Non-resident taxes on property
30 / 3 / 2010
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The taxation of property ownership is one of the oldest forms of taxation in the world. Spain is not an exception, and it has a long tradition in taxing non-resident property ownership even when some choose to own their property through corporate structures.

Spain is very experienced at taxing property ownership and has specific tax legislation applicable to non-residents which has evolved over the years. Wealth tax, always a consideration, was recently abolished in Spain. Capital gains tax was reduced from the old 35% rate to 19% today. Inheritance tax is the subject of much discussion at all times and considerable reductions are applicable in different Regions of Spain for resident taxpayers. Demands for reductions to residents and non residents continue in many Regions.

The use of corporate structures to own property has diminished for a variety of reasons. Legislation is now in place to prevent property ownership through a corporate structure from avoiding tax.

The main taxes a buyer of property should be aware of are the following:

Transfer tax and value added tax

The purchase of a new property from a developer is subject to 7% value added tax (VAT) and any subsequent transfers of the property is subject to 7% transfer tax in most parts of Spain. The Spanish Government has increased the VAT rate from the present 7% to 8% with effect from July 2010. The Regional Government of Andalusia, which is responsible for transfer tax, has also increased the rate applicable to property from the present rate of 7% to 8% where the value of the property exceeds € 400.000, with effect from March 19th, 2010.
The transfer of urban land (building land) is subject to 16% VAT and this rate will also increase in July 2010 to 18%. The transfer of rural land is normally subject to transfer tax.

Stamp duty
All title deeds that are registered in a property register are normally subject to a stamp duty of 1% on the value of the transaction, unless transfer tax is paid. This is also applicable to mortgages where the base for the stamp duty is not the principal of the loan but the total risk guaranteed with the mortgage, i.e., the principal plus any interest for delays and legal costs.

The main taxes a vendor needs to be aware of upon selling a property are:

Withholding tax

Non-resident property owners will have 3% of the value withheld by the purchaser upon transferring the property. This tax is normally withheld by the purchaser at the notary upon transfer of the property. This tax is a withholding tax on account of any possible tax liability in Spain; it is not the capital gains tax payable on the sale of a property. There have been cases where property owners have sold their property in Spain, had the 3% withheld and left the country thinking that they had paid the capital gains tax. This is not the case and the Spanish Tax Authorities are very active in chasing such situations which in some cases can result in unpaid tax of more than € 120.000 a level which could be considered a tax crime under the Spanish criminal code.

Capital gains tax

The capital gains tax is usually the main concern of non-resident vendors of property in Spain. Although it has become a more friendly tax at the present rate of 19%, it is still considerable and needs careful attention. In the event that the property has been held for many years, it is possible that certain reductions are applicable to the gain. Property owners are advised to keep all the invoices relating to costs of the purchase and sale of the property, such as agent’s and professional fees (lawyers, notaries and registrars etc.) as these are all deductible items. Invoices for improvements carried out on the property, which in some cases can be quite important, should also be kept.
Capital gains tax paid in Spain can be offset against tax payable on the gain in the country of residence of the non-resident of Spain, providing there is a double taxation treaty between the country of residence and Spain or where th internal legislation provides for this offset.

Local council plusvalia tax

In addition to the capital gains tax, there is a local tax payable to the Town Council, called the plusvalia tax. It should not be confused with capital gains tax. This is a tax levied on the increase in the value of urban land. It is a much lower tax and is payable by the vendor. In some cases, it may be agreed by the parties in the sale and purchase contract that the buyer will pay this tax, but legally it is payable by the vendor.

Money laundering provisions

Spain, in line with other EU countries, has implemented strict money laundering prevention provisions in its legal system that require all the professionals who take part in the sale or purchase of a property to report suspicious transactions. This is also applicable to financial institutions.
All parties to a transaction need to be clearly identified, in the case of individuals with NIE numbers and in the case of corporate structures with NIF numbers and disclosures regarding ultimate shareholders or beneficiaries, evidence of payment and certificates from the financial entity regarding the origin of the funds and the account holder.

Annual taxes applicable to property ownership by the non-resident

Non-resident property owners are required to file an annual return on deemed income tax in the event that the property is not rented. This tax is calculated at 2%, or 1,1% in the event of a revised cadastral value, of the highest of three values, that which would have been used to calculate the now abolished wealth tax, the purchase value or the cadastral value of the property which is stated in the annual rates bill. The tax rate applicable is 24% on the deemed income.
In the event that the property is rented, 24% withholding tax is payable on the rental income. This withholding tax is calculated on the net rental income since the beginning of the year, another favourable change for the non residents as it was always calculated on gross rental income without any deductions allowable. This withholding tax can be offset against any taxes payable in the country of residence if a double tax treaty exists or internal legislation permits.

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