Non-Resident Taxes in Spain

Raymundo Larraín Nesbitt, December, 8. 2015

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

Article copyrighted © 2015. Plagiarism will be criminally prosecuted.

The following article has been summarised to avoid unnecessary tax technicalities. The quoted tax rates are subject to change from one year to the next. Seek professional legal advice on your matter – see disclaimer below.

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

Introduction

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

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

This article deals only with non-resident taxes. To ascertain whether you qualify as resident or non-resident the Spanish Tax Office applies the following criteria:

• You spend more than 183 days in a calendar year in Spanish territory.
• Your centre of financial interests is located in Spain.
• Your spouse and/or underage children live in Spain.

If any, or all three, above apply you will be regarded as resident for tax purposes which escapes the purpose of this article.

Are you married or in a joint property ownership?

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

Cadastral Value

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

 

Non-Resident Taxation Overview

 

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

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

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

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

I. Non-Resident Income Tax

 

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

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

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

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

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

1. Not renting out property

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

Yes. This is a frequent question. It is a legal fiction whereby it is surmised that you derive some form of financial benefit from your Spanish home; that is why it is called non-resident imputed income tax as it is deemed. Spanish Authorities take the view an owner derives a benefit in kind from owning property irrespective of whether it is true or not and taxes it accordingly. It is a fixed annual fee.

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

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

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

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

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

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

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

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

2. Renting out property (without permanent establishment)

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

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

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

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

Rental related articles

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

II. IBI Tax (Impuesto sobre Bienes Inmuebles)

 

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

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

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

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

III. Rubbish Collection Tax

 

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

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

IV. Wealth Tax

 

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

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

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

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

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

Tax form: 714

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

V. Special Tax Levied on Real Estate (GEBI)

 

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

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

Tax form: 213

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

VI. La Complementaria or Bargain-Hunter Tax

 

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

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

 

Frequently Asked Questions (F.A.Q.)

 

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

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

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

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

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

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

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

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

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

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

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

3. Do I need to appoint a fiscal representative?

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

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

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

What can a lawyer do for you?

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

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

Conclusion

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

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

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

 

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

French economist and Finance Minister under King Louis XIV.

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

 

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

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

 

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

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Limiting Liability in Spain

Raymundo Larraín Nesbitt, November, 8. 2015

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

Photo credit: Flickr.

Following up on last month’s article, Filing for Personal Bankruptcy in Spain (popularly dubbed as ‘Second Opportunity Law’), I have written this other one which aims to delve further on the matter and gives a few pro tips on how to limit one’s own personal liability should things pan out the wrong way.

The topic of this article will be the mitigation of personal liability on trading. I will gloss below over the main legal changes. I won’t include traditional legal solutions, such as traders incorporating limited liability companies, as they are more than covered elsewhere.

Introduction

After eight years of severe recession, which has left in its wake five million unemployed and an anemic economy, it has dawned on many that the road to recovery passes through self-employment. Madrid’s central government has smelled the coffee and is busy spreading the gospel on passing new laws to incentivize entrepreneurship.

To better grasp the extent and scope of the new reforms I am forced to sidetrack and make a brief historic recap on personal liability. Traditionally Spain’s legislation has been anything but lenient on self-starters. The outdated nineteenth-century regulation on personal liability is found in both Spain’s Civil Code (S.C.C.) and Mercantile Code and is punishing compared to the modern take of fellow EU countries.

Article 1911 of the S.C.C. stipulates the liability of a private person is personal and unlimited, liable with all his assets now and in the future. Put simply, it institutes unlimited personal liability. If to this you add that effectively (*) there are no statute of limitations on mortgage-backed loans (the most frequent type of asset-based loan employed to fund startups in Spain) you have a potent recipe for disaster as it allows creditors unfettered access to borrower’s assets (current and future). Article 6 of the Mercantile Code rules likewise on the liability of married sole traders.

(*) Whilst it is true the S.C.C. rules the statute of limitations is twenty years on mortgage-backed debts the fact is this time frame can be renewed at any point from scratch making it, in practice, non-time-barred. A pristine example of a nineteenth-century anachronistic bias in favour of lenders.

It is generally accepted that only 50% of businesses survive the first year and of these 90% fail within the following five years. Stigmatizing young entrepreneurs who fail by socially branding them as financial pariahs is obtuse and short-sighted. Failure is required to succeed and laws in Spain should exercise a higher degree of flexibility allowing businesspersons to recover financially from mistakes within a reasonable timeframe i.e. five years; life is not black or white. Failure and success are intimately entwined. Oftentimes only through multiple blunders does one achieve success as it follows a series of trial and errors. Success is a by-product of failure.

