nagging doubts on whether the full amount could be claimed upon (plus legal interests) despite the restrictive wording of some bank guarantees. Moreover even if a buyer agrees, for whatever reason, to have insured an amount which is less than what he’s actually paid for the Supreme Court considers that a buyer cannot waive his consumer rights enshrined in Law 57/68 and regards any such agreement as null and void

Other like-minded rulings: SSTS of 3rd of July 476/2013, rec. 254/2011, and 25th of November 2014, rec.1176/2013.

•    STS 275/2015

Following article 2 of Law 57/68 it is the exclusive obligation of a developer to place all the anticipated funds received by off-plan purchasers in a special account that the developer must open ad hoc.

In accordance with article 7 of Law 57/68 it establishes that it cannot be imposed on a buyer to deposit these anticipated amounts in a special account. In other words the full refund of off-plan deposits to a buyer cannot be conditioned to the fact that a buyer has deposited said amounts in a special account as it is exclusively the developer’s obligation; not a buyer’s.

•    STS 426/2015

It makes it clear that a breach of article 1.2 of Law 57/68 (handing a bank guarantee to an off-the-plan buyer) has a statutory claim period of 15 years ex article 1.964 of the Spanish Civil Code. The limitation period used to be less.

The relevance of this is that buyers who purchased off-plan and were never given a bank guarantee can now claim their deposits from the lender where the monies were being paid into. Regardless of whether their developer is already under insolvency proceedings or not; it doesn’t matter. In other words, off-plan buyers would be claiming from a lender which – presumably – has money; not from a bankrupt developer. The timeline to do this is 15 years to be counted as from the time the deposits aren’t refunded on grounds of a lack of bank guarantee. I know for a fact many people are caught in this dire situation.

•    STS 429/2015

This ruling makes it clear that a buyer can sue a lender, or insurance company, first without having to sue a developer as a pre-requisite. They are all jointly and severally liable for the breach. The significance of this is that when we sued a lender or insurance company they would oppose at court that the developer had to be sued first. The Supreme Court now establishes that this is no longer needed and that litigation lawyers can sue lenders or insurance companies without any need to sue a developer first. This is relevant because most developers are on the brink of insolvency (if not bankrupted already) so what’s critical is to chase the party that has funds and is able to refund a buyer in full.

Other like-minded Supreme Court rulings: SSTS 3rd of July 2013, rec. 254/2011 and 2391/2014 of 7th of May 2014, rec. 828/2012.

 

Special Focus on Off-Plan Buyer’s Cancellation Rights

 

Rulings 2391/2014 and fundamentally 429/2015 are pivotal as they introduce a major milestone regarding contract cancellation. They make it clear that any and all off-plan purchase contracts subject to Law 57/68 are out with the scope of article 1.124 of the Spanish Civil Code (which rules on contract cancellation due to breach of contract and applies to all civil contracts in general). These new rulings break the line of jurisprudence established by the Supreme Court (STS of 9th of June 1986) which construed article 3 of Law 57/1968 (new-build contract termination).

Article 1.124 of the Spanish Civil Code required in off-plan contracts that a contractual breach was studied carefully to ascertain whether a breach was regarded as important or not. If it actually frustrated the goal pursued in the contract itself (‘frustración del fin contractual’). This required that lawyers reasoned with great care why terminating a new-build contract was justified – this is no longer the case.

The Supreme Court has performed legal microsurgery extricating Law 57/68 from the sphere of action of article 1.124 of the SCC. The change is extraordinarily relevant from a legal point of view (nothing short of groundbreaking). Up until recently lawyers recommended that a buyer had to wait a ‘reasonable’ time after the date set in the Private Purchase Contract (PPC) to complete to sue for breach of contract. The Supreme Court’s jurisprudence establishes that off-plan purchase contracts subject to Law 57/68 now work as automatic contractual resolutions. There is no longer a need to justify in a lawsuit if the breach is relevant or not as it operates automatically. The most common breach is when a developer delivers a property late; after the date set in the PPC.

In my litigation article from 2012, Ten Reasons Why Your Case Against a Developer can be Thrown out of Court in Spain, I advised would-be litigants on my first point that they should wait prudently at least six to nine months after the contractually scheduled delivery date of a property to sue for breach of contract and demand a full refund of their deposits (plus interests). This was done so that a law court did not dismiss the case ab initio without even examining its merit, as was the case in 2008.

The relevance of this change in criteria by the Supreme Court, and other recent like-minded rulings, is that off-plan buyers are no longer required to wait a prudent timeline before terminating their off-plan contracts. They can in fact litigate as from the very next day set in the Private Purchase Contract to deliver the property. Providing they do so in good faith, which the Supreme Court regards as essential to balance the opposing interests of both parties to the contract.

E.g. an English couple buy a two-bedroom off-plan property in 2015 with a delivery date in the PPC set as the 4th of August 2017. If the property is not ready by the 4th of August 2017 they can terminate the contract and request a full refund of their deposit plus interests on the following day. Before this major change this couple would have had to wait to at least February/April 2018 before terminating their contract besides having to justify in great detail the contract cancellation so that a judge approved it.

Whilst this may seem rather one-sided in favour of buyers, it is in fact tempered by article 3 of Law 57/68 which allows developers to cancel a PPC and sue a buyer for non-performance when they skip or pay late just one stage payment in an off-plan purchase in tandem with article 1.504 of the SCC. The Supreme Court understands it is not lopsided as there is equilibrium to both opposing interests in Law 57/68; they can both resort to an automatic contractual resolution given the case.

Personally I would take this with a pinch of salt. The ‘good faith’ limitation on exercising a buyer’s automatic cancellation right introduces a grey area that is fairly relevant. Having acted on behalf of developers I can clearly see how a developer’s lawyer can drive a wedge, and latch onto it, modulating or exploiting it in a developer’s interest by creating a shadow of a doubt in a judge’s mind.

Bullet Points

The following pointers can be gleaned from the above Supreme Court rulings.

• Bank guarantees are regarded as an essential contractual element in off-plan purchases. If none are supplied by a developer, a buyer can resolve a contract and demand full refund of his stage payments plus interests.
• A buyer can still sue a lender for his deposits even if no bank guarantee was handed over (joint liability of banks).
• Bank guarantees only expire upon meeting two conditions: when a Licence of First Occupation is attained by a developer and when the developer is able to hand over the property to the buyer. Expiration dates on bank guarantees are null and void.
• It is the exclusive obligation of a developer to open and set up a special account where all stage payments will be deposited for safekeeping interim the building process.
• 15-year limitation period to file a lawsuit (statute of limitations).
• The insured amounts are all the anticipated deposits (stage payments) paid by a buyer prior to completion (including the initial reservation deposit paid to the estate agent) regardless of the amounts secured in a bank guarantee’s wording (which may be less).
• An off-plan buyer cannot waive the consumer rights enshrined in Law 57/68. And even if he does agree to waive them, the agreement is considered null and void.
• Developers and lenders (or insurance companies) are jointly and severally liable for safeguarding a buyer’s anticipated deposits (stage payments). Meaning a buyer can sue a lender or insurance company first without any need to sue a developer beforehand and be forced to wait for the outcome (as most developers are bankrupt nowadays). This significantly cuts down litigation time and ensures a refund as lenders or insurance companies have liquidity or else they would not be trading (subject to supervision by regulatory bodies that ensure minimum liquidity ratios).
• Any extension to the scheduled delivery of a property set in the PPC requires a written addendum that a buyer must sign in agreement. It does not suffice that one is notified of the extension; it must be signed by the buyer.
• A buyer can terminate the contract on the following day stipulated in a PPC as the scheduled delivery date of the property (automatic contractual resolution) in the event of late delivery. The developer must be formally notified (by recorded delivery). It is imperative this is done in good faith; otherwise the cancellation may be dismissed by a law court.

Spain’s Supreme Court Rulings on Bank Guarantees – Conclusion

The gist of this article is to highlight Spain’s Supreme Court sensitivity towards off-plan buyer’s plights. Its rulings are remarkably pro-consumer in off-plan purchases and are setting the stage for lower courts in future litigation. This is very promising and welcome news for new-build buyers wishing to litigate on grounds of a Law 57/68 breach. Even in cases where a bank guarantee was never supplied a buyer can still sue for a full refund of his deposit plus legal interest providing the 15-year statutory limitation has not elapsed.

Law 57/1968 is a pre-constitutional law that is now forty seven years old. It was widely held as ‘revolutionary’ at the time as it pioneered consumer rights in Spain when these were not regulated by law (Spain was still under a dictatorship). Five decades on it is undeniable that it is in urgent need of a reform given the importance the construction sector has in Spain’s overall economy and the widespread predominance of consumer rights which are prevalent in modern democratic societies.

“Lawyers exist to protect us from other lawyers.”

 

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

Larraín Nesbitt Lawyers is a law firm specialized in conveyancing, taxation, 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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Holiday Rental Laws in Spain – Explaining The Latest Changes

Raymundo Larraín Nesbitt, March, 8. 2015

Lawyer Raymundo Larraín Nesbitt explains the changes in landlord rental allowances (tax relief) in Spain spurred by the key ruling of the European Court of Justice (ECJ) from last 3rd of September 2014 (Case C-127/12), as well as the new holiday rental laws in Spain.

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

 

 

 

Introduction

I am going to split my article in two parts.

The first part deals with the batch of regional holiday rental laws that have swept the land becoming an ubiquitous requirement. Any landlord wishing to rent privately their Spanish property for a period exceeding one month in a year falls under the remit of this new regulation.

The second part deals with the changes in taxation related to rental laws brought about by European Legislation; specifically regarding applicable deductions and allowances at both state and regional level (Autonomous Communities).

 

I. Holiday Rental Laws

 

Definition

Over the past two years almost every Autonomous Community in Spain has zealously ruled on what is known as ‘viviendas de uso turístico‘ or private holiday rentals. These are laws which seek to regulate short-term touristic lets from private individuals and bring them in line with minimum (hotel) lodging standards. The laws in all Autonomous Communities are fairly similar so a couple of common denominators can be extrapolated. A touristic let is generally defined by two elements:

• A dwelling that is offered on a short-term rent to tourists employing the media (internet, newspapers, magazines, travel agencies etc.). There is great diversity in the offered lodging and may range from a letting a whole detached villa in a luxurious seaside resort to renting a single room in a Bed & Breakfast. Some communities expressly bar the possibility of renting a single room.
• The property is let out one or more times a year for a period that normally exceeds one month i.e. summer lets or winter lets in ski resorts. But they can also be rented for days, weeks or months.

Excluded Properties

In general, properties that meet the following criteria would be excluded from this regulation and would fall under Spain’s Tenancy Act (Ley 29/1994, de Arrendamientos Urbanos).

• Property that is lent to friends/family without any compensation (monetary or otherwise).
• Property that is let to the same person/s for a period that exceeds three months in a year.
• Rural property which falls under its own regulation.
• Landlords who own three or more properties in the same development or ‘urbanización’ fall under a different regulation: ‘apartamentos turísticos’ (not to be confused with ‘viviendas de uso turístico’ which is the topic of this article).
• No more than fifteen people can live in the same property.

Requirements

Touristic lets are generally obliged to meet the following criteria which by no means is a closed list (I only highlight the main ones). For an accurate list you should check the touristic rental law of the Autonomous Community where your property is located. Please read further below a region-by-region list of approved holiday rental laws.

