Purchasing Real Estate for non residents, under Spanish tax laws

1. Basics of property taxation

At the successful completion of a property purchase contract, there is always, as well as the buyer and vendor, a third party laughing in the background: the taxman. It is worthwhile to have a tax adviser of gestoría to handle the annual tax demands. That saves a lot of work and avoids possibly missing deadlines for payment, which can lead to fines.

Single taxation on purchase/sale
The purchase and/or sale of property has one-off extra costs in taxation:

Sales tax - value added tax VAT. The normal tax rate in Spain is 16% but this only applies to purchase of building land, or business premises or land. The purchase of a newly built dwelling house or flat is taxed at only 7% in the case of a first purchase of this object. All other property purchases are only included under the land purchase tax.

Capital / land purchase tax - Impuesto sobre Transmisiones Patrimoniales
This one-off tax specifically covers any remunerated transfer of land when there is no sales tax. It can be compared with the German land purchase tax. As of 01.01.2000 in the Balearic Islands there is a 7% tax of the notarially declared purchase price on property purchase, which the buyer has to pay. The tax is payable within one month from signing the notarised deed. Declarations of new work, which need notarial recognition and are to be inscribed in the property register, are taxed at 0.5% of the building value.

Capital gain tax
Also known as plusvalía this tax is collected by the local district and taxes the increase in value of land and property since the last change of ownership of the property, which is set on the basis of the local authority's own valuation tables. The purpose of this tax is to provide the local community with a share in the growth in value of land and property. Legally, the vendor is liable for the tax. However, in the Balearics it is usually passed on to the purchaser.

Income tax
Income tax is actually one of the typical annual taxes. However, in the sale of a property the vendor incurs one-off taxes that come under income tax, but are directly related to the property and thus should be mentioned here. As in Germany, the Spanish income tax differentiates between limited and unlimited tax liability. Unlimited tax liability is applicable to residents. From the tax law point of view, a resident is a person who spends more than 183 calendar days in Spain, whose economic activity is mostly in Spain, or whose spouse and/or dependent children live in Spain. Limited and unlimited tax liability affect property purchase in different ways, since unlike in Germany, private sale of property is taxable. If the vendor of Spanish real property has limited tax liability in Spain because he has his place of residence in Germany, the profit on the sale is taxable at the flat rate of 35%. The profit on the sale is calculated as the difference between purchase price and sale price. The purchase price includes expenditure on maintenance, costs and taxes of purchase, as well as agent's fees on subsequent purchase. For property acquired before 1996 there are reductions of 11.11% from the third year of ownership. Sale of a property that had been in the vendor's ownership for ten years or more on 31.12.1996 is tax free. For transfers after 1.1.1997 the above mentioned reductions apply only if the property was acquired before 31.12.1994. For all other sales there are small reductions of the taxable profit in accordance with a coefficient that is set anew each year. In respect of the vendor's tax liability thus calculated, the buyer is liable to the Spanish tax authorities for up to 5% of the declared sale price. For this reason, the buyer usually keeps this sum back and pays it himself to the tax office. This rule allows the Spanish tax authorities to ensure that foreigners do not purchase their property in Spain and then leave the country without paying due taxes. The above rule only applies to resident vendors.

Annual taxes
Possession of a Spanish property, even though it is a privately owned object, is linked with various annual tax liabilities. Income tax In principle, every property owner in Spain is obliged to make an annual income tax declaration. In the framework of income tax (Impuestos sobre la Renta de las Personas Físicas), even owner-occupied property is taxed. Owner-occupation is seen from the tax point of view as fictitious rental income. In the case of non-residents a fictitious usage value of 2% of the rateable value or, as appropriate, of 1.1% of a rateable value set by a law of 01.01.94 is established. If there is no known rateable value, half of the purchase price is used as the basis. Income tax at 25% is to be deducted from his value. When property is rented gross income is taxed at a flat rate of 25%, with the tenant being liable alongside the non-resident owner for his/her tax bill, and even being obliged to retain the tax payment every month from the rent and pay it directly to the tax authorities.

Wealth tax
In the case of physical persons, ownership of all kinds of assets and rights with economic value is the basis of wealth tax. The qualifying date for the wealth tax declaration is 31.12. Only persons resident in Spain enjoy a free allowance of 100,000 €. Also, persons who own only one property in Spain and thus have only limited tax liability are always obliged to make a wealth tax declaration. The wealth tax eclaration is made together with the income tax declaration. The tax rate lies between 0.2 and 2.5% of the rateable value or the purchase price, if the latter is higher. There is no free allowance. Taxpayers are not called on by the tax authorities to make the appropriate payments form income and wealth tax. It is recommended to employ a tax adviser for filling in the tax declaration.

Land tax
The local land tax, known as IBI, is calculated on the basis of the rateable value and has to be paid at the municipal administrative offices (Ayuntamiento) before 31.06 every year. The IBI tax form also shows the rateable value of the property as established by the local authority. It is recommended to make the payment by standing order from a bank. The relevant forms are available from the Ayuntamiento.

2. Purchasing property through companies

The purchase of property in Spain by natural persons is tied up on both the purchaser's and the vendor's side with tax burdens. As of 01.01.2000 the buyer has to pay the 7% land purchase or value added tax and mostly also the capital gain tax. The non-resident vendor is especially hit by the 35% tax on the profit made from the sale. In order to avoid these taxes, as well as later inheritance tax, lawyers and tax advisers are increasingly recommending property purchase through a Spanish limited company (S.L.), or otherwise to find a way through companies in tax havens such as Gibraltar or the Channel Islands. The reason is especially that the introduction of property into a Spanish company attracts only the 1% company tax and the transfer of shares to the buyer is then tax free. The Spanish tax authorities have long since seen through this tax trick and rightly classify such a transaction as evasion when the company only or overwhelmingly owns property. The consequence is that the buyer must once again pay the 7% land purchase or value added tax, the value of the property being assessed by the tax authority itself, and he also has to meet the costs of forming and administering the company. Nor is the purchaser spared by the tax authorities; he has to pay the tax mentioned earlier. The more complicated construction of transferring shares in a Spanish 'Property Ltd' to a company in tax havens is also not necessarily more attractive. Their property ownership is taxed annually in Spain in addition to the normal annual taxes with a special tax of 3% of the rateable value. A taxation model of this kind can only be of interest in view of expected inheritance tax, since in the event of inheritance, in Spanish as in German law, tax-haven shareholders are hidden. Finally, it can be taken that such tax-saving models are only advantageous in a very small number of cases, and thus should be looked at sceptically by the buyer.