It is counterproductive to place a lifetime financial millstone on entrepreneurs who fail with rolled-up interests to boot creating a debt spiral of which there is no escape. A business failure in Spain means you won’t (normally) get a second chance as personal liability is unlimited and in most instances not subject to a statute of limitations. This creates a perverse incentive NOT to start your own business and rather play it safe by working for someone else. I simply cannot stress enough how wrong and detrimental this is to the broader economy. Lawmakers are sending out the wrong message: risk-taking is bad.

This goes on to explain why it comes as no surprise that most youngsters in Spain are reluctant to start their own companies (understatement). Speaking from personal anecdote, most of my foreign friends, especially American and British, had in mind setting up their own businesses early on from a young age. After having worked for others, learning the ropes of the trade, most took the leap of faith starting their own companies. In stark contrast, from all my Spanish acquaintances and friends only a small handful ended up setting a business. And of them, none went to college… One concludes grimly that the more educated you are in Spain, the less inclined you will be to start your own business out of fear of failing; which is simply crazy and a perfect good waste of human talent. Squandering talent is an opportunity cost a modern economy can ill afford if it wants to stay ahead in the game and be competitive.

What makes countries’ economies powerful and vibrant are young, and not-so-young, businesspeople willing to put at stake their own assets to create a new business venture in pursuit of a dream. It is in my opinion a risk-taking mentality which drives economies forward and make countries great in their own right i.e. U.S. or U.K.

To further this purpose, governments, politicians and lawmakers at large should enable this by paving the way, cutting through unnecessary red tape and streamlining procedures for entrepreneurs to succeed. For it is these who will create jobs and push the economy forward, not the state. Governments will then be able to reap the profits through non-confiscatory tax collection and reallocation of resources where necessary.

Governments should at no time undertake the responsibility of job creation which must be left to the private sector. Laws do not create jobs. Unfortunately in Spain, this has not been the case historically and regulation is heavily biased towards lenders which act detrimentally to those seeking to start their own business and who refuse to rely on government handouts. The majority of young people starting out in Spain unsurprisingly harbour no ambition of creating their own business and seek working for someone else; preferably in the public sector as civil servants (mainly because they cannot be dismissed and income is guaranteed).

A prolonged eight-year recession has – fortunately – managed to break the gridlock and change this herd mentality. Faced with bleak job perspectives qualified young Spaniards are migrating in mass abroad (the UK being the favourite hotspot). Those who have not flocked abroad have been ‘forced’ to set up their own business in Spain as it has dawned on them they can no longer afford to wait sine die to find a job.

Moreover, Spain’s central and regional governments have wisely taken this on board and are busy toning down the administrative maze by helping entrepreneurs cut through the red tape, removing legal hurdles, subsidizing them or even going as far as cutting their losses by means of limiting their personal liability on trading debts on approving new legislation.

It is in one of these new laws, and its impact on personal liability, I will now centre on.

Law 14/2013, of 27th of September, in Support of Entrepreneurs

Law 14/2013 goal is to incentivize and foster an entrepreneurial mentality on introducing a batch of measures. It has been popularly dubbed as the ‘Golden Visa Law‘.

For this article’s sake, I will only focus on the single measure which arguably mitigates personal liability following Art. 8: by creating a legal mesh on a trader’s main home shielding it against creditors.

This law also creates the figure of a ‘Limited Liability Entrepreneur’ or ERL for short.

An entrepreneur, or ERL, can now protect his main home from creditors in Spain providing all the following criteria are met (this is not an exhaustive list):

• Property must be his main home (therefore, by definition, an entrepreneur must be resident in Spain to benefit from this protection).
• Property’s value cannot exceed €350,000 or €450,000 in cities with over one million inhabitants. This value is attained by multiplying the cadastral value by the local Tax Office’s coefficient. More on how to calculate this in my article La Complementaria or Bargain-Hunter Tax (under the heading ‘Pre-Emptive Measures’). It should be noted that this value is effectively well below the market value of a property.
• Lodge ERL status at both Land and Mercantile Registries.
• Debt-protection wards only against credits linked directly to trading activities.
• Detailed accounting must be lodged at the Mercantile Registry year-on-year. Failure to comply (lodge the accounts) within a given deadline (seven months as from fiscal year end) causes immunity loss in favour of debt-collection agencies.

Extent of liability: fully discharged*. Main home cannot be subject to creditor action i.e. it is embargo-free. The Land Registrar will now turn down any application (derived from trading activities) to embargo a legally earmarked property.

*Exception: Non-trading debts. Debts in the hands of public authorities, such as the Tax Office or Social Security, are still subject of action on the designated property i.e. embargoes.

Effects: as from the 29th of September 2.013.

What does this mean?

Put simply, it means the law, for the first time in well over a century, allows businesspersons to protect their main house from business debts. If a trader fulfils the requisites laid out above he can effectively create a legal firewall that insulates his property against claims arising from trading debts. Creditors are barred from seizing his main home to auction it off and recoup their debts. This is a first-timer.