EDIT October 2016: For the avoidance of doubt, as some people are reportedly getting confused, what follows is a generalisation. I have taken the draft holiday rental law of Andalusia as template to extrapolate generalities or common denominators to be expected from all regions, as regional holiday rental laws in Spain are in fact fairly similar with small variations. Touristic lets are generally obliged to meet certain criteria, though it varies by region, I list the main ones for Andalucia below. If, for example, you are interested in Murcia region, please check the local regional requirements of Murcia´s holiday rental law for the minutiae (I do not list them below!).

• The property must have attained what is known as a Licence of First Occupation (also known as First Occupancy Licence, Habitation Certificate, Habitation Licence, Licencia de Primera Ocupación, Cédula de Primera Habitabilidad, Cédula de Habitabilidad or Cédula de Ocupación).
• Full compliance with planning, health and safety, security and disabled access amongst other laws; both at a national and regional level.
• Rooms must be ventilated and have blinds or shutters.
• Free internet service available in every room.
• Air conditioning unit in every room (as a fixed fixture, not a portable device).
• When properties are let during the winter season (October through to April) a heater must be made available in every room that is let (as a fixed fixture, not a portable device).
• First aid kit and fire extinguisher.
• Cleaning service at the start of new lodgings.
• Rooms must have adequate furniture.
• Complaints book.
• Touristic guides, maps of the surroundings (books).

Non-Compliance

My advice is that landlords would do well to seek tailored legal advice and determine if their property complies fully with all laws. Failure to comply may lead to stiff fines. Fines range from hundreds to over a dozen thousand pounds.

E.g. landlord has not applied for a touristic letting licence from his town hall or the property is unregistered at the special register for touristic properties.

E.g. landlord is reported because he does not have a ramp built for disabled access.

E.g. landlord does not have a wi-fi connection set up.

E.g. landlord has not attained a Licence of First Occupation from local planning authorities.

My Take on Touristic Rental Laws

I had already written an admonitory article back in 2013 (New Measures to Bolster Spain’s Ailing Rental Market) on the worrisome trend the Autonomous Communities were following on enacting their own laws to regulate touristic lettings on the wake of Law 4/2013 which (clumsily) left the door ajar to them.

I feel compelled to excoriate these touristic rental laws which are a bad idea as in the best of cases they impose a new set of obligations (and associated expenses) on landlords which severely impact their rental income and at worst require a rental licence is attained under threat of hefty fines on non-compliance. In some cases individuals will not be even allowed to rent as these laws (artificially) stifle competition. At no time should public administrations limit the rights and usage of private homeowners to rent out their properties. It is a direct attack on private property which in my eyes is a red line that should not be crossed.

This unnecessary batch of new regional laws only make the prospect of renting for small-time landlords – which are legion – all the more difficult (acting almost as a deterrent) whilst at the same time make life easier on large powerful hotel groups as competition is removed. In other words, these regional laws thwart competition in a free market economy benefiting large corporations at the expense of the little people who make a meagre supplementary income by letting property out. The field is uneven.

Two years on, the majority of the seventeen Autonomous Communities which make Spain have jumped on the band wagon passing legislation on touristic lets. Landlords would do well to seek legal advice on whether their property complies fully with the new spate of regional regulation. Some of these laws (i.e. Balears) require that local authorities issue a ‘rental licence’ before you are allowed to let and impose hefty fines on non-compliance. The obligations are (formally) geared to set a homogenous minimum standard to rent property and in some cases require a substantial upfront investment which may negate altogether the very idea of letting as the numbers may not stack up in every case.

If you examine the new requirements landlords are expected to meet they resemble closely those we have come to expect from the hotel industry (i.e. free wi-fi, A/C units, professional cleaning service etc.). It stands to reason you cannot possibly demand from private individuals the same blue-ribbon lodging standards and services as those offered by financially powerful multinational hotel groups. It’s daft.

Private individuals in many cases will not have the financial means to acquire all the ‘minimum’ gadgets, let alone face the grim prospect of being fined dozens of thousands of pounds on non-compliance. If these regional laws are enforced harshly by authorities it will leave the burgeoning business of private home rentals to affluent people or groups; the only ones with the means to keep up with the frantic pace set out by regional authorities. Borrowing a quote from Thomas Jefferson — “There is nothing more unequal than the equal treatment of unequal people”.

Again the cynic in me asks cui bono? Who stands to gain more from such changes in home rental regulation? Definitely not landlords (or tenants for that matter). The powerful hotel industry does. Property has been let to tourists for decades without major hindrances (in fact Spain’s whole unbalanced and undiversified economy hinges on tourism and construction; they account for well over 20% of its GDP). Adding red tape is unnecessary and redundant.

Why now? Because after a huge property boom that lasted almost a decade the properties now on offer have trebled whilst demand remains stable. This has in turn dramatically increased competition for hotel groups which has severely dented their bottom line (and miffed their shareholders). They have relentlessly lobbied over the last years to curtail what they deem as ‘unfair competition’.

Competition is always good for the broad economy as it drives prices down and improves services not to mention job creation at a time when the economic recovery remains anemic (in Spain). Competition at its heart is what keeps people and companies on their toes. Remove competition and companies become complacent, services deteriorate and prices soar. In a competitive market bad companies are weeded out by consumers through natural selection. More so in the days of internet with professional bloggers that take delight on rating hotel accommodations for the benefit of all us punters. This is not about accommodating lofty ideals, it’s about being pragmatic in today’s tough world. A healthy robust economy demands competition to flourish and create jobs, period. Remember my words next time you have to pay for a pricey (hotel) lodging in Barcelona or Madrid.

You can find an insightful article from American journalist Kevin Brass (New York Times, Wall Street Journal) with poignant comments on the matter of (Spanish) administrations encroaching on private short-term lettings (for the benefit of the hotel lobby) from the 8th October 2014: Opinion: Attacks on Short-Term Rentals Are All Hype.

EDIT 9th of April 2015: Spain’s Competition and Market’s Authority (CNMC) has taken legal action against Madrid’s Holiday Rental Law on grounds of “anti-competitive practices that restrict consumer’s ability to choose (a service)”. More on this: Five-Day Holiday Rental Limit Challenged in Madrid.

 

Region-by-region List of Approved Holiday Rental Laws

 

Moving on from my rant, I have compiled a comprehensive list of the Autonomous Communities in Spain with approved touristic rental laws at the time of this article’s printing. The most high-profile absentee is Andalusia’s draft law which has sparked hot controversy. Regardless, I have included below a link to its draft bill out of interest to anyone.

EDIT 03/02/16: the autonomous region of Andalusia approved its Holiday Rental Law in February 2016. More on this matter in my article: Andalusia’s Holiday Rental Decree.

Holiday rental laws are here to stay. It is a landlord’s duty to acquaint himself and comply with the regulation of his own Autonomous Community. Some aspects of the below-listed regulations vary widely so it is highly advised professional advice is sought beforehand to be on the right side of the law. In some instances, such as Balears, holiday rental licences are fairly restrictive and hard to attain.

• Andalusia: Approved. Andalusia’s Holiday Rental Law explained in English. The new approved law: Decreto 28/2016, de 2 de febrero, de las viviendas con fines turísticos. Fines for non-compliance range between €2,000 to €150,000. Another important law which currently applies is Law 13/2011 of Tourism in Andalusia.
• Aragón: Decreto 167/2013, de 22 de octubre, del Gobierno de Aragón, por el que se aprueba el Reglamento de los apartamentos turísticos en Aragón
• Asturias: Updated regulation pending. Decreto 60/1986, de 30 de abril, sobre ordenación de los apartamentos turísticos and Decreto 34/2003, de 30 de abril, de viviendas vacacionales.
• Balears: More information in my updated article (September 2017) New Balearics Holiday Rental Law. Require a holiday rental licence for villas and townhouses; apartments are excluded. Decreto Ley 6/2013, de 29 de noviembre, por el que se modifica el artículo 52 de la Ley 8/2012, de 19 de julio, del Turismo de las Illes Balears
• Basque Country: Decreto 198/2013, de 16 de abril, por el que se regulan los apartamentos turísticos
• Canary Islands: Fairly restrictive. Decreto 142/2010, de 4 de octubre, por el que se aprueba el Reglamento de la Actividad Turística de Alojamiento and the new Reglamento de las viviendas vacacionales de la Comunidad Autónoma de Canarias. Read this post on the new holiday rental law for the Canary Islands.
• Cantabria: Decreto 19/2014, de 13 de marzo, por el que se modifica el Decreto 82/2010, de 25 de noviembre, por el que se regulan los establecimiento de alojamiento turístico extrahotelero en el ámbito de la Comunidad Autónoma de Cantabria
• Castilla-La Mancha: Unapproved.
• Castilla y León: Unapproved, only for rural tourism Decreto 75/2013, de 28 de noviembre, por el que se regulan los establecimientos de alojamiento de turismo rural en la Comunidad de Castilla y León
• Catalonia: Barcelona city is restrictive with new permits. Decreto 159/2012, de 20 de noviembre, de establecimientos de alojamiento turístico y de viviendas de uso turístico
• Extremadura: Unapproved / updated regulation pending. Decreto 182/2012, de 7 de septiembre, de ordenación y clasificación de apartamentos turísticos en Extremadura
• Galicia: For detached homes only; room rentals are banned Decreto 52/2011, de 24 de marzo, por el que se establece la ordenación de apartamentos y viviendas turísticas
• La Rioja: Unapproved.
• Madrid: Stays of less than five days and single room rentals are banned Decreto 79/2014, de 10 de julio, por el que se regulan los apartamentos turísticos y las viviendas de uso turístico de la Comunidad de Madrid
• Murcia: Updated regulation pending. Existing regulation is from 2005. Decreto 75/2005, de 24 de junio, por el que se regulan los apartamentos turísticos y alojamientos vacacionales
• Navarre: Updated regulation pending. Decreto Foral 230/2011, de 26 de octubre, por el que se aprueba el Reglamento de Ordenación de los Apartamentos Turísticos en la Comunidad Foral de Navarra
• Valencian Community: Decreto 92/2009, de 3 de julio. Reglamento de Alojamientos Turísticos y empresas gestoras de la Comunitat Valenciana.

 

II. Changes in Taxation Brought About by European Legislation

 

Landlord Rental Allowances

Following up on last month’s article regarding the ECJ’s landmark ruling of last 3rd of September 2014, which put an end to discrimination between residents and non-residents on taxation matters, these changes also affect rental laws.

Law 26/2014 of the 27th of November amends both the Personal Income Tax Act (I.R.P.F.) and the Non-Resident Income Tax Act (I.R.N.R.). These changes came into force on the 1st of January 2015. I had already referred to these changes in December’s and February’s articles: Taxes on Selling Spanish Property and Changes To Spain’s Inheritance And Gift Tax Law.

Law 26/2014 adapts and transposes the decision taken by the ECJ amending internal Spanish national laws. It brings to an end (fiscal) discrimination between residents and non-residents in a wide array of matters; for this article’s sake specifically on rental matters. EU-residents are now treated on par with Spanish residents on taxation matters relating to allowances and deductions. This translates into paying fewer taxes (as non-residents now qualify for deductions and tax allowances which were previously barred to them as these were earmarked for Spanish residents alone).

For the purpose of this article, when I make reference to ‘non-tax residents’ I will always be referring to citizens which are either tax resident in another Member State of the European Union or else in the European Economic Area (E.E.A.). Just to clarify, the below-listed changes do not benefit tax residents outside of the EU or EEA.

