Overview Real Estate Owned by Non-resident Individuals Real Estate Owned by Companies Favourable International Private Law Residence for Tax Purposes
While Spain does not restrict the acquisition of Spanish real estate by foreigners, Spanish tax law has provisions similar to those in France which make it more difficult and as a consequence more expensive to hold real estate in a tax efficient way.
As in other countries, there is an unavoidable annual tax on real estate ownership, based on the cadastral value (the value assigned by the Tax Administration), which is normally far below the market value. In addition to the local real estate tax, other taxes on ownership are levied, the nature of which varies depending on whether the owner is an individual or a company.
There are three primary property taxes in Spain; with effect from January 2012 property taxes are as follows
1. IVA (VAT equivalent) on all "new" properties (being registered for the first time) = 4%
2. ATP (Transfer Tax) on all "re sales" determined by each province = approximately 8% - 10%
3. CGT Capital Gains Tax = 21%
If the owner is a non-resident individual, both wealth tax and personal income tax are levied on the real estate. Wealth tax is levied on the value of assets situated in Spain, the tax rate is progressive and varies from 0.2% (up to €193,000) and rises to 2.5% (for value exceeding €12,316,000).
If the real estate is privately used by an individual owner, a tax of 25% of 2% of the cadastral value of the real estate is payable on the owner’s deemed income.
If the real estate is owned by a foreign company, a special tax may apply. Foreign companies owning Spanish real estate or otherwise having an interest or benefit from Spanish real estate, are charged an annual 3% tax on the cadastral value. This special tax does not apply to companies domiciled in countries which have a tax treaty with Spain containing an exchange of information clause, so long as the ultimate owners of the shares of such companies are individuals resident in Spain or in a country that has such a tax treaty with Spain. This exemption is available upon submission of proof of domicile of the company and proof of residence of the ultimate owners issued by the competent tax authorities, or to companies carrying out business activities on a regular basis other than the lease of real estate, or companies quoted on officially recognised stock exchanges, apart from certain other special cases.
When real estate is owned by a Spanish company, the company will be liable only to pay the normal real estate tax in the same way as outlined for foreign companies, but the special real estate tax for non-resident companies does not apply.
As in other countries, real estate is sometimes transferred indirectly by transferring shares of a real-estate holding company. Spanish laws aim specifically at preventing the avoidance of tax on capital gains from the transfer of real estate by means of the sale of the shares of a real-estate holding company. They do this by expressly determining that the capital gains derived from the sale of shares of Spanish or foreign company will be subject to tax in Spain if its main assets consist of real estate located in Spain or if they give the owner the right to use the real estate in Spain. A non-resident shareholder of such a company will be liable to tax on capital gains, unless he is resident in a country that has concluded a tax treaty with Spain. As a general rule, tax treaties provide for capital gains from the sale of shares to be subject to tax exclusively in the country of which the shareholder is a resident. However, in some tax treaties, Spain has made a reservation regarding capital gains realised in the sale of shares in real-estate companies.
In order to secure the payment of tax on capital gains obtained by non residents who are not permanently established in Spain, the buyer is obliged to withhold 5% of the purchase price and remit it to the Spanish tax authorities. If the buyer fails to retain the withholding tax, the tax claim remains on the real estate. The withholding tax is a pre-payment on the actual tax payable by the seller upon filing his tax return. A refund is made to the seller in the event that the actual tax liability proves to be lower than the withholding tax.
A transfer of shares is generally not subject to any indirect taxation (for example real estate transfer tax), but Spanish anti-avoidance provisions make the sale of shares liable to real estate transfer tax at the rate of 7% if the transfer of shares allows the buyer to gain control of the company and over 50% of the assets of the company consists of Spanish real estate. Back to top
Unlike the situation in France, Spanish international private law allows a foreigner’s home law to be applied even on Spanish real estate. This makes life easier with regard to inheritance planning involving real estate in Spain, but Spanish inheritance taxes are applicable in any case. It is also nevertheless advisable to make a Spanish will applicable to the Spanish estate. While a foreign will is recognised it may lead to delays and prove more costly in the long run.
While the rules on tax residence used to be relatively lax, they have now been tightened up. Persons who maintain their habitual residence in Spain by staying in Spain longer than 183 days during any one calendar year are deemed resident for tax purposes. Any absences during a prolonged stay are counted together, so it is now very easy to qualify under the 183 day rule. Alternatively, one is deemed resident for tax purposes if the centre of one’s vital interests or professional activities can be found to be in Spain. It is also worth mentioning that in the absence of proof to the contrary, it is presumed that a person has his habitual residence in Spain when his or her spouse and his or her minor children are habitual residents there.
A bespoke 'offshore' solution can be complex and requires careful planning and execution. We therefore encourage our clients to contact us directly, without obligation.
While all of our consultants in our offices provide a Free Initial Consultation, the offices listed below have particular expertise in this area and will gladly assist with advice on how to approach your unique challenge.
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