What can a lawyer do for you?

Following this new regulation, a lawyer can weave a protection on your main home cocooning it against creditors. A failing business venture no longer need translate to businesspersons losing their main homes to creditors.

Conclusion

This law is a step in the right direction. Its overarching effort is commendable as it manages to single-handedly dent a legal monolithic block (unlimited personal liability) which had been widely accepted as immutable for well over a century; perhaps in due time this crevice will be expanded upon by other modern laws. Although these changes, viewed from Main Street, may seem altogether trivial, from a legal perspective they are a huge leap qualitatively; nothing short of a legal breakthrough or inflection point on personal liability.

However, I feel compelled to level a few criticisms. For starters the benefits (strictly from a personal liability mitigation point of view) are paltry compared to the array of new obligations it sets forth to fulfil the law’s protection. In other words, it is jarringly one-sided as the protection offered is scant compared to the number of responsibilities one must comply with to take advantage of it. Almost to the point of much ado about nothing, but ultimately not quite.

Another obvious criticism, aside from having only one measure to mitigate personal liability, is that it sets a value on the main dwelling which, to top it off, is not that high for Spanish standards. Perhaps it would have been wiser not to establish any value at all on a main house or at the very least set a much higher figure i.e. €1,000,000.

Additionally, what happens in cases when the property is held under joint names? Does the law protect only the share on the property that belongs to the partner which trades or both? What happens in cases where partners do not have separation of assets but a community of goods (co-ownership)? Does the other partner need to expressly consent this benefit or else is it over understood as it benefits them too? Many questions arise that can only be replied to by judges through rulings.

Still, despite its flaws and shortcomings, this law is better than nothing and must be welcomed. Kudos to lawmakers. There is still a lot of work to be done by ironing out pesky regional inconsistencies and building upon this legal breach to widen the gap and help self-starters to be up on their feet sooner; and most certainly not to pillory entrepreneurs financially for the remainder of their lifetime on having tried and failed.

From a practical point of view, leaving esoterics aside, this law translates into entrepreneurs sleeping at night soundly in the safe knowledge that their main dwelling is legally ring-fenced and cannot be embargoed or repossessed on the back of trading debts; particularly assuaging to those with underage children or who are single parents.

“Failure is so important. We speak about success all the time. It is the ability to resist failure or use failure that often leads to greater success. I’ve met people who don’t want to try for fear of failing.” – J.K. Rowling.

British novelist best known as the author of the Harry Potter fantasy series. Single parent high-achiever.

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

Larraín Nesbitt Lawyers is a law firm specialized in inheritance, conveyancing, 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

 

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 politicians or elephants were harmed on writing this article. VOV.

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Law 20/2015: Important new bank-guarantee legislation explained for offplan buyers

Raymundo Larraín Nesbitt, September, 21. 2015

Regular legal-contributor Raymundo Larraín Nesbitt explains the recent changes to bank guarantee legislation (Law 20/2015) that will affect people buying off-plan or under-construction property in Spain.

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

 

 

 

Introduction

Spain’s controversial law on bank guarantees, law 57/68, always the object of heated debates, will be abolished in 2016. This pivotal law in the off-plan buying procedure has been the focus of many of my articles:

 

Before anyone panics this pre-constitutional law has been replaced by a more modern law that is surprisingly almost identical with only a few tweaks that I care to highlight below.

The ironic in me cannot help but notice the convenience of its timing. As I highlighted in my above article, the Supreme Court rulings on bank guarantees were of late highly beneficial to consumers; to the point of awarding buyers astonishing automatic contractual resolutions. I believe a spanner may have been thrown in the works to curb the Supreme Court’s pro-consumer bias.

Only time will tell the tale.

Law 20/2015, of the Insurance Sector

Law 20/2015 amends, amongst other laws, Spain’s Building Act (Law 38/1999, Ley de la Ordenación y de la Edificación) which itself amended law 57/68.

In its third derogatory disposition it expressly abolishes law 57/1968. This new law will come into force as from the first of January 2016.

Novelties

The ‘new’ law closely resembles its forty-seven-year-old predecessor. The main slew of changes are as follows:

• Law 57/1968 relating to off-plan bank guarantees is abolished and superseded by Law 20/2015.
• The new law comes into force on the first of January 2016. All off-plan contracts signed before will still be governed by law 57/68.
• Bank guarantees (or insurance policies) securing off-plan deposits are now only valid as from the time a developer has attained a Building Licence. This is a key point I had defended in all my articles advising new-build buyers to withhold payment until a developer had secured a valid Building Licence from a town hall’s planning department.