Rental Allowances – Situation Prior to the ECJs’ Ruling

Non-resident rental allowances were virtually non-existent prior to this ruling for private individuals. There were few instances in which you could offset rental taxes as they required you employed someone full time and had a permanent establishment in Spain. Obviously of little practicality which was not an option for the vast majority of non-resident landlords.

Post-ECJs’ Ruling – Changes to Spain’s Rental Laws

The ECJ’s key ruling of 3rd of September 2014 marks the inflection point which puts an end to (fiscal) discrimination between residents and non-residents. It forces Spain to amend its internal laws and accommodate the European principles on which the EU is grounded on. The significance of the ECJ’s ruling is that it has opened up the opportunity for non-residents to apply as from the 1st of January 2015 to the below-listed state tax allowances and deductions which were previously reserved only to Spanish residents. In addition, non-residents may also benefit from those set by the Autonomous Communities where the property is located which have a penchant of being more generous than state law.

When taxpayers are resident in another European Union Member State, or in the E.E.A., the expenses described in the Law on Personal Income Tax (IRPF) can be deducted when calculating the taxable base, provided that proof is supplied that these expenses are directly related to income earned in Spain and have a direct economic connection that is inseparable from the activity carried out in Spain. When expenses are deducted, a certificate of tax residency in the corresponding State issued by the tax authorities of that State must accompany the tax return.

Landlord’s State Allowances and Deductions for Private Home Rental

The following state deductions and allowances can be offset or deducted mitigating the tax bill without prejudice of additional compatible allowances set out by the Autonomous Community contingent on where the property is located. Please take legal advice on the latter for your particular case as for economy of space I will not be listing them below.

The above translates into higher returns for a landlord. Meaning non-resident landlords stand to profit from higher net yields on letting in Spain as from 2015.

Article 24.6 of the Non-Resident Income Tax Act (I.R.N.R.) makes a direct renvoi on these to art. 23 of the Personal Income Tax Act (I.R.P.F.).

1.- Physical Persons

A. Rental Tax Relief / Deductible Expenses (Art. 23 I.R.P.F.)

Proof must be supplied that the following expenses are directly related to income earned in Spain and have a direct economic connection that is inseparable from the activity carried out in Spain.

• Interests arising from a loan to buy the property (i.e. mortgage).
• Local taxes and administrative charges and surcharges that impact on the rental income or else on the property itself (i.e. IBI tax, rubbish collection tax).
• Expenses arising from formalising rental contracts such as lets or sublets (i.e. Notary and/or Land Registry fees); legal defence (i.e. hiring a lawyer for tenant eviction purposes).
• Maintenance costs may be offset; refurbishment expenses are excluded.

Examples of maintenance costs (deductible): repainting over flaky paint, plumbing, debugging, tennis court green mold cleaning, swimming pool pump replacement, annual lift maintenance, leaking faucet.

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

Notwithstanding the above, refurbishment expenses may be claimed on selling the property by offsetting them against your Capital Gains Tax liability. Please read my article: Taxes on Selling Spanish Property.

• Home insurance premiums (theft, fire, civil liability etc.). Please read my articles Home Insurance in Spain, Community of Owners’ Insurance Policies and How to Cancel your Home Insurance Policy in Spain. However claims arising from events that diminish the value of a dwelling are non-deductible i.e. fire
• Utility invoices (electricity, water, gas and landline).
• Concierge, gardening & security services (i.e. gated communities).
• Home depreciation and amortization. The calculation is 3% on the highest value of the following two: home buying costs or cadastral value; the value of the land is excluded.

B. Allowances

• The 100% tax allowance on letting to under thirty-year-olds is supressed as from the 1st of January 2015. The allowance is now 60% on the net income regardless of a tenant’s age.

2.- Legal Persons

Those set out by the Company’s Income Act (Law 27/2014, of 27th of November).

Changes to Spain’s Rental Laws – Conclusion

Any change that implies paying fewer taxes is always welcome. The less Administrations meddle in private affairs and businesses, all the better.

If you own property in Spain and plan to rent it out for a period exceeding one month in a year I strongly recommend you seek legal advice to comply with the obligations set forth by your Autonomous Community.

“Freedom is the right to question and change the established way of doing things” – Ronald Reagan.

American 40th US President (1981 – 1989). He steadfastly contributed to the Cold War victory which led to the fall of the Berlin Wall and the collapse of the U.S.S.R.

 

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 delusional politician was harmed on writing this article. VOV.

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Changes To Spain’s Inheritance And Gift Tax Law

Raymundo Larraín Nesbitt, February, 21. 2015

Regular legal-contributor Raymundo Larraín Nesbitt examines the legal impact in Spain on matters such as non-resident taxation and inheritance tax brought about by the key ruling of the European Court of Justice (ECJ) from last 3rd of September 2014 (Case C-127/12).

By Raymundo Larraín Nesbitt
Lawyer – Abogado
21st of February 2015

 

 

 

European Court of Justice. Photo credit: Cédric Puisney

 

Introduction

Continuing the trend set out last month on Succession, I think it was long overdue I wrote an article on the ECJ’s landmark ruling of last 3rd of September 2014. The legal repercussions, on the wake of this ruling, have rippled wide and deep across Spanish law; particularly regarding non-resident taxation. For this article’s sake the most prominent change is Law 26/2014 of the 27th of November which amends, amongst other laws, the Personal Income Tax Act (I.R.P.F.), the Non-Resident Income Tax Act (I.R.N.R.) and the Inheritance and Gift Tax Law (Impuesto de Sucesiones y Donaciones, I.S.D. for short). These changes came into force on the 1st of January 2015. I had already referred to them fleetingly in December’s article Taxes on Selling Spanish Property.

Law 26/2014 adapts the decision taken by the ECJ amending internal Spanish national laws. In a nutshell, amongst many other changes that escape the goal of this article, it puts an end to (fiscal) discrimination between residents and non-residents in a wide array of matters; most notably on inheritance and gift taxation.

If you are looking for in-depth articles on Spanish Inheritance Tax please follow these links: 

 

For the purpose of this article, when I make reference to ‘non-tax residents’ I will always be referring to citizens which are either tax resident in another Member State of the European Union or else in the European Economic Area (E.E.A.). Just to clarify, the below-listed changes do not benefit tax residents outside of the EU or EEA.

I will now, as briefly as I can muster, highlight the major changes.

Succession – Situation Prior to the ECJs’ Ruling

To better understand the scope and wide impact of the legal changes it is necessary for me to digress and explain what the existing situation was prior to the ECJ’s ruling.

Basically there were two sets of allowances on inheritance tax; one set out by rigid state law, which is the common regime and is applied nationwide subsidiarily, and another more indulgent regional one set out by each of Spain’s seventeen Autonomous Communities. Broadly speaking, state law applied to non-tax residents by default in all cases. Regional tax laws applied to residents by default.

State law is hands down more unforgiving and decisively less lenient than regional tax allowances which only applied to (tax) residents. Non-tax residents were forced to follow state inheritance law regardless of where the estate was located in Spain.

Spain is divided administratively into seventeen Autonomous Communities. Each of these have devolved competencies on Inheritance tax matters up to a certain point and may apply generous deductions to the point that Inheritance and Gift tax is almost suppressed in some Autonomous Communities. Making a sweeping generalisation, and just to make things clearer to understand, Spain is divided broadly in communities ruled by centre-right and centre-left wing parties. Their ideological spectrum directly impacts on taxation.

On the one hand, Autonomous Communities ruled by centre-right wing parties (i.e. Partido Popular) have generous tax provisions in place almost suppressing inheritance and gift tax i.e. Madrid, Basque Country, Navarre, Valencia, Balearic and Canary Islands. You can read further in-depth on the matter in my article Making a Spanish Will from 2012.

On the other hand, you have autonomous regions led by centre-left parties (or left-wing) which, coherently with their ideology, not only do not apply generous regimes to succession but even penalise it furthermore as they firmly believe wealth ought to be ‘redistributed’.

This is the ideological trench warfare in which non-tax residents are parachuted in being caught in the crossfire. Non-tax residents were, until the ECJ’s ruling, unfairly barred from taking advantage from the generous regional tax allowances which were only reserved to residents and significantly improved upon those set out by state law.

A non-tax resident beneficiary of a deceased’s Spanish estate followed the general state law on inheritance and the inheritance was directly dealt with from Madrid (centrally as opposed to regionally in the case of tax residents). This was irrespective of in which of the seventeen Autonomous Communities had the deceased passed away or where the majority of his assets were held. In other words, non-tax residents were being discriminated as, unlike tax residents, they could not take advantage of the generous tax provisions which almost suppressed inheritance tax in some Autonomous Communities.

This was clearly incompatible with the founding principles and self-admitted goals of a European Union which vies to create a single economic and political space posed to compete in equal footing with the US, China and other major rising superpowers.

Post-ECJs’ Ruling – Changes to Spain’s Inheritance and Gift Tax Laws

The European Commission, through the ECJ’s ruling of 3rd of September 2014, ended all discrimination and forced Spain to amend its internal laws and accommodate the European principles on which the EU is based on.

As an example of such changes, Spain’s Constitutional Tribunal (Tribunal Constitucional) has annulled in March 2015 a part of Law 13/1997 relating to inheritance tax (ISD or IHT) from the Autonomous Community of Valencia when it states that only residents with habitual residency in said Autonomous Community can benefit from the lenient tax allowances on inheritance procedures (decisively more generous than state law as it allows an allowance of up to 99% for next-of-kin beneficiaries, Groups I and II). The Constitutional Tribunal has quashed this and stated that these allowances also apply to non-residents in the Community of Valencia (STC 3337/2013, from the 18th of March 2015). The effects of this ruling are ‘pro futuro’; going forward. It doesn’t affect closed matters.

Without further ado the changes brought about by Law 26/2014 (third final disposition):

 

I. Inheritance Rules

 

a) Deceased is non-tax resident. If the deceased was resident in a Member State of the European Union or else in the European Economic Area (non-tax resident in Spain) the beneficiary will now benefit from:

• The regional tax allowances where the majority of the assets of the deceased are located in.
• If there are no assets in Spain, the rules of the Autonomous Community where the beneficiary lives apply.

b) Deceased is tax resident and beneficiary is non-tax resident. If the deceased was resident in Spain and the beneficiary is resident in a Member State of the European Union or else in the European Economic Area (non-tax resident) he will benefit from:

• The regional tax allowances where the deceased lived.

 

II. Gift Rules

 

a) Immovable property located in Spain (i.e. real estate). If a non-tax resident is donated an immovable asset (located in Spain) he will now be entitled to the regional tax allowances of the Autonomous Community where it lies.

b) Immovable property located outside of Spain (i.e. real estate). If a tax resident is donated an immovable asset located in a Member State of the European Union or else in the European Economic Area, other than Spain, he will be entitled to the tax allowances of the Autonomous Community where he lives in Spain.

c) Movable property located in Spain (i.e. a painting). If a tax resident in a Member State of the European Union or else in the European Economic Area is gifted a movable asset located in Spain he is entitled to apply the tax allowances and gift rules of the Autonomous Community where that asset spent most of the days during the previous five years.

Consequences of the Changes in Inheritance and Gift Tax Laws

When one of the parties is non-tax resident in Spain the above-mentioned changes will bear a dramatic impact on the beneficiary’s taxation; significantly decreasing or even suppressing the tax altogether providing the estate is located in one of the Autonomous Communities outlined above with generous allowances on inheritance and gift taxation. In other words, for clarity’s sake, a beneficiary stands to pay much less now under this new law as from the 1st of January 2015.

For those who are non-tax resident in the E.U. or E.E.A. there are no changes. State law still applies to them unabated.

