17 Jan Spanish Real Estate: Non-Resident Tax Implications
The aim of this tax article is avoid potential taxation shortcomings when dealing with Spanish properties. The scope of the main tax implications is limited to the purchase and maintenance of Spanish properties owned by non-residents in Spain, from the fiscal viewpoint.
Below are summarized the Spanish tax consequences to be taken into account, even though each case should be studied individually, to ascertain the corresponding implications.
Indirect Taxation. The purchase of new properties is subject to 10% VAT alongside stamp duty tax. The stamp duty applicable is ranging between 0.5% and 2%, depending on the Autonomous Region where the property is located.
On the other hand, in case of resale of properties, the purchase is subject to Transfer Tax at a rate generally ranging from 6% to 10%, again depending on where the property is located. However, when the property is purchased by a company/entrepreneur and the seller is registered for VAT purposes, the buyer may waive the VAT exemption and therefore, the purchase is subject to stamp duty, and VAT through reverse charge mechanism, by entailing the corresponding VAT deduction. In other words, the transaction is neutral for VAT purposes.
In order to face tax avoidance transactions, the Spanish legislative included an anti-abusive clause, whereby the explained indirect taxation also applies, in case of transfer of shares of companies with real estate properties representing more than 50% of its assets.
Local Property Tax. Annually, the local property tax must be paid. The property tax is calculated taking into account the cadastral value, determined by local authorities and generally lower than the market value. Then, to said cadastral value a percentage (between 0,4% and 1,3%) determined by the local town is applied.
Wealth Tax. It applies annually at a progressive scale ranging from 0,20% to 2,75% of the net value of the assets located in Spain. Each Autonomous Region has legislated differently in this regard. For example, Wealth Tax is not applicable in Madrid. EU tax residents apply the legislation of the Autonomous region where the property is located, whilst non-EU tax residents apply general wealth tax rules implemented by the Spanish tax authorities, with very reduced allowances.
Note that there is a general exemption of the first 700.000€ of net wealth (500.000€ in certain regions such as Cataluña). The first 300.00€ of the habitual abode are also exempt.
The above explained wealth tax might also be applicable in case of properties held by Spanish or foreign corporate structures, as Spanish properties might be subject to wealth tax when directly or indirectly held, according to the far reaching interpretation of Double Tax Treaties by Spanish tax authorities.
Inheritance Tax. When heirs receive a Spanish property, they are subject to Spanish inheritance tax at a progressive scale ranging up to 34% (36,5% in some regions). The final outcome depends on special rules adopted by the Autonomous Region legislation to be applied, such as exemptions, surcharged based on the degree of kinship with the deceased, disabilities of heirs, etc.
Income Tax. Income arising from the exploitation of properties is subject to Non-Resident Income Tax. The tax rate applicable to non EU residents is 24%, said rate is reduced to 19% in case of EU tax residents, as well as EEA tax residents.
In the latter scenario, expenses directly related to the exploitation of the property are deductible, and therefore, the final taxation is on net income. When the property is held by a non-resident company, the same rules apply, as opposed to Spanish Companies being subject to 25% tax rate.
If the Spanish property is not being exploited, the above explained rates apply to a presumed obtained income via imputation applicable to a tax base amounting to 2% of the cadastral value (1,1% in some specific scenarios). Said imputation does not apply in case of properties held by companies, regardless of their tax residency status.
Special levy on real estate properties of non-resident entities: entities (owning Spanish properties) tax resident in a jurisdiction qualifying as a tax heaven for Spanish tax purposes, are subject to a special levy on real state of 3% of the cadastral value of the property.
Tax on the Increase in Value of the Land. In case of sale of the property another cumulative and almost unknown tax is levied at municipal level. It taxes the increases of the sold land, it is calculated taking into account the number of years the property has been held by the seller and the cadastral value, among others. It can represent a relevant value when selling the property.
Said tax also applies in case of direct sale of the property by a company. Conversely, it does not apply in case of sale of shares of the Company.
Capital Gains Tax. The Capital Gains arising from the sale of the property are subject to tax at a rate of 19%. In order to guarantee said payment, the Spanish buyer of the property must withhold 3% of the overall price, and pay it on behalf of the seller to the Tax authorities. If finally, the capital gain tax to be paid is lower than the mentioned 3% withheld, the taxpayer is entitled to apply for refund. In order to face avoidance structures, said taxation is also applicable to transfer of shares belonging to companies mainly composed of Spanish real estate.
Taking into account the explained implications, it is important to carefully analyze and plan each acquisition, in order to optimize from the taxable point of view the purchase and maintenance of Spanish properties.