E.g. Buying Off-Plan Property in Spain

As can be gleaned from the above it stands to logic that a conveyance lawyer must advise his client not to pay any deposit before a Building Licence is issued to a developer. Any interim payment you make prior to its granting will be unsecured and you will be left financially exposed with a risk of losing your deposits. I stress, your deposits are NOT covered by a bank guarantee or insurance policy prior to attaining a Building Licence under this new legislation.

• The amounts secured will now include the client’s staged deposits, plus legal interest, plus all associated purchase taxes i.e. VAT
• The legal interest will be as from the time the stage deposits are handed over as to the scheduled delivery date of the property outlined in the Private Purchase Contract (PPC).
• The stage deposits will be deposited in a specific bank account that is ring-fenced for the sole purposes of financing a development. Much like an escrow account.
• Tailored bank guarantees. They will now be individualized for every buyer. Collective bank guarantees will cease to exist not being acceptable going forward; a contentious point I had defended in my bank guarantee articles, highlighting just how problematic collective bank guarantees were in practice to execute. The details of the property being bought will be specified on the bank guarantees as well as the buyer’s personal details.
• It is the developer’s onus to take out this insurance policy or bank guarantee and obviously at his own cost. The beneficiary is the off-plan buyer always. A buyer will not pay a penny for it. This has now become a moot point, having sparked much controversy under the old legislation.
• A bank guarantee will still hold valid even if a developer fails to continue servicing the insurance premiums. The lender or insurance company will be legally compelled to refund in full the guaranteed amounts.
• Bank guarantee: validity. A bank guarantee is valid as from the time a developer attains a Building Licence from the town hall’s planning department up to completion before a Notary Public.
• If a buyer gives an extension to a developer, in writing, because completion is running behind schedule then the bank guarantee must be likewise extended to match the new scheduled delivery date of the new-build property.
• Direct recourse. If the development is stalled or else the development is not finished on time by the contractual (read binding) scheduled delivery date a buyer can send by recorded delivery to a developer a letter requesting full repayment of all stage payments, plus legal interest plus associated buying taxes. The developer has a deadline of thirty days to pay back said amounts. After this deadline a buyer (his lawyer) can claim these amounts (direct recourse) from the insurance company or lender itself who guaranteed the stage payments. In other words an off-plan buyer can skip the developer altogether and go straight for a lender which – presumably – will be in a healthy financial position to repay it. The lender or insurance company has a deadline of thirty days to repay said amounts in full as from the time it is legally notified by the conveyance lawyer.
• Bank guarantees: expiry date. They will now expire two years as from the time a developer is in breach of contract without the buyer exercising his rights to terminate the contract and apply for a refund. This is a major novelty as bank guarantees before had no expiry date.
• Contractual reference. All off-plan contracts will now make express reference to bank guarantees specifically mentioning which lender or insurance company is being held responsible for the safeguarding of a buyer’s stage deposits supplying contractual details for identification purposes. The escrow account will now be detailed in the Private Purchase Contract itself.
• Bank guarantees: handing over. Upon signing an off-plan contract a developer will hand over the bank guarantees. This is also a major novelty as before buyers were expected to pay and would then be handed a bank guarantee, one at a time, which could take one or two months as from each stage payment. Not an ideal situation to be in as the developer could file for bankruptcy in the interim. This risk has now been eliminated as ALL stage payments will be guaranteed ab initio. No longer will a buyer have to wait patiently to be given a bank guarantee at a time for each and every stage payment they make.
• Bank guarantee: refund limitation. Related to the above, despite being the full stage payments (plus legal interest, plus taxes) guaranteed in block a buyer can expect to be refunded only what he actually paid. Which is why it is very important that buyers on making use of foreign currency brokers safe keep copies of all overseas transfers.
• Bank guarantee execution. If the development is not finished on time a buyer, at his own choice, can either request a full refund or else give the developer an extension – in writing –.
• Bank guarantee cancellation. Same as before, 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).

A new third condition has been added:

3. If a buyer refuses to complete before a Notary Public when legally compelled to do so.

• Bank guarantees: publicity. Developers are now forced in their sales publicity to make explicit reference to being compliant with this new law 20/2015 even mentioning the name of the lender or insurance company as well as the bank account details of the escrow account where all staged deposits will be paid into.
• Bank guarantees: non-compliance. Developers are subject on non-compliance with up to 25% of the total amounts that should have insured or else the amount set by the Autonomous Community where the new-build is located.

 

Frequently Asked Questions

 

As this change will presumably elicit multiple queries I’ll do my best to address them in the below questions & answers section.

1. I have already signed an off-plan contract. How does this new legislation affect me?

It does not. This new law comes into force as from the first of January 2016. All off-plan contracts signed before said date are still ruled by law 57/68.

2. I plan to buy off-plan in 2016. Will my contract be ruled by the new law?

Yes. Every off-plan contract signed after the 01/01/2016 will be governed by law 20/2015.