Changes to Spain’s Inheritance and Gift Tax Law – Conclusion

This is a welcome respite and much-needed change. Kudos to European lawmakers. It made little to no sense to discriminate against fellow EU-members. The previous regulation clearly undermined the principles in which the European Union is firmly grounded upon. Member States must all row as one if the Union is to stand. Or we all become one thing or all the other; but not both. Spain can’t have it both ways.

“A house divided against itself cannot stand” – Abraham Lincoln.

American 16th US President (1809 – 1865). He resolutely ensured a pro-union victory and brought about the emancipation of slaves.

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

Larraín Nesbitt Lawyers is a law firm specialized in inheritance, taxation, litigation and conveyancing. 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

 

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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. Voluntas omnia vincit.

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Spanish Wills and Probate Law In Light Of European Regulation 650/2012

Raymundo Larraín Nesbitt, January, 8. 2015

Solicitor Raymond Nesbitt explains the legal consequences European Regulation 650/2012 (Brussels IV) has on foreign resident’s Spanish Wills.

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

 

 

 

Introduction

This article serves as a gentle reminder of the impact European Regulation 650/2012 (Brussels IV) will have on all foreign residents who live and own assets in Spain and who have made a Spanish will (I am particularly thinking of British and Irish nationals).

European Regulation 650/2012, in force since 2012, introduces significant changes to Succession that may require you to make a new Spanish will. These changes will come into force as from the 17th of August 2015. Anyone affected by it that passes away on or after the said date, and who has not updated their Spanish will accordingly, may cause devastating problems to their beneficiaries (normally family). Let this article act as a warning to all those affected by it.

These devastating effects on your family include, but are not limited to, protracted, lengthy and expensive litigation besides fights that tear families apart. In my professional experience the bitterest litigation takes place within families fighting over inheritance money.

If you wish to avoid serious problems to your loved ones you should heed the advice given in this article.

This Regulation has EU-wide impact. If you own property elsewhere in Europe, for example in France or Italy, and your habitual residence is located there you may face similar problems to the ones described in this article for those who have taken up residency in Spain. Take legal advice.

If you are looking for in-depth articles on Spanish Inheritance Tax please follow these links: 

 

To close, I have structured my article as a F.A.Q. for ease of comprehension. Please feel free to add any comments below and I will do my best to address any legal queries relating to it.

What Do These Changes Entail?

Prior to this Regulation, British nationals (foreigners in general) had free testamentary disposition in their Spanish wills over their Spanish estate following art. 9.8 of the S.C.C. providing their own national law allowed it (meaning they could leave their Spanish estate to whoever they pleased). This avoided a testator from following Spanish forced heirship rules that establish that 2/3rds of the Spanish Estate would go to their children. Almost everyone buying property in Spain will have been advised by their conveyance lawyer to draw up a Spanish will exclusively for their Spanish assets.

Regulation 650/2012 changes the rules of the game as it introduces that Succession in all Member States will now be ruled by the laws of the land where the testator holds residency status in lieu of his own national law (article 20). The United Kingdom and the Republic of Ireland have opted out of this Regulation.

This change translates in practice, for example, for an English resident in Spain who’s made a Spanish will that his Succession will now be governed by default by Spanish Inheritance Laws instead of England and Wales’ Succession Laws.

Spanish Succession Laws stipulate that both descendants (children or grandchildren) and ascendants (parents or grandparents) will inherit with priority over a surviving spouse. They are entitled, by law, to inherit fixed shares of the estate. Spain’s Civil Code dates back to the nineteenth century and needs to be brought up to speed with modern times.

Meaning that the Spanish will of this Englishman as it stands now, unchecked, may be successfully contested by forced heirs under Spanish Succession Laws unless he has specifically opted that his will is governed by his own national law (England and Wales) in accordance with articles 38 et seq. of this Regulation. In other words, your Spanish will must make express reference that your Spanish estate must be disposed of following your own national law (as opposed to Spain’s which is applied by default unless you make a specific provision in your Spanish will).

Following on the above example, a resident Englishman decides to leave everything to his stunning blonde girlfriend (twenty years her senior) and cut out his three children from a previous marriage. If he doesn’t make a new Spanish will his children (any of them) can challenge successfully his existing Spanish will leaving his girlfriend exposed and unprotected to protracted litigation. It is almost a certainty that his children will win the case under this new Regulation. You can only leave everything to your new gorgeous girlfriend under English law and for that you need to opt specifically for it on making a new Spanish will.

A resident testator can only avoid having their will contested by making a new Spanish will that reflects his personal choice (to have his own national law governing his Succession in lieu of Spain’s Inheritance Laws which do not contemplate free testamentary disposition).

Who Does It Affect?

In a nutshell, Regulation 650/2012 affects all foreigners who have their habitual residency in Spain and die on or after the 17th of August 2015 (articles 23 and 83). Spanish nationals may disregard the whole article as they are unaffected by the changes. Specifically:

• Foreigners who have their habitual residence in Spain. It affects Spanish wills witnessed prior to the 17th of August 2015 or else which are non-compliant with Regulation 650/2012 terms i.e. there is no mention that your Spanish estate should be disposed of following your own national law. If you are resident in Spain and have made a will according to your own national laws but it is not clearly reflected within (e.g. there is no specific provision in the Spanish will that your Spanish estate should be ruled by your own national laws) you may need to make a new Spanish will compliant with this Regulation. It really falls to a case-by-case scenario; seek a lawyer’s advice to double-check your Spanish will if you are unsure.

• Non-resident foreigners, who have made a Spanish will, and plan to become resident in Spain at some point in the future i.e. British family who bought off-plan property in Spain and plan to sell up in the UK and retire to Spain over the next years.

Can I Choose my Own National Tax Law Besides Opting for my National Succession Law?

Short answer is no.

What this Regulation entitles you is to choose freely the Succession Law of your own nationality (i.e. England and Wales or Scotland’s) in lieu of Spain’s compulsory heir rules which, following this new Regulation, applies by default if your habitual residency is in Spain at the time of your death on or after the 17th of August 2.015.

I stress, to avoid misunderstandings, that you cannot choose what Inheritance Tax Laws apply to your Spanish estate. As a rule of thumb, any beneficiary, whether resident or non-resident, inheriting assets located within Spanish territory has to pay Spanish inheritance tax.

So, for example, an Englishman whose habitual residency is in Spain and inherits Spanish assets will pay Spanish inheritance tax.

And likewise, a non-resident Scottish man who inherits Spanish assets will also pay Spanish inheritance tax.

You cannot opt out or choose your own national Inheritance tax laws on inheriting assets located in Spain. You have to pay Spain’s IHT.

What Can I Do? Can I Simply Update my Existing Spanish Will?

Short answer is no.

After speaking with multiple notaries it is clear that a simple addendum (codicil) cannot be made to your existing Spanish will without incurring in legal risks. In order to avoid your will being successfully contested at the time of your death it is necessary you make a new Spanish will.

Only by making a new Spanish will does it ensure you have a cast-iron guarantee that it will remain uncontested. If you do not heed my advice your outdated will may be challenged by any forced heir under Spain’s Succession Laws. And they will most likely win the case.

If I Make a New Spanish Will What Happens With The Old One? Could there be a Conflict?

No. In Spain the newest will always overrules any prior ones. Spain has a Central Registry of Wills located in Madrid. Any will that is witnessed by a notary anywhere in Spain will have the details sent to this central registry. The original will is stored for safekeeping by the notary himself. There shall be no conflicts.

The only problem is if you decide to make a holographic will instead of having it witnessed by a public notary. I highly recommend this is never done as Spain has very strict rules for these type of wills and they can be easily annulled.

Can I grant a Power of Attorney and have my Spanish Lawyer make a New Will for me?

No. Making a will under Spanish law is a personal act that requires it is made in person and not through proxies.

I am a British/Irish national resident in Spain. Neither the UK nor the RoI have Ratified European Regulation 650/2012, Therefore I don’t Need to Follow your Vested Advice. Thank You Very Much.

It’s beside the point.

Spain has ratified it and your assets are located in Spain for the purpose of this article. When you pass away your Spanish Estate will be unwinded following your own national laws. Both the UK and the RoI make an internal “renvoi” to Spanish Succession laws which happen to follow Regulation 650/2012. So regardless if neither the UK nor the RoI have ratified this Regulation, Spain has and your Spanish estate will be bound by it following European Regulation 650/2012.

I am a British/Irish national and NOT resident in Spain. I Don’t Plan to Become Resident in Spain.

In such a case this Regulation does not affect you. It only affects existing residents in Spain or else those who at some point in the future plan to take up residency in Spain. There is no need for you to make a new Spanish will. You may disregard the whole article.

I am a Foreign Resident Living in Spain. I Plan to Leave All (or Most of) My Estate to My Spouse/Partner. I Have Children (or Grandchildren) and my Parents (and Grandparents) are all Dead. Do I Still Need to Make a New Spanish Will?

Yes, you would need to make a new Spanish will. You should do it before August’s deadline.

It is important to note that Spanish law will govern the estates of all foreigners who have their habitual residency in Spain and who die on or after the 17th of August 2015 as per art 83 of this new Regulation. In other words, Spanish law will govern by default the estates of all foreign residents unless a specific provision is worded in their Spanish will to avoid it.

Children, under Spanish Succession law, have priority on inheriting over a surviving spouse; regardless if they are from a previous marriage or not. They are entitled to 2/3rds of the deceased’s estate. Your children – any of them – could apply to a Spanish court to have your will set aside. They would most likely succeed under this new Regulation leaving your wife or partner in dire straits i.e. they could for example inherit the villa where your wife/partner currently lives in and throw her out leaving her unprotected.

If you care for your partner/spouse’s future well-being act now and make a new Spanish will according to your own choices (providing of course your own national law allows it).

The same rule applies to grandchildren. Grandchildren also have priority on inheriting over the surviving spouse. They would likewise be entitled to 2/3rds of the estate.

In order to legally leave everything to your wife (or partner) you need to override Spanish Succession Laws by making a new Spanish will and specifically opt that your own national law governs the will (E.g. England and Wales’) in lieu of Spain’s Inheritance laws.

I am a Foreign Resident Living in Spain. I Plan to Leave All (or Most of) My Estate to My Spouse/Partner. I Do Not have Children (or Grandchildren) and One (or Both) my Parents/Grandparents are Alive. Do I Still Need to Make a New Spanish Will?

Yes, you need to make a new Spanish will.

If there are no descendants (children or grandchildren), ascendants (parents or grandparents) of the deceased are next in line in the pecking order (arts. 809, 810 and 935 et seq. of the S.C.C.). They have priority on inheriting over the surviving spouse. You run the risk of having one of your parents, or both, contesting your will and leaving your spouse or partner unprotected as a result.

Parents of the deceased are entitled to half of the estate if the deceased wasn’t married to their partner.

Parents of the deceased are entitled to one-third of the estate if the deceased was married to the surviving spouse.

I am a Foreign Resident Living in Spain. I Plan to Leave All (or Most of) My Estate to My Spouse/Partner. I Do Not have Children (or Grandchildren) and my Parents (and Grandparents) are all Dead. Do I Still Need to Make a New Spanish Will?

No. Your existing Spanish will leaving all (or most of) your estate to your spouse/partner should suffice.

I have read your article but the 17th of August 2.015 is now past; Is it now too late to make a new Spanish will in compliance with this European Regulation or can I still make a new will?

