This article seeks to set out in brief terms the tax implications for persons non-residentes in Spain who owns real estate in Spain, whether the property is used for holidays or as a source of income, and of selling it.
Attention will mainly be focused on issues relating to Non-Resident Income Tax, Wealth Tax and Inheritance and Gift Tax.
Please bear in mind that our note is based on OCDE Convention Tax Model as normally Spanish Goverment uses it. In any case, the non-resident always has to review his own Tax Convention with Spain in order to be sure regarding his tax obligations and responsabilities.
As I am living in Berlin so it should be emphasised that the recent amendments to the Convention on Double Taxation between Spain and Germany signed on 3 February 2012 have made important changes as regards the ownership of real estate by way of interposed companies; this will also be dealt with in this article in a way which it is hoped will prove useful.
The article consists of the following sections:
- Non-Resident Income Tax
- Wealth Tax
- Inheritance and Gift Tax
- Indirect ownership of real estate. New German-Spanish Convention.
1.- Non-Resident Income Tax
Article 6 of the OCDE Model Convention gives Spain the power to tax under its domestic law the income of a person non-resident obtained from the ownership and enjoyment of real estate in Spain.
Article 13 of the OCDE Modelo Convention also provides that if a non-resident sells real estate located in Spain the Spanish tax authorities may tax that transfer in Spain.
Spanish Law 5/2004 on Non-Resident Income Tax, which applies the Conventiones, provides the regulatory framework for non-residents citizens to be taxed on income obtained from real estate in Spain and on its possible future sale to third parties.
As regards the obtaining of income from property a distinction must be drawn between situations in which the owner only uses the property for holidays and those in which he obtains income from it by renting it to third parties.
1.1.- Property for personal use:
A non-resident who is the owner of property in Spain used for his own purposes pays tax on the presumed income from that property in the same way as Spanish tax residents.
The tax base for these purposes is 1·1% or 2·0% of the value given to the property by the public authorities (the «valor catastral«).
The rate of tax applicable is the general rate for non-residents of 24,75%.
The cost of this tax obligation will normally be minimal, although there is an obligation to declare and failure to do this may have consequences for non-tax residents.
The obligation must be performed by presenting tax form 210 within the calendar year following the date on which the tax became due.
1.2.- Property leased to third parties:
A non-resident in Spain who is the owner of property which is leased must pay tax on the income from that lease.
The tax base consists of the rent after deducting any expenses deductible for tax purposes according to regulations provided it can be proved these relate directly to the income obtained.
The rate of tax applicable is the general rate for non-residents of 24,75%.
If the property is only leased for part of the year income must be calculated as in the previous paragraph for the months in which the property is leased and a proportional part of the presumed income referred to in section 1.1 added for the remaining months.
Non-residents must perform these obligations by presenting tax form 210, the date of presentation depending on whether tax is payable in each particular case or not.
The lease will not be subject to Value Added Tax (IVA) unless the property is let with supplementary services such as cleaning. If the property is let with other services legal advice should be sought on this question.
1.3.- Sale of property in Spain
On selling real estate located in Spain non- residents should be aware of the following:
The taxable gain for capital gains purposes is the difference between the transfer value and the acquisition value.
The acquisition value consists of the real value for which the property was acquired plus the expenses and taxes inherent to the acquisition, not including interest, paid by the person now selling the property. This value is then adjusted to take into account the time of acquisition by applying the updating coefficients laid down each year in the Budget Act.
The transfer value is the real amount for which the transfer has taken place, less any expenses and taxes inherent to the transfer paid by the vendor.
If the property was acquired before 31 December 1994 the capital gain is reduced depending on the year of acquisition.
The applicable rate of tax is 21%.
There is a tax obligation in Spain by which purchasers acquiring property from a person not residing in Spain for tax purposes must retain 3% of the sale price and pay it directly to the Spanish tax authorities as a payment on account of non-resident tax.
Tax is paid, apart from the payment on account made by the purchaser, by completing form 210 within 4 months of the sale.
2.- Wealth Tax
Conventionally, Article 21 of the OCDE Modelo Convention provides for the possibility of non–tax residents paying tax in Spain on any real estate they have there.
In accordance with this article 5 of Spain’s Wealth Tax regulations obliges non-residents to declare real estate in Spain and makes it subject to the rules on Wealth Tax.
In general all property of a value below 700,000 € (taking the greater of the public authority value and the acquisition value) does not give rise to Wealth Tax or have to be declared for these purposes.
If the value of the property is greater than this non-residents should, despite the relatively small amount of tax involved, seek professional advice on the performance and payment of their tax obligations.
3.- Inheritance and Gift Tax
There is no convention on double taxation between Spain and other countries (despite Grece, France and Sweden) on Inheritance and Gift Tax, and hence it will be Spanish regulations which determine whether non- residents are subject to this tax in Spain.
Under the Inheritance and Gift Tax Act German tax residents who inherit or receive a gift of real estate in Spain must pay tax on it.
Non-residents are subject to the national regulations on Inheritance and Gift Tax, despite there being a number of more advantageous rules passed by the various autonomous regions.
This led the European Commission to bring proceedings against Spain on 7 March 2012 for discriminating between Spanish citizens and those of the EU. The case is still pending but might open the door to possible claims for compensation if the Spanish rule is found to be contrary to the principle of free circulation of persons and capital.
If there is double taxation on inheritance or gifts it is the residence countrie of the individual which has to correct this in its domestic regulations.
4.- Indirect ownership of real estate. New German-Spanish Convention.
The new Convention on Double Taxation between Spain and Germany has been in force since 18 October 2012, replacing the previous Convention of 1966.
In real estate matters important changes are made to taxation of income from real estate, capital gains from the sale of property and the ownership of property for the purposes of taxation of net worth.
The change consists of treating real estate and real estate holding companies in the same way, so that the provisions of article 6 (income from real estate), 13 (capital gains from real estate) and 21 (ownership of real estate for purposes of net worth) refer both to direct control of property and to indirect control by way of interposed companies.
Up until recently if a German tax resident was the owner of real estate by way of a German company he did not have to pay tax in Spain. Now the new Convention is in force tax is paid in Spain on all income obtained in Spain from the holding, leasing, sale or ownership of the property.
It is advisable as a result of the above to review all current structures of real estate investments in Spain.