3. I am litigating at present to recover my stage deposits. How does this new legislation affect me?

It does not. The law court will examine your case under the merit of the old law which is still in force.

4. If in 2016 I sign an off-plan contract and I’m handed a bank guarantee securing all my deposits but the Building Licence is delayed until 2018 am I still covered?

No. Under the new legislation you are only covered as from the moment a developer attains a Building Licence (BL).

Say, for example, you hand over the monies in 2016 and the BL is issued to the developer in April 2018. Should the developer file for bankruptcy any time before April 2018, even if you have a valid bank guarantee covering all your money, you would lose it all and have no recourse. The bank guarantee, even if legitimate, only becomes ‘active’ as from the time the BL is issued.

Bottom line, bank guarantees only secure your money going forward as from the time a Building Licence is issued by a town hall; not a moment before.

Conclusion

This new law addresses many of the criticisms that were leveled against its forty seven year old predecessor.

Law 57/68 needed a makeover. It had become outdated in many aspects. This new law leaves the door ajar to be detailed further in future regulation.

It is of paramount importance to restore confidence in overseas buyers by creating a clear steadfast legal frame in which to operate. The rules of the game must be known to all to level the playing field.

“Trust, like reputation, is hard to earn, but easy to lose.”

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

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

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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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PERSONAL BANKRUPTCY IN SPAIN: Second Opportunity Law

Raymundo Larraín Nesbitt, September, 8. 2015

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

 

Introduction

In 2003 law 22/2003, Ley Concursal or Insolvency Law, was passed which updated Spain’s outdated insolvency procedure. The previous laws, which were intended as ‘temporary’ were from 1885 and 1922. The timing of the law couldn’t have been better as shortly after its approval Spain’s economy would take a severe downturn driving thousands of companies into insolvency.

This new law has undergone over two dozen amendments in such a short span of time. Some of these have been major to assist it to adapt to reality as the law was not working as intended. In theory the mission statement of this law is to save companies that file for creditor protection helping them to exit receivership and trade again normally.

In practice it works out very differently. Whereas, for example, in the US 95% of companies that file for creditor protection manage to come on top within a three-year period, in Spain 95% of companies end up being liquidated within the same time frame. In Spain filing for creditor protection is almost a guaranteed corporate death sentence. This trend must be reversed.

Despite this well-meaning law the shortcomings are clear. The major culprit of Spanish companies going under, once they have filed for protection, are the privileged credits held by the Tax Office and the Social Security. These single-handedly strangle financially ailing companies forcing them into administration. It is clear to my mind that the iron grasp held by both institutions must be released if struggling companies are to continue trading successfully. Companies create wealth, jobs, services and products not to mention they contribute paying taxes. It is in Society’s best interest to protect and save them where possible. The failings of this law should be addressed by lawmakers assisted by professionals on the ground. 90% of Spanish companies are SMEs and find themselves unable to endure repayment of these privileged creditors should they file for insolvency.

Amidst these changes was February’s Royal Decree 1/2015 popularly dubbed as ‘Second Opportunity Law’. This law focuses on private individuals, not companies, filing for creditor protection (bankruptcy). The change was spurred in a conference of lawyers when a speaker pointed out that struggling borrowers in Spain echoed Sisyphus’ myth. Like the myth, some individuals face the daunting prospect of facing a mounting debt, with rolled-up interest, creating a ceaseless debt spiral of which there is no escape. The intention of this law was to put an end to the gridlock by cleaning the slate and allowing borrowers to restart anew. Or at least so goes the theory.

In practice however there are serious repercussions which borrowers ought to ponder which may even dissuade them from taking this route; at least until the law is amended.

 

Second Opportunity Law

 

The conditions to benefit from it are laid out in Art. 178 bis of Spain’s Insolvency Act. To file for (personal) bankruptcy one must do so before a Mercantile court in Spain. The procedure will be overseen by a Mercantile judge. A private individual must meet the following requirements:

1. Physical person.
2. Must have filed previously an insolvency procedure. The procedure concludes outstanding debts & liabilities outstrip assets.
3. The insolvency procedure must have concluded the borrower is not guilty or at fault. They must be borrowers in good faith. Good faith is the leitmotif that pervades throughout the Second Opportunity Law. Creditors will clutch at any crevice to overturn this principle and portray a borrower in a different light so as to disqualify him for this creditor protection.
4. The borrower must not have been convicted by a court ruling of a catalogue of economic related crimes within the previous ten years.
5. The borrower must have tried reaching an out-of-court settlement with its lender, creditors.

Options

Two options fan out at a borrower’s choice.

1.- Option A

The borrower pays the credits against the mass as well as all privileged credits. Those regarded as privileged are lenders (i.e. mortgages), Tax Office and Social Security. Note that privileged credits must be repaid in full regardless.