No, it is not too late. In fact you should make a new Spanish will immediately updating it. You can make a new will at any moment after said deadline. The problem I highlight is only if you die on or after the 17th of August 2.015 and you have not updated your will.

Spanish Wills and European Regulation 650/2012 – Conclusion

To avoid potentially devastating consequences to your loved ones that may lead families to fight over inheritance money it is your duty to have your existing Spanish will checked by a Spanish lawyer and, only if necessary, to make a new Spanish will compliant with European Regulation 650/2012. This will allow your own national law to be applied to your late estate in lieu of Spain’s Inheritance Laws.

Making a new Spanish will typically has an individual cost of between €100 to €250. This is a paltry amount compared to the dozens of thousands of euros your family stands to lose unless you take evasive action now before August’s deadline; not to mention the additional grief and aggravation you will spare them at a time of bereavement. It is in truth a small price to pay for peace of mind.

Surviving spouses or partners are the ones who stand to lose most (or all) under this new Regulation unless you act now.

Remember, you have until the 17th of August 2015 to make a new Spanish will if this Regulation affects you. Do not take chances with your loved ones’ well-being and plan ahead for your demise.

“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 inheritance, taxation, litigation and conveyancing. 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

          Succession and Wills – European Commission

 

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).

Pro tip: Plusvalia tax does not apply to rural properties, only to urban ones.

 

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.

To claim tax relief from the tax office, your VAT invoice must meet these listed requirements: VAT invoice dissected 

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 urban 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.

I stress again that, by definition, plusvalia tax does not apply to rural property.

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.

Larraín Nesbitt Lawyers is a law firm specialized in taxation, conveyancing, inheritance, and litigation. 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

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

How to Buy Property in Spain – Advice 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.

2.014 © Raymundo Larraín Nesbitt. All rights reserved.

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How to Apply for Healthcare in Spain

Raymundo Larraín Nesbitt, November, 8. 2014

Expats retiring to Spain will need to consider health care along with property rental or investment decisions. Regular legal-contributor Raymundo Larraín Nesbitt strays again from his usual property themes to give us a general overview on how to apply for healthcare in Spain.

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

 

 

 

Emergency Cover vs. Full Healthcare Cover

I have to begin by distinguishing two types of health cover.

  • Emergency cover is universal and open to all human beings, whether EU citizens or not. The only requirement for emergency health assistance is that you need to be registered at your local town hall (‘Certificado de Empadronamiento’ or census certificate). This is explained in detail in a section below.
  • Access to full health care cover by the Spanish Healthcare System requires a Social Security Number (‘Número de la Seguridad Social’ or SSN for short). This allows you unrestricted access to state-run healthcare. A SSN can be attained by working for a company or else on becoming self-employed (by contributing monthly to a pay-in scheme).

 

1. Emergency Healthcare Cover

A registered person will have access to public emergency, primary and speciality care for common illness, maternity care during pregnancy, delivery, post-partum etc. It is highly recommended that all foreigners register at their local town hall (known in Spanish as ‘empadronamiento’) for this and many other advantages listed below (and it’s free). Basically the more people that are registered, the more funds the central government allocates to a town hall which – in theory – should benefit everyone.

 

Step-by-Step Explanation to Attain a Public Health Card (PHC)

 

A PHC grants you the right to health care (both primary and outpatient) in both hospitals and emergency centres.

1. As outlined, the first step is to attain a Registration Certificate (‘Certificado de Empadronamiento’) from your town hall.  This is a pretty straightforward hassle-free requirement. To register oneself at your local town hall simply follow the below:

• EU members: identity document from your own country, Community card issued by a police station or else your passport. Copy of Title Deeds and a copy of a utility bill (water or electricity).
• Tenants: your rental contract, a copy of a utility bill under the name of the tenant (which must match the tenancy agreement) as well as an identity card or passport.
• Home owners: copy of the title deed and/or a utility bill for the property.
• Under aged: if a child lacks a passport they will require the same documents as an adult except for those born in Spain (a birth certificate or Family Book will suffice in such a case).

2. Find out where your Primary Care Centre (‘Centro de Salud’) is located.
3. Take your passport (and a photocopy) together with your Registration Certificate.
4. Fill in the ad hoc form. After a period spanning normally 2 to 3 months you will be mailed your Personal Health Card.

Benefits of Registering Oneself at Your Local Town Hall (Empadronamiento)

I am digressing a bit here from the article’s topic but I feel compelled to explain the benefits of enrolling in your town hall’s census (‘Empadronamiento’ or Registration Certificate):

• Discounts on IBI tax (akin to the United Kingdom’s Council tax). In some municipalities (i.e. Estepona) this discount may reach up to 80% (!).
• Increased medical attention (more doctors).
• More fire-fighters.
• The right to State education (free, public).
• The right to vote (registered foreigners can vote only on local and European elections).
• Discounts on municipal services.
• Free access to Sports Centres.
• Free access to public libraries.
• Access to Social Services and Leisure Centres (full or partial rebates on social activities i.e. painting, music, theatre, sewing).
• Additional security.
• More ambulances.
• More schools.
• Social assistance.

2. Full Cover Health Assistance

As explained in the article’s introduction, for comprehensive cover you must attain a Social Security Number and be working (legally) in Spain. This can be attained either of two ways:

a) By working for someone else i.e. a company.
b) On becoming self-employed (‘autónomo’ in Spanish).

Either requires that you, or your employer on your behalf, contribute to a monthly state pay-in scheme.

European Healthcare Insurance Card (EHIC)

If you are visiting Spain temporarily, and reside mainly in a EEA member country, the EHIC allows you full access to Spain’s State Healthcare System. You must request information in your home country on how to apply for this card.

The EHIC will not be valid if the holder is mainly resident in Spain. It does not cover you either if you are travelling with the express purpose to seek medical treatment i.e. travel to Spain specifically to give birth.

UK State Pensioner

As a UK pensioner, if you are living in Spain and you receive a UK State Pension or long-term Incapacity Benefit, you may be entitled to state healthcare paid for by the UK.

The UK’s EHIC is only for use outside of Spain on holidaymaking within the EU; it is not intended for those whose main abode is in Spain.

Applying for Healthcare in Spain – Conclusion

Foreigners are entitled to the same healthcare as the rest of Spanish citizens. The only requirement is to be registered at the town hall of your residence.

For full health care cover it is mandatory that you attain a Social Security Number and contribute to a monthly state pay-in scheme.

UK pensioner’s access to the Spanish healthcare assistance is paid for by the UK.

“Tres cosas tiene la vida: salud, dinero y amor” – Cristina and Los Stop.

Popular Spanish pop song from the sixties. Loosely translated as: “Only three things matter in life: health, money and love.”

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.

2.014 © Raymundo Larraín Nesbitt. All rights reserved.

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How to Buy Property in Spain Safely

Raymundo Larraín Nesbitt, October, 10. 2014

Buying property in Spain safely, by solicitor Raymundo Larraín Nesbitt, is an article that provides a trove of information; it will help you clear the minefield and avoid the most common pitfalls. It acts as a compendium on his five-part series ‘How to Buy Property in Spain’. You may also be interested in reading Buying Resale in Spain, Buying Off-Plan Property in Spain, Buying Distressed Property in Spain, How to Buy Commercial Property in Spain or How to Buy Rural Property in Spain.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
10th of October 2014

 

Introduction

Over the last decade I have written a series of specialized articles featuring real estate conveyance that acted like jigsaw pieces. The purpose of this pretentiously-titled article is to collate part of my dispersed writings on the same topic and group them altogether acting as a backbone that binds and fleshes them out cohesively in a single document. The individual jigsaw pieces should now fall neatly into place forming, one hopes, the overall conveyance puzzle I had in mind.

Following on the above, for reasons of space constraint, I cannot reproduce in this article the hundreds of pages I have written on the matter over the course of years. The idea behind this article is to act as a placeholder repository that conveys basic information on a wide range of conveyance matters and most significantly provides the links to the focused articles which are the ones that really provide in-depth cover on any given subject. So please kindly bear with me and follow the external blue links to the dedicated articles when you want to delve deeper into a topic.

2014 Overview of Spain’s Real Estate Market – A Silver Lining

After seven years of recession I believe we may be almost out of the woods. 2014 in my opinion will be remembered as marking the inflection point where the market started to pick up again and a new property cycle began.

Granted there is still a huge oversupply of properties that will likely take several years to be absorbed by the market. Spain in the boom years built in frenzy more properties than France, Germany and the United Kingdom altogether. This irresponsible glut of properties is largely explained as a result of a combination of factors such as ultra-low interest rates which fostered widespread easy credit, unbridled lender ambition, bloated property valuations commingled with the Administration’s oversight. Properties with poor location and lack of amenities (particularly those found inland) will likely not sell as no one is interested in them irrespective of price. They should have never been built in the first place as they appeal neither to foreign nor domestic demand

What is holding back recovery to a large extent is the credit shortage or credit-crunch. Lenders are being over-conservative handing out mortgages and are enforcing strict lending criteria as many are still widely viewed by experts as undercapitalised. Fortunately the European Central Bank has in a surprising move lowered the base rate last September to a historical low of 0.05%. This is a welcome respite for mortgage borrowers (maybe not so much for Germany) which may in time help credit to flow back to families and society at large. Albeit being realistic this new base rate will not translate to an immediate availability of credit and is likely to take quite some time to permeate through. But it is most certainly a step in the right direction. This bold move by the ECB suggests interest rates across the Eurozone will remain at historical lows for some time allowing buyers of second homes to take advantage of competitive rates.

Credit is the lifeblood of the real estate market; without mortgage financing the market languishes and grinds to a halt relying heavily on cash-buyers which are obviously a minority. Encouraging signs of lenders willing to lend again, with reasonable terms, are beginning to hit the headlines. Affordable borrowing will play a major role in the rebound as it is a prerequisite to a solid housing market recovery.

The overall outlook is that there is still a massive glut of properties available but what’s important to note is that the market is multi-tiered and we are witnessing recovery at different speeds much the same as Europe offers countries with variable growth levels. The high-end of the spectrum, dominated by premium properties, is selling quickly once again. As in every recovery in Spain the rebound is kick started by well-heeled buyers acquiring high-end properties. The drive sparked by top-of-the-range real estate will eventually gain momentum to the point of pushing forward the mid-range market in a herd mentality. This is how every recovery in Spain has begun and I believe we are precisely at a cycle turning point with well-off clients seizing first-rate properties with the general market to follow trend in due course.

For the first time in several years reports are surfacing pointing to a fledgling house price recovery. Even Spain’s National Statistic Bureau (INE) has joined in reporting the first house price increase in a six-year period. What it is clear to my mind is that the market has indeed levelled off and we are now well on track on the road to recovery with well-located and smartly-priced properties gaining traction.

Any industry insider will tell you that we have witnessed in 2014 – for the first time in seven years – strong foreign demand mainly from north European countries (Nordics), Russians and to a lesser extent Arabs. Domestic demand remains depressed conditioned by all-time high borrowing costs with the exception of high-end property which has proved resilient with affluent Spaniards from Madrid and the Basque country (let alone wealthy foreigners) snatching up trophy properties at bargain prices in well-to-do locations.

A traditional indicator of recovery in Spain has been when savvy wealthy Spanish families buy into the market decisively which is indicative of a cycle end and the beginning of a new one as witnessed over the last two property cycles (eighties and nineties). Upbeat macro figures are pointing more and more that we could really be at the start of a new growth period. Whether this bourgeoning recovery holds up and translates into consistent growth remains to be seen as external geopolitical factors could easily derail it.

