Last 11 April, the deadline for filing the Personal Income Tax (PIT) and Wealth Tax (WT) began. This deadline will expire on 30 June 2023.
As regards WT, it must be remembered that at the end of last year a major reform with a significant impact for non-residents holding real estate investments in Spain through foreign corporate structures was introduced.
Wealth Tax
Indeed, as of 2022, the participation in foreign companies will be subject to Spanish WT if at least 50% of their assets is made up of real estate located in Spain.
In short, the participation in foreign entities whose assets consist, directly or indirectly, of real estate located in Spanish territory will be subject to Spanish WT. This participation will have to be declared at the higher of (i) the nominal value, (ii) the equity value or (iii) the capitalisation value at 20% of the profits of the last 3 years.
Many questions arise as to how to determine the taxable base in these situations, as it may be the case that foreign individuals with assets abroad end up paying Spanish WT on these assets.
This has been confirmed by the Spanish Directorate General for Taxes (DGT) in a recent binding ruling (V0107-23), in which it is concluded that, regardless of whether the foreign company has other assets, if the Spanish property represents more than 50% of its total assets, the entire value of the foreign company’s is taxable under the Spanish WT.
Notwithstanding the fact that this is the DGT’s criterion, the reality is that the Spanish WT goes beyond its boundaries, which may generate ultra-taxation problems, since the Spanish state taxes assets that have no link with Spain, as is the case with the participation in foreign entities.
Foreign entities that pay taxes in their countries of origin under a transparency regime
Another question that often arises in practice is about foreign entities that in their countries of origin are taxed under a transparency regime (i.e., the income obtained by these entities is attributed to their members, who are taxed for it). Thus, the main question is whether this transparency also applies to the Spanish WT, namely, whether the members of these entities will be taxed on the value of their participation in the entities or on the value of the underlying real estate investments.
In this respect, attention must be drawn to the criteria of the DGT about the German entities with the legal form “KG” and “GmbH Co KG” (among others, binding rulings V3874-16, V2420-22 and V0481-23).
These type of entities are taxed in Germany under a transparency regime, however, according to German law, their capital may be represented by shares and they have their own legal personality and can, therefore, hold rights and obligations.
In the aforementioned binding rulings, the DGT clarifies that the members of the entities with these characteristics will be subject to Spanish WT for the value of their participation in the entities and not for the value of the underlying real estate investments.
Conclusion
In our opinion, this criterion makes it clear that the concept of transparency for the purposes of the taxation of the income obtained by a given entity plays no role in wealth taxation, and its importance lies in the fact that it can be extended to other types of foreign entities with similar characteristics to the German entities “KG” and “GmbH & Co KG”, so that it will be necessary to refer to the legislation of the country of origin of each specific type of entity in order to analyse its legal regime.
Therefore, when implementing foreign corporate structures with real estate investments located in Spain, one of the aspects to be taken into account is the possible impact on the taxation of assets that could arise in Spain for the ultimate owners of such investments.