The upside is that ordinary credits, those held by family members or friends, only have to repaid up to 25%. The remaining 75% is condoned legally.

2.- Option B

The borrower submits himself ‘voluntarily’ to a draconian five-year repayment plan which takes into account the individual’s income and debt amount; it is a tailored plan.

• The first requirement is that the borrower proactively assisted in finding a solution.
• The borrower must not have attained this privilege previously.
• The borrower must have actively sought job placements (and be able to prove it).
• The borrower’s name will be lodged in a public insolvency registry for the next five years.
• The borrower must continue to pay alimony, where applicable.
• The borrower must continue to pay privileged creditors, as listed in the point above.

The result is that after the five years have elapsed all ordinary and subordinate outstanding debt will be cancelled.

However, debts owed to privileged creditors will remain outstanding in full:

• Mortgage debt (lenders).
• Unpaid taxes plus interests (Tax Office).
• Unpaid wages (Social Security).

Repeal

Both options can be jeopardized by a borrower on any of the following:

• Breach of any requirement. The observation of all and any requirements is stringent.
• Non-payment within the repayment time frame of any amount. This automatically invalidates the good faith requirement.
• Discovery by the court of concealed assets or non-disclosed sources of income i.e. working off-the-books when on the dole.
• Significant improvement of financial situation i.e. beneficiary of an inheritance.

Conclusion

Debt-laden borrowers may want to think twice before taking this route.

Despite the hype I have read in the press, hailing this new law as the perfect solution to many’s ongoing financial tribulations, the truth is far from it.

The key point is that the debts which are written off are those classified as ordinary or subordinate; which normally belong to friends and relatives. Meaning that those who trust and love you more are the ones that will bear the brunt for you.

In sharp contrast, privileged creditor’s debts (lenders, Tax Office, Social Security) remain as is. Not a cent will be condoned and will have to be repaid in full. This is what’s misunderstood at large.

In other words, to save your own financial situation you will be alienating yourself from those that love and care for you the most. Besides, on following this route your personal details will be listed at the Civil Registry for any to see. And these are not erased. You will become a financial pariah which consequences will last throughout your lifetime in Spain. Lenders will be highly reluctant to lend you money again, whether as a personal loan or to start a new business. So much for ‘second opportunity’.

Which is why in my opinion, and that of others more qualified than myself, filing for personal bankruptcy in Spain should be taken only as last resort when all other venues have been exhausted. In fact, only 1.65% of bankrupt people chose this path in so far this year (one in fifty).

Some privileged creditors (read lenders) are walking away scot-free when in many cases they were the culprits on creating this situation in the first place by offering recklessly loans to borrowers that clearly did not meet the minimum requirements in the heyday of the property boom. They directly contributed to the current situation and should be held co-responsible, sharing in the losses of their own making. Accountability shines for its absence.

For those that have reached a nadir in their financial situation, and seek a second opportunity, you may want to think twice before taking this option. Whilst I am a firm believer in giving people a second chance in life, you may want to sit this one out; at least until the law is amended and lenders bear too the consequences of the folly of the roaring 2000s.

 

“La elección no depende solo de la voluntad, sino de la posibilidad.” – Spain’s Supreme Court.

Loosely translated as: “Choice doesn’t hinge solely on one’s own will, albeit on opportunity.”

Acknowledgements

I am especially indebted to Ms Catalina Cadenas de Gea, Judicial Secretary of Málaga’s Mercantile Court Number Two, for her invaluable input on writing this article. Gracias.

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

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

 

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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Dispelling Spanish Inheritance Tax Myths

Raymundo Larraín Nesbitt, August, 8. 2015

Over the last eight years a few rogue companies have been set up with the sole purpose of putting the fear of God into British to entice them to incorporate corporate structures on top of the Spanish real estate or else buy into obscure equity release schemes to avoid Spain’s IHT (the latter led to hundreds of senior citizens losing their homes to these cunning predators). Truth is most people didn’t even need them in the first place. On average inheritors pay 15% on Spanish Inheritance Tax, a far cry from what’s been shouted from the rooftops.

For a full comprehensive list of IHT-related tax myths peddled by unscrupulous non-regulated outfits or IFAs (Independent Financial Advisors) with a vested interest to coax fellow British into incorporating expensive (and often unnecessary) corporate structures, or else set up devious equity release schemes, to elude Spanish Inheritance Tax please read my article below which debunks them.

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

 

Introduction

Scaremongering, a time-proven sales tactic. Car and insurance salesmen, in my experience, have always been top of the game at this because they know exactly what makes a customer tick. You will read plenty of scary stuff on ex-pat newspapers and internet on inheritance taxation in Spain which aims to prey on the gullible and harp on people’s inbred prejudices. I will try to cast away some of these widely held misconceptions.