Hire a Qualified Registered Lawyer

This is the single most important advice that can be given before you start house-hunting. If you only happen to follow this first tip the rest of the points mentioned in this article become redundant.

Hiring a lawyer is by no means mandatory on conveyance procedures. But I cannot stress enough the importance of retaining a Spanish lawyer, if you are a foreigner, to act on your behalf in a conveyance procedure, both on buying and selling property. This should be your starting point before signing any reservation agreements or paying any deposits.

It is often that I hear that those with vested interests in their being no lawyers involved are often the most outspoken on advocating that retaining a lawyer’s service is an unnecessary expense and always put as an example that Spaniards themselves don’t hire them on buying property.

Whilst it may be true that some Spaniards do not retain a lawyer to act on their behalf in a conveyance this can be explained for a number of reasons. Almost every Spaniard has a relative or a friend who happens to be a lawyer and advises them free of charge. Besides they are fluent in their own language (!) and have ready access to a myriad of legal articles which are regularly published in the press. Despite this Spaniards still end up having all sorts of problems on buying or selling property because they did not want to incur in additional expenses hiring a professional. Quite often their blunder far exceeds what a lawyer would have charged for his service.

To identify oneself as an “abogado/lawyer” one must be both qualified and registered in Spain:

· Qualified: having passed and attained a Spanish law degree or else by having homologated it.
· Registered: being admitted to practice Law at one of Spain’s regional Bar Associations.

The second point is already inclusive of the first one, as on applying to practice Law before a Bar Association one must submit both his Law degree and his full academic record. Additionally, someone with a criminal record may not join the Law Society. One should exercise extreme caution on those claiming to be an ‘abogado’ and yet are unregistered to practice. Ask yourself why? Quite a few of the notorious mishaps featured in the press relate to non-qualified intruders dealing in conveyance matters.

Besides registered lawyers have the advantage of professional indemnity insurance in the event of negligence or malpractice. Bottom line; make sure your lawyer is registered to practice, for your own sake. Be wary of cold-calling from legal advisors, senior legal advisors, legal executives, legal assistants, paralegals and in general anyone who does not clearly identify himself/herself as a lawyer/abogado (and is therefore registered).

Unlike other countries such as the United Kingdom these fancy titles don’t mean anything in Spain – we have no paralegals. Or you are either a registered Spanish lawyer or you are not, period. It’s that simple. Someone who is not a trained registered lawyer is not qualified to give legal advice in any shape or form, cannot entertain to address himself/herself as a ‘lawyer’, cannot solicit clients for legal services – even if outsourced – nor practice law in Spain. You can easily check if your lawyer is registered to practice law on this registered Lawyer’s database. Beware of the increasing number of Spanish bogus law firms cold-calling requesting money upfront (particularly regarding timeshare). They are not law firms, they are boiler rooms (unlicensed, unregulated and unsupervised).

If the property you wish to buy is high-end you may want to seek advice beforehand so as to mitigate tax exposure, namely to Spanish Inheritance Tax. Often the best tax planning results are achieved prior to acquiring a property as they may require the incorporation of a string of holding companies to lock-up the asset. You can read further in my article: Buying and Owning Spanish Property through Companies: Pros and Cons.

Bottom line it is advisable to retain an independent lawyer in Spain both on buying and selling property.

You can check this list of recommended English-speaking lawyers or request one from your home country’s local consulate in Spain.

NIE Number Requirement

One of the first steps on buying property in Spain, besides hiring a lawyer, is to apply for what is known as a Spanish NIE number which is a Tax Identification Number for foreigners enabling you to file and pay taxes into the Spanish Tax office. It will be required, for example, on all the following:

  • Buying or selling property.
  • Inheriting assets in Spain.
  • Opening a bank account.
  • Taking out insurance.
  • Buying a car.
  • Working in Spain.
  • Obtaining a mortgage.
  • Some private foreign schools require a NIE number from parents and/or new (foreign) pupils to enrol them!

 

Basically any activity involving paying taxes requires a NIE number. You cannot complete on a property in Spain without one, either on buying or selling, as the Notary will disallow it.

You may apply for a NIE number in person or else appoint a lawyer to do it on your behalf. Our law firm offers this service: NIE number service.

For the former, be ready to take time off work, allocate holidays, spend over €1,000 in booking flights and hotels to Spain all to wake up very early and make long queues under a scorching sun for hours on end. Did I mention your Spanish must be excellent as public servants will seldom speak in English let alone other languages?

Or alternatively you can cut to the chase using the most popular option which requires appointing a lawyer as a proxy by means of a limited Power of Attorney (P.O.A.) specific only to apply for a NIE number. Lawyers usually charge a reasonable fee of €100 – €150 for it. In under ten days you will have a new NIE number mailed (or e-mailed) to you to get you started on your property hunt.

 

Property Types

 

I distinguish broadly between five types of real estate property. The first four may be grouped under the generic term ‘resale’ property whereas the fifth is new-build or off-plan which requires a category all unto itself and for this reason I reserve it the last place below.

I go into the trouble of distinguishing these five categories or subclasses because they each sport their own nuances and idiosyncrasies which ought to be highlighted clearly to would-be buyers so they are fully aware of the differences. In most legal articles dealing with Spanish property conveyance you will find them all grouped together in a mixed bag making no distinction which I honestly believe is a crass mistake. The division is not merely academical but practical.

1. ‘Standard’ Urban Resale Property

Is hands down the most frequent property-type conveyed.

Please read my article Buying Resale Property in Spain.

2. Commercial Property

Is a type of property legally earmarked as commercial premises subject to special taxation and other particularities (i.e. opening licence).

Please read my article How to Buy Commercial Property in Spain.

3. Rural Property

Requires a (cautious) approach to it due to the myriad problems it has caused in the past.

Please read my article How to Buy Rural Property in Spain.

4. Distressed Assets (Fire Sales and Bank Repossessions)

This term refers to pre or post lender repossessions which are rife on the radio and press. The following two articles clearly explain how to profit from distressed real estate assets held by lenders or directly from private owners seeking a quick sale. Fire sales and foreclosures offer great value as they are heavily discounted.

Please read my articles Buying Distressed Property in Spain and Bank Repossessions in Spain.

5. Off-Plan or New-Build Property

As explained above, the fifth type of property cannot be labelled – by definition – as resale and requires a distinct category all unto itself. Off-the-plan or new-build property is when you sign a contract to buy a property that is yet to be built and is not expected to be finished until several years’ time. I strongly recommend reading my articles:

• Buying Off-Plan Property in Spain
• Off-Plan Construction Guarantees
• Bank Guarantees in Spain
• Supreme Court Rulings on Bank Guarantees
• Licence of First Occupation

They provide an insightful account of the full off-plan buying procedure. Due to space constraints I am unable to reproduce the hoard of information available to them. These articles explain key concepts, such as Bank Guarantees and Licence of First Occupation, which are specific to off-plan and not shared by its resale cousins (with the exception of Catalonia where LFO’s are indeed required for resales).

The market has swerved from one extreme to another; from loving off-plan to having a major fallout. In time the market will find its equilibrium. Although nowadays you will find that off-plan is being almost demonised in the press the fact is that buying off-plan has many advantages as well as some associated drawbacks. Not that long ago it was normal to obtain a significant discount (premium) on buying off-plan as you took on a risk until the unit was ready to be delivered legally (with a Licence of First Occupation). The main risks were related to the uncertainty of the property ever being delivered as well as the time elapsed until completion which could easily take two years or more.

Many took advantage in the boom times selling on these properties for a sizeable profit prior to completion (also known as “flipping”) as it was basically a leveraged investment (ultra-low interest rates coupled with lenders’ lax lending criteria fuelled widespread easy credit) which only required a fraction of the funds paid up front. That same off-plan dwelling was significantly more expensive (i.e. 30%) if you purchased it key-ready as now there was no associated risk (uncertainty).

This, however, changed over time leading us onto today’s depressed market. Now that the dust has settled, purchasers are increasingly turning to resale property in lieu of off-plan as they judge it safer post-credit-crunch particularly out of fear of developers filing for creditor protection or not being capitalised enough to complete existing builds. Off-plan is being shunned as they believe the hazards nowadays frequently outweigh the rewards, making the resale and let market look altogether more appealing within the context of a grim financial environment.

This will no doubt change in the future with the upcoming of the next property cycle. The million-dollar question is of course second-guessing when that will be!

Your guess is as good as mine.

Financing

Most buyers require a mortgage set-up to finance their property purchase. Post-credit-crunch lenders in Spain have been understandably reluctant to finance properties and they have discouraged this activity by non-subtly raising the borrowing fees to all-time highs.

This however changed earlier on this year when Spain’s number one lender by market capitalisation, Bank Santander, decided to spearhead the change by leaving the door ajar on relaxing its mortgage terms. I am confident that, as in the past, smaller lenders will follow the market leader’s example and begin to facilitate credit by offering more competitive and affordable terms to borrowers which will pave the way to a full-blown recovery.

Spanish lenders are risk-averse nowadays so they expect a buyer to come up with a 30 to 40% deposit. This will however likely change in the near future, as credit begins to flow, requiring smaller down payments from borrowers.

I strongly recommend a buyer reads beforehand my mortgage-related articles:

• Spanish Mortgage Loans: An Overview.
• Spanish Mortgage Loans: Beware of Abusive Clauses.
• Mortgage Collar Clauses Revisited (‘Cláusulas Suelo’).
• Lifetime Loans or Reverse Mortgages in Spain Explained.

 

The Buying Process

 

The buying process differs between resale and off-plan property. This is explained because in the former the property is readily available, or key-ready, whereas in off-plan it is yet to be built and takes several years as a norm. I will explain separately both procedures as they each have their own particularities with some elements in common.

 

I. Resale Buying Process

 

The full buying procedure is explained step-by-step in my article How to Buy Commercial Property in Spain under the section “Profile on the Buying Process”. This three-step procedure applies to all four resale property types outlined below:

• ‘Standard’ urban resale.
• Commercial.
• Rural.
• Distressed.

Please refer to said article for a full account of details as well as useful tips on common pitfalls to avoid on buying resale property. I won’t replicate the information here as it would elongate this article unnecessarily besides duplicating the information.

The first step is to sign a reservation contract or deposit agreement at a real estate agency which is normally non-refundable. This takes the listed property off the market (normally for the next 30 days). I strongly advise a buyer hires a lawyer before he commits to sign a reservation contract. Some of these deposit agreements are standard templates which may be poorly worded and can create serious obligations for a buyer that go against his best interests.

Examples:

a) As a buyer; by creating an obligation to buy. By setting an unrealistic completion date of only six weeks as from the time of signing the reservation contract when this short timeframe may exceed the time needed to set up a mortgage with a lender. This leads to a breach of the contract which may result in heavy losses for a buyer as he may be ‘forced’ to complete (can be compelled legally to do so by the seller’s lawyer). A buyer can be sued for specific performance by the seller compelling him judicially to buy the property.

b) As a seller; by creating an obligation to sell. Should the vendor opt out (because for example they have found a second buyer willing to pay more) they may be forced to pay double the amount of the down payment placed by the first buyer as a reservation deposit. Likewise a seller may be sued by the buyer for specific performance to try and compel a sale.

The above two examples highlight why it’s highly advisable to hire a lawyer from the outset so that he reviews the clauses set forth in the reservation contract carefully before you sign and pledge to anything. Do not act rashly signing away. Let a lawyer carry out the basic legal checks first.