 

Examples of Widely Held Misconceptions

 

1. “Spanish Inheritance tax legal fees can be at least 40 to 50%.”

False

Fact: On average inheritors pay in Spain 15% in inheritance tax. Only in the most extreme cases would you pay such a high amount. To give an idea, a single beneficiary that inherits over €800,000 would stand to pay 34%. Normally there are multiple beneficiaries to an estate; it’s not just one person that inherits all. Also the beneficiaries of the bulk of the estate are normally children, not non-relatives (which do not qualify for tax allowances). The significance this has is that the taxable base (the 800k) would then be split amongst the heirs dramatically reducing the IHT liability as it follows a sliding scale. To this you must also add the legal and family allowances (both national and regional) which reduce the percentage to be paid even further. Also worth mentioning is the fact that the taxable base for property is well-below the true market value.

I’ll put this in perspective with the most common example on British nationals inheriting in Spain. In my experience expatriates have second homes in Spain worth on average €400k. This property is normally owned in joint names meaning each spouse owns 50% of the property. On average couples have two children. So when one parent passes away, his 50% (the €200,000) is normally inherited by his two children. Therefore the taxable base of each child would be €100,000 (as the €200,000 is split equally between them). The surviving spouse naturally still owns his 50%. The state inheritance tax on a taxable base of 100k would be approximately €10,000 (10%). Children are classified in Group I for inheritance taxation purposes. The state tax-free allowance amounts to almost €16,000 for each child. In other words, the state allowance completely offsets the inheritance tax liability (meaning they pay nothing on inheriting in Spain in this example). Additionally children under 21 years old have further annual reductions with a maximum cap of €48,000. On top of this there are autonomous regional allowances that children may benefit from. So in this particular example, which in my professional experience I dare say is the most common, each child would stand to pay zero on inheriting a taxable base of €100,000 each. When the surviving spouse passes away the same result will unfold again providing the laws are not changed. So basically each child will have paid almost nothing on inheriting €200,000 each when both parents are dead.

On the other side of the spectrum, we can imagine a parent passing away bequeathing a €3,000,000 property to a single child or to a friend. In this particular case the inheritance liability would indeed sky rocket (over a million). For this particular case I strongly advise obtaining an estimation on the inheritance tax the beneficiary stands to pay. In this example it is definitely worthwhile looking into corporate structures to mitigate exposure to ISD/IHT as much as possible.

2. “Heirs will be forced to sell the property in Spain to pay off Spain’s extreme inheritance tax”

False

Fact: Same as previous point. Selling a property would be exceptional. In fact I’ve never come across a single client in over a decade that has been forced to sell to pay Spain’s ISD/IHT on inheriting. Moreover, you cannot inherit anything until you have first paid inheritance tax. So no-one can sell the property they are inheriting to then pay off the tax as the property is technically not theirs to sell as it is still under the deceased’s name. Only once the tax duties have been settled and the property is lodged under the name of the beneficiary at the Land Registry is he free to sell on if he wishes as the property is now legally under his name to do with it as he pleases.

3. “The financial debt of your heirs is maybe as much as 50% of the value of your property”

False

Fact: Everyone inheriting in Spain would then be broke. Same as the previous two bullet points, on average inheritors (beneficiaries) pay 15% for IHT/ISD in Spain.

4. “Yours husband or wife will not be exempt from Spanish Inheritance Tax.”

Misleading

Fact: Spouses indeed are not exempt from paying inheritance tax in Spain but they qualify for legal tax allowances. If resident in Spain then the surviving spouse is entitled to further autonomous regional tax allowances. These allowances, both from the state and from the autonomous region where the property is located, may greatly reduce the burden. Additionally if the surviving spouse is resident in Spain they may qualify for a 95% reduction on the main home providing they have lived in it the previous two years and keep it the following ten years (with a maximum reduction of €122,000).

5. “Want to avoid up to 81% of Spanish Inheritance Tax?”

Misleading

Fact: Scaremongers love quoting the extreme 81.6% tax rate for IHT as if this were the norm on inheriting in Spain. While it’s true that Spain’s inheritance tax can be as high as 81.6 pc – in the most extreme case – this only applies to the following case:

a) the beneficiary inherits > €800,000
b) the beneficiary is already well-off (his pre-existing wealth before inheriting > €4,000,000 or £3,000,000)
c) is a non-relative of the deceased classified in Group IV (no family ties to him i.e. a friend)

Clearly a problem affecting only a privileged few. Not a problem that the vast majority of beneficiaries inheriting in Spain will have to contend with unless they are already multimillionaires.