Strictly speaking a First Occupancy Licence (LFO) is unrequired for resales and applies only to new-build or off-plan property. That said, in some parts of Spain, such as Valencia and Catalonia, a LFO is required for resales as an exception to the general rule. Additionally a trend has emerged over the last couple of years with risk-weary lenders demanding a LFO is produced for resales to cover their backs on granting a mortgage loan. Many transactions are being put on hold because of this ‘new’ requirement for resales which used to apply only to off-plan property as explained in the next section below in detail. The reason being is that lawyers must request from the local town hall copies of a LFO which may take several months.  In my personal opinion this is absurd as we have gone from one extreme to another; from lenders blissfully ignoring a LFO for off-plan in the boom days to now demand them for every resale which was never their purpose and defeats their logic. It is daft in my view to ask for a LFO on a twenty-year-old property that has all the utilities connected and has no legality problems of any kind. This simply adds an unnecessary new layer of red tape which may contribute to potentially jeopardize resale transactions constituting a deal-breaker in some cases without adding any legal safety to long-standing resales.

The second step will be to sign a Private Purchase Contract (PPC, for short). This step is optional for resales and at times it is merged with the first one for simplicities’ sake. You normally make a down payment of 10% of the property’s value setting a reasonable date for completion (particularly if you require mortgage financing). If movables are being sold along the property it is highly advisable an inventory is added to the PPC. This inventory should be drawn up with great detail to avoid misunderstandings. This inventory will likewise be added to the Title Deed at the Notary Public on completion. It is regarded as a contractual element which binds both parties. If the seller does not include something from within, it will be regarded as a breach of contract.

The third and final step is to pay the balance and complete before a Notary Public. You will require your NIE number and a valid copy of your passport. Your lawyer will ensure that Community of Owners’ fees, utility bills and IBI tax are all up to date. A new owner is held liable for all community fees from the current year he’s buying on a pro rata basis as well as all those dating back three years. This liability is extensive to what is known as ‘derramas‘ or unforeseen community expenses such as painting the building or fixing the lift. Which is why it is very important that at the time of completion your conveyance lawyer attains a certificate from the Community Of Owners signed jointly by the administrator and president stating that all community fees are up to date by the vendor. Should there be any payment outstanding, it goes against the property itself not against the former owner; your lawyer can always practice a retention at completion to offset this outstanding debt.

 

II. Off-Plan Buying Process

 

The procedure differs from resale property for the very reason that the property is yet to be built. It also follows a three-step procedure. I strongly advise reading my article Buying Off-Plan Property in Spain  for a full list of potential pitfalls associated to this property type. The major differences with resale property are the time elapsed between the stages, which will normally span a couple of years or more, as well as the stage payments.

The first step once you have chosen a development that suits you is to sign a reservation contract at an estate agency. This deposit is non-refundable. The same warnings highlighted above for resale apply here for off-plan.

The second step is to sign a Private Purchase Contract (PPC) and start making a series of stage payments. These stage payments, as a rule of thumb, equate to half of the properties’ sales value. Stage payments (and initial reservation deposit) should be covered by what is known as a bank guarantee.

Bank guarantees are essential and of utmost importance in the event a developer becomes insolvent or fails to complete a development within a reasonable timeframe for whatever reason. They act like safety nets for buyers on all the money paid. You should be able to keep receipts of all the stage payments (including the initial reservation deposit) as the Notary public will require at completion a detailed trail of paperwork that justifies each and every amount paid to the developer to comply with Spain’s anti-money laundering laws. If you happen to wire your funds to Spain using the services of a foreign currency broker (which in my experience saves thousands of euros) make sure they supply you with justification of all the moneys transferred over to a developer. The problem with off-plan is that stage payments are normally carried out years before completion so it is easy to misplace a receipt of one or more payments which may cause serious issues down the line with the Notary at completion who may even refuse point blank to witness a property conveyance unless all anti-money laundering provisions are strictly adhered to.

The third and final step is to complete before a Notary Public and make payment of the balance (remaining 50%). The third stage normally takes a couple of years after signing the PPC depending on how advanced the construction of the property is. I strongly advise to complete only with a Licence of First Occupation (LFO) in place. Completing without a LFO is legal in Spain but highly inadvisable (only justified in qualified exceptions such as a developer teetering on the brink of insolvency). For a full list of the serious legal associated risks on completing without the property attaining a LFO by the Town Hall’s Planning Department I refer to my article Licence of First Occupation. As from the moment a developer attains a LFO he can legally compel you to complete on the property. This is known as ‘forced completion’.

Before you complete it is strongly recommended you carry out what is known as a snagging list which will highlight any construction flaws i.e. mismatched tiles, damp patches, mould growths, leaking faucets, flaked painting, damaged appliances, unsuitable drainage. Normally I would hire a reputable chartered surveyor who will draft a complete report (to British standards) outlining any build defects or problems. I have never come across an off-plan property that doesn’t have one or more defects at least. Your appointed lawyer will then negotiate with the developer that he finishes or completes any pending works even withholding a pre-agreed amount at completion to guarantee the work will be done. Once you complete on a property, and hand over all the money to the developer, your negotiation position is severely undermined. So any outstanding problems should be fixed prior to completion not post-completion.

At completion one must hand over all the bank guarantees to the developer’s legal representative. Bank guarantees are void as from the time the developer attains a LFO from the Town Hall where the new-build is located, well before completion. Up until the issuance of a LFO any community of owner’s fees are the responsibility of the developer. One is held liable for garbage collection tax as from the time the LFO is issued which normally takes place some two years after completion. You can expect however to receive a backdated billed from the Town Hall for the previous two years. The same applies to IBI tax.

I strongly advise you change all locks to the off-plan property you have just acquired, including storage rooms. Many people had copies of these keys during the construction phase. Your legal representative will change all the utilities over to your name. If you have purchased in a development make sure you acquaint yourself with the Community of Owners statutes and bylaws. Some buyers will try to defer completion until the communal facilities (swimming pool, lush tropical gardens, tennis court) or promised amenities (golf club, luxury hotel, private hospital) are finalised. Holding out completion on such grounds cannot be done (successfully) for legal reasons. Please read my litigation article on the matter: 10 Reasons why Your Case Against a Developer may be Thrown out of Court in Spain.

Associated Buying Expenses

As a rule of thumb purchase costs add 10 – 15% over and above the purchase price. In some regions of Spain, particularly in Valencia, this figure may be higher. Please take thorough legal advice to budget your purchase before you commit. You can read my article Taxes on Buying Spanish Property for more details.

Besides paying taxes (explained below), a buyer is bound to pay the following fees:

• Notary fees (for the formalization of the deeds): approx. 0.1 – 2 %
• Land Registry fees (for the inscription of the deeds): approx. 0.1 – 2 %
• Mortgage & Gestoría fees (if finance is required): 1 – 2 %
• Lawyer’s fees: 1 – 2 %
• Estate Agent’s fees: 5 % (these are paid for by the vendor unless agreed otherwise)

Taxation

I will split the explanation between the taxes that are to be paid at completion and those borne post-completion (to be filed on an annual basis). The former (completion) is common to both residents and non-residents alike. The latter (post-completion) differs as explained below.

A. Completion

You can read my in-depth article Taxes on Buying Spanish Property.

Resale: is subject to Property Transfer Tax (or ITP in Spanish) which varies, depending on the Autonomous Community where the property is located, between 7 to 10%. As an exception to this general rule, on buying commercial property, from either a developer or a professional, 21% VAT is applied in lieu of Transfer Tax.

Off-plan: is subject to both VAT (currently set at 10% of the total property price) and Stamp Duty (ranging between 0.5 – 1.5% of the total property price; dependent on location as it varies from one Autonomous Community to the next).

B. Post-Completion: Taxes

You are liable to file and pay Income Tax on owning property in Spain for which you may need to appoint Fiscal Representation in Spain. These taxes differ between buyers holding resident status and those who do not.

i. Resident

Defined as spending in Spain more than 183 days in a calendar year or else have their main centre of interests and activities in Spain (i.e. spouse, children, main business). Residents are taxed on their worldwide income and assets.

ii. Non-Resident

Non-residents are liable for Non-Resident Income Tax and, additionally, may be liable for Wealth Tax on their Spanish assets. You can read further my in-depth article Non-Resident Property Taxes in Spain.

•    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%

Non-EU/EEA residents are taxed at a flat rate of 24 per cent on their Spanish-sourced income – for example, rental income from property in Spain, income from a business in Spain and interest on funds deposited with a Spanish bank. Those who own a Spanish property exclusively for their own personal use and have no other source of taxable income in Spain pay a version of income known as ‘imputed income tax’, which is calculated on the property’s cadastral value (rateable value). 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.

Wealth Tax had been supressed but has recently been reintroduced as a consequence of the financial crisis. Please read my article, in collaboration with Blevins Franks, on Spanish Wealth Tax (Patrimonio) for more details.

Careful with the Tax Office on Buying or Selling at a Discounted Price – La Complementaria

Now that I’ve established it is a great time to buy property in Spain – the bad news. Due to Spain’s ongoing real estate depreciation many buyers are securing properties at such knockdown prices they are unwittingly drawing the attention of the Tax Office. So much so that over the last years many will have received a letter from Spain’s Inland Revenue some six months after completion demanding supplementary tax is paid on the property on having ‘underpaid’ ITP or Property Transfer Tax. This is known as “la complementaria” in Spanish legal jargon and affects resale property. You can read further in my article La Complementaria or Bargain-Hunter Tax on how to pre-empt it and how to appeal one.

This can be explained because the authorities use standard value tables (“bases de comprobación de valores”) to draw a comparison between the fiscal value of the property and the declared sales price at completion. These tables were reviewed every now and then following the upward trend in property price. This was fine so long as there was a continuous capital appreciation but when the market grinded to a halt seven years ago these tables froze in time and do not reflect accurately the overall 50% depreciation real estate assets have undergone (speaking in broad terms). So basically the rateable values that 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 market values.

If the Tax authority detects a statistical meaningful deviation they will exact the difference in what they deemed the 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.

On buying distressed Spanish property you should pre-empt this by requesting beforehand an assessed property valuation specifically for tax purposes. This will be a legally binding report which your lawyer may use at a later date.

If you have already received this letter don’t panic, this is happening frequently. You can either pay the requested tax or else appeal it. Providing the difference is not deemed as ‘significant’, your chances of appealing it are fairly high.

If it the amount demanded is low I honestly believe it is not worthwhile the aggravation to appeal. The key decisive factor is that the difference between the fiscal value (the rateable values explained above) and the declared value (what is recorded in the Title Deed at completion before the Notary Public) should be high enough to attract a large tax bill; this will warrant paying a law firm for its legal services. Law firms charge typically between €800 up to €3,000 for this service (this is inclusive of a chartered surveyor’s valuation necessary to appraise the property). So basically any tax bill high enough that exceeds said amounts will easily offset both a lawyer’s and appraiser’s fees warranting an appeal. For high-end property lodging an appeal on a “complementaria” is worth every penny in my professional experience.

Post-Completion: Make Sure Your New Property is registered under Your Name

Once you’ve completed (or closed) on the property before a Notary Public you should ensure it has been registered under your name. A property normally takes two to three months to be registered at the Land Registry post-completion (if no mortgage finance is required).

You will be given the ‘original’ Title deed to the property a few days post-completion.  Losing the original Title deed (“Escritura”, in Spanish) is only a minor setback as you can easily request copies from the Notary before it was witnessed.

If you require mortgage financing you will have to sign additionally, besides a Title deed, a Mortgage deed. Your lender will be the one dealing with registering the property; expect at least a six-month delay – if not more – until you are returned the ‘original’ Title deed. Lenders withhold always the original Mortgage deed for their own records and will give you only an authorised copy. Once the property has been duly registered you can request the ‘original’ Title deed for your safekeeping.

The reason why it takes so long is that all taxes associated to the purchase must be paid first. Only then can the deed transferring ownership be lodged at the Land Registry. A buyer can ensure everything is above board on requesting a Nota Simple. I would advise requesting one only after two to three months have elapsed since completion. Law firms can provide you a copy of a Nota Simple translated into English for a reasonable fee.

Post-Completion Checklist

Once you have acquired your new property, you will now have to face all the associated running expenses besides the taxes I already explained in a previous section above. 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!).

Any unpaid community bills will result in the Community of Owners placing a charge against your property which may lead to auctioning it off publicly to recoup the debt! This legal procedure in Spain works fairly efficiently (as in twelve months on average). Moreover unpaid communal debts can be chased by Spanish Community of Owners abroad against assets you hold in your home country (within the European Union). Please read my articles Bad Debtor’s List (“Fichero de Morosos”) and Spanish Creditors Pursuing Debts Abroad. I also advise hiring home insurance as it is notorious that properties built in Spain are not entirely waterproof (or at least not to the same standards as in the UK) and are prone to damp patches in the winter period.

You should open a Spanish bank account if you haven’t done so already. Utility companies do not accept overseas payments so you should set at least all the following as a direct debit against your Spanish account:

•    Utility bills (invoiced quarterly in the case of water and monthly with electricity).
•    Rubbish collection tax. Paid twice or once a year depending on the town hall.
•    IBI tax. Paid annually (akin to the UK’s Council tax). I strongly urge this tax is set up as a direct debit; failure to pay it may lead the authorities to auction off your property in a procedure which is surprisingly expedient – as in months. Whoever is the owner of a property on the 1st of January of the current year is liable to pay for this tax.

Finally, on owning property, I cannot stress enough how advisable it is that you make a Spanish Will to dispose exclusively of your Spanish estate. This will not preclude any other made in your home country and is limited to your Spanish assets. It will save your beneficiaries time, money and hassle at a time of bereavement.

On a positive note the European Court of Justice on the 3rd of September 2014 has put an end to discrimination between residents and non-residents on benefiting from regional tax allowances regarding Spain’s Inheritance Tax. This landmark ruling will now force the Spanish Government , as it cannot be appealed, to allow non-residents to benefit as well from the generous regional tax allowances which until now were (unfairly) reserved to those holding resident status only. Predictably non-residents will group seeking a refund on what they overpaid over the last four years (statutory time period). This was a contentious point that I had been criticizing for years in all my articles and blog posts on the matter as discrimination cannot be tolerated among fellow EU member states as it undermines the very principles on which a united Europe was built on.

How to Buy Property in Spain – Conclusion

The budding signs of recovery are abundant indicating a turn of the tide in 2014. It is an excellent time to buy property again in Spain taking advantage of today’s post-crash low prices. I must highlight that in the particular case of British the favourable exchange rate trend only makes things cheaper by reducing the average conveyance transaction by thousands if not tens of thousands as the pound is on a two-year high against the euro. Osborne’s bold pension reform also provides new opportunities to seize the moment.

The strengthening of the pound against the euro, record low interest rates and big discounts make three compelling arguments to seize the opportunity and buy now.

Make sure you are assisted on your house-hunting by reputable experts (such as a long-established real estate agency, a reliable mortgage broker or a seasoned lawyer) to benefit most from the wide range of available bargains – you will be spoilt for choice.

I would advise buying with a view to enjoy the property and Spain’s privileged mild weather rather than be on the prowl for a quick profit as I believe that it may still take a while before we see again consistent capital appreciation.

I would also strongly advise that you rent a property in the area you are interested in for a reasonable time before committing to buy just to test the waters and experience first-hand the effect of seasons and how they impact your property and surroundings. You will avoid nightmare scenarios such as buying a flat above a late-night bar that only springs to live in the summertime.

You could always go for a Rent-to-Buy contract which allows you the freedom of letting a property whilst simultaneously entitling you the right to exercise a purchase option if interested (at a pre-agreed heavy discount stipulated in the lease contract which is well below the current market value); a win-win for both landlord and tenant. For more information please read my article Let-to-Buy in Spain: The Smart Choice which explains the pros and cons in detail. Alternatively you may be interested in buying property with a view to rent it out. Please read my articles Letting in Spain: The Safe Way and Tenant Eviction in Spain.

That said if you are buying for the long-term on a well-located area you should do nicely over the next years as an investment provided you purchase now at a reasonable price while bargains are still available.

“You never know what you have until you lose it” – Anonymous.

 

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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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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New Driving Laws in Spain

Raymundo Larraín Nesbitt, September, 8. 2014

Most people who own property in Spain need to drive a car here too. Regular legal-contributor Raymundo Larraín Nesbitt strays from his usual property themes to update us on the major novelties in Spain’s new traffic laws.

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

 

 

Photo credit: Daily Mail. © Getty Images.

 

Introduction

Spain has recently passed new motoring laws which came into force last 9th of May 2014. This new law merits an article unto itself as it significantly alters and impacts existing legislation. I have purposely written it in bullet points so readers can easily skip through the drivel to reach the section they are interested in.

As a disclaimer this article only highlights major changes; it is not to be taken or construed as an exhaustive guide to existing road laws. As a word of caution, this new law only establishes ‘master strokes’; the fine print will be elaborated in detail in future regulation.

This leads me to apologise in advance if some points in my text are obscure. Regrettably the new law leaves quite a few grey areas open to interpretation until further regulation is passed i.e. use of child seats by minors! Not ideal.

Law 6/2014 of 7th of April

The complete wording of the law, in Spanish, can be found in Spain’s Official Law Gazette (B.O.E.). This new law amends Spain’s Highway Code (Law 339/1990).

 

Major Highlights

 

1.Speeding

Art 1.10

• Increased in  motorways to 130 kph  (existing speed limits remain in force however if safety is in doubt)

2. Drink-driving & Drug-driving

Art 1.9 & 1.18

• The legal amount permitted is:

i) 0.5 grams per litre of blood or 0.30 g/l for new or professional drivers.
ii) 0.25 milligrams per litre of exhaled air or 0.15 mg/l for new or professional drivers.

For those – like me – who are still left clueless on the above I put practical examples for both men and women.  Alcohol consumption and its effects vary from one person to the next depending on various parameters: age, gender, speed of alcohol consumption, empty stomach, exhaustion level and weight. In general terms for a man weighing 70 kilos this translates to 1.5 beers (understood as half pints in Spain) or two glasses of wine. For a woman weighing 60 kilos this translates to one beer or one and a half glass of wine. So you may want to keep at bay any binge drinking on a Friday night!

• In addition to breath alcohol testing carried out by the Guardia Civil in its random road checks drivers may also be tested for drug-use. If you test positive, besides losing up to six driving points and incurring a hefty fine (detailed below in section seven), you may even lose your driving licence and have the car immobilised. The exception to this rule are medically prescribed drugs. These tests are mandatory and may not be refused without facing legal consequences. Anyone involved in an accident may be forced to take alcohol and drug tests (even pedestrians).

3. Cyclists

Art 1.12 & 1.14

• The use of helmet is mandatory for under sixteen-year-olds.
• The use of helmet is compulsory on cycling on interurban roads and its use is ‘recommended’ on urban roads as well.
• On overtaking cyclists a distance of 1.5 mts must be observed by drivers. If an overtaking maneuver poses “any” danger to a cyclist a driver must desist until it is deemed safe. Again an open-ended criteria that ought to be ruled in detail in my humble opinion to avoid grey areas specifically on affecting people’s life’s (cyclists).

4. Foreign-plated cars

Art 1.16

• Foreign residents: any vehicle owned or driven by them with a foreign licence plate must be changed over to Spanish plates – no exceptions.
• Non-residents: forbidden to circulate in Spain with uninsured foreign-plated cars.
• Non-residents: forbidden to drive in Spain foreign-plated cars which have not passed the equivalent of the Spanish ITV (UK’s MOT).

5. Children

Art 1.17

• Forbidden to drive under twelve-year-olds in motorbikes (as passengers).
• Following Art 1.8 and 1.17 small children, relating to weight and height restrictions (unspecified), may not occupy front or rear seats (sic). Note: Unfortunately the law is unclear on this point and leaves the door ajar to future regulation to elaborate this point in detail. This grey area leaves this article open to interpretation until the regulation is passed. Being a parent this makes me deeply unhappy.

To solve this one must refer to Spain’s 1990 Highway Code (Art 117) and its 2003 regulation as amended by Royal Decree 965/2006.

I construe this as any child under 135 centimetres may not occupy the front seats even if placed on a child seat. They must occupy only rear seats and in addition should be placed on an approved homologated child seat (“Sistema de Retención Infantil” or SRI in Spanish).

Transporting children under 1.35 metres in height (4 feet and 43 inches) regardless of age requires the mandatory use of a child seat . This extends to rent-a-cars and taxis (you must source your own child seat and be able to demonstrate it on renting a vehicle). Professional drivers, such as taxi drivers, will not be held liable on passengers breaching the law. The fine will be €200 and the (private) vehicle maybe immobilized by law enforcement agents. Tourists should pay special attention to this point on passing through or on holidaymaking in Spain.

Children equal to or taller than 135 centimetres may occupy front seats so long as they wear a driving belt.

Dummy-poof recap for concerned parents:

• Minors < 1.35 metres (4 feet and 43 inches) may only occupy rear seats and use of an officially homologated child seat is mandatory.
• Minors ≥ 1.35 metres may occupy front seats (or rear seats) strapped by seat belts.

The use of seat belts is mandatory for all passengers.

6. Radar Detectors

Art 1.17 & 1.18

• The use of such speed-detecting devices is prohibited resulting in fines of up to €200 and you stand to lose up to three driving points.

7. Fines

Art 1.24

• Payment of fines increased to 20 days qualifying to obtain a 50 per cent discount.
• Fines range from €500 to €1,000 for driving at double the amount permitted (Art 1.20). Driving points lost range between four to six points.
• Fines range from €500 to €1,000 for driving under the effects of drugs (Art 1.20). Up to six driving points lost.

8. Penalty Information Exchange between European Driving Agencies

Additional second disposition.

European Driving Agencies will freely exchange information on road penalties relating specifically to:

• Speed-driving (fines).
• Drink-driving.
• Drug-driving.
• Jumping red lights.
• Non-compliance with mandatory use of seat belt.
• Non-compliance with mandatory use of helmet.
• Driving using a mobile or similar handheld devices.
• Driving on the wrong lane, reserved to specific vehicles or unauthorised overtaking.

The following three countries have opted out of the above penalty information exchange scheme: United Kingdom (DVLA), Republic of Ireland and Denmark.

Conclusion 

Driving in Spain is fairly different from the UK. And I am not referring to driving on the other lane. As a real-life example after having lived and worked in the United Kingdom for the last four years only once did someone blow the horn at me (and yes, it was justified). On coming on holiday to Spain, in the space of only three days I was honked at no less than five times – all unjustified.

The lesson here is that on travelling abroad you would do well to acquaint yourself with local driving laws and get accustomed, as much as possible, to your new driving ‘idiosyncrasy’; take it from me!

“When in Rome, do as the Romans do” – St Ambrose.

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.

2.014 © Raymundo Larraín Nesbitt. All rights reserved.

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