6. “If you incorporate a UK Limited Liability company and place the Spanish real estate inside you will be 100% shielded against Spain’s ISD/IHT. After death, only the shares are reorganised, the company owns the asset, and so it doesn’t change hands. This falls outside Spanish inheritance tax. Win-win”

False

Fact: Resident beneficiaries are obliged to pay inheritance tax under article 17 of Spain’s Inheritance and Gift Tax Royal on inheriting real estate within Spanish territory; regardless on whether the property is locked up or not within a holding company structure and regardless of whether you inherit the property itself or the shares. Likewise non-resident beneficiaries of a property located in Spanish territory also stand to pay Spanish inheritance tax (ex art. 18 of same decree) regardless if it’s in a holding structure or not. Moreover, I believe in the latter you may even be liable to attract UKs IHT beside Spain’s if the beneficiary happens to be a UK national.

Additionally Spain’s Non-Resident Act 5, 2004 clearly states that any re-arrangement of company shares (regardless of company’s nationality) which main asset is real estate located in Spain is taxable in Spain (CGT).

Depending on how clumsily this tax avoidance scheme is carried out it may be labelled as tax evasion (criminally pursuable for defrauded amounts above €120,000 ex art. 305 et seq. Spanish Criminal Code).

And to close I would like to take the opportunity to dispel a malicious misunderstanding on misreading one of my articles: Non-residents – Six Advantages of Making a Spanish will. Making a Spanish will does not reduce or mitigate your beneficiaries’ inheritance tax bill in any way whatsoever (as highlighted in the article itself). But it is extremely useful to save your beneficiaries time, money and hassle at a time of bereavement.

Without a Spanish will a beneficiary will normally incur in penalties and surcharges for late payment on inheritance in Spain. The reason for this is because there’s a deadline of 6 months as from the time of the testator’s demise to file and pay Spanish Inheritance Tax. UK probate, in my professional experience, always exceeds the six months deadline if there is no Spanish will. In which case penalties and surcharges are accrued and added to the inheritance tax for late payment. So ‘in a way’, making a Spanish will helps to mitigate or reduce the inheritance tax bill by way of helping not to attract said surcharges and penalties as the beneficiary is able to pay in time within the six-month deadline thus avoiding a lengthy procedure. I hope this clarifies the misunderstanding.

Spain’s Statutory Four-Year Tax Limitation

Another matter is if Spanish authorities do not get wind on the death of an owner who holds company shares, property or other assets. The statutory limitation of 4 years on all taxes, including Spanish Inheritance Tax, may kick in timing out the obligation to pay inheritance tax altogether – there is nothing the Tax Office can do after said time has elapsed to claim payment of inheritance tax from the beneficiaries. It should be noted that – exceptionally – the statute of limitation for Spanish Inheritance Tax is 4 years, six months and one day. In the particular case of a non-resident in Spain it is extremely difficult for the Spanish Tax Office (understatement) to know if and when they have passed away; unless of course his beneficiaries take to pro-actively inform the Spanish tax authorities… (or for that matter their bank in Spain; which also has the legal obligation to disclose the death to the tax office).

 

Conclusion

Inheritance tax planning in Spain is a complex matter, so please seek legal advice from a qualified lawyer and be wary of anyone advocating property ownership through corporate structures is “always beneficial” – not the case and in fact may be even be counter-productive and a complete waste of money. Beware of companies offering bespoke one-trick ponies to circumvent Spanish inheritance tax by offering “100% protection” against it.

If you fear Spain’s inheritance tax (IHT/ISD) you should first ask for an estimation from a law firm (we offer a SITAR service) before you do anything rash such as setting up a Spanish company or UK limited company to place it on top of the Spanish real estate. Inheritance tax varies widely within Spain’s seventeen autonomous regions (in some it’s not even taxed!). Truth is that corporate structures are neither needed nor recommended for the vast majority of people.

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

Larraín Nesbitt Lawyers is a law firm specialized in inheritance, taxation, 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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Taxes on Buying Spanish Property

Raymundo Larraín Nesbitt, July, 8. 2015

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

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

 

 

 

Introduction

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

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

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

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

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

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

 

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

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

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

I. New-Build or Off-Plan Property

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

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

 

II.    Resale Property

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

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

 

III.    Commercial Property

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

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

 

Taxes on Selling Spanish Property

 

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

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

I.    Capital Gains Tax

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

II.    Plusvalía Tax

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

 

Post-Completion Taxes and Maintenance Upkeep

 

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

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

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

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

a. EEA/EU-residents

• Revised = 0.22%
• Unrevised = 0.4%

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

• Revised = 0.26%
• Unrevised =0.48%

Conclusion

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

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

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

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

And last my shameless plug; hire a good lawyer.

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

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

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

 

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

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

 

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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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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.

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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.

Legal services Larraín Nesbitt Lawyers can offer you

 

Related articles

 

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2.015 © Raymundo Larraín Nesbitt. All rights reserved.

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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.”

 

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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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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.

 

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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. No delusional politician was harmed on writing this article. VOV.

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