Individuals who own property in Spain – whether residential property which they occupy and perhaps let for part of the time, or commercial property which they own for investment reasons – will want to know about a recent major upheaval in Spanish taxation. Individuals with simple structures may find themselves pleasantly surprised, but all holders of Spanish property need to review their tax position as a matter of some urgency.
On 1 January 2007, the Spanish tax legislation was amended to introduce significant changes to the tax regime for individuals and companies. The changes are particularly important for individuals who own real estate in Spain. This article will look at the implications of the reforms for the most common ways of holding Spanish property. Any UK resident owner of Spanish property will also need to consider the UK tax implications of owning Spanish property.
What if I own the Spanish property directly?
Individuals who are not Spanish resident but hold Spanish investments directly have generally benefited from the reform - the Spanish tax charge on the eventual capital gain (for example, on a sale of the property) has been reduced from the previous 35% to the current 18%. However, those individuals continue to be subject to income and wealth tax charges on an annual basis on their Spanish assets, and to significant Spanish inheritance tax liabilities on an eventual inheritance or gift of assets situated in Spain. Spanish inheritance tax is generally in the region of 34%.
And what if I own the property through a Spanish company?
Taxpayers who are not resident in Spain but hold Spanish investments through a Spanish company also need to evaluate the effects of the new legislation, particularly where the company is a Passive Investment company ('sociedad patrimonial'). Passive Investment companies will no longer benefit from the reduced 15% rate on long term capital gains: they will be taxed under Spanish corporation tax rules. The current standard corporation tax rate is 32.5%.
If the shares of the Spanish company are held directly by an individual who is not resident in Spain, they may benefit from the new tax framework if the disposal of the property is arranged as a share transfer – the Spanish tax charge on the gain has also been reduced to 18%. The investor will, however, continue to be exposed to an annual Spanish wealth tax charge, if no tax treaty relief is available, and to eventual Spanish inheritance tax costs.
Are offshore vehicles any good?
The amended legislation has mostly negative implications for individuals who are not resident in Spain but own Spanish properties through offshore companies. These include bringing into the Spanish corporate tax net all companies domiciled in tax havens and zero tax jurisdictions, if the underlying assets mostly consist of Spanish real property and property rights. All arrangements of this sort now require careful review to improve their tax position.
Is there anything else of which I should be aware?
The reform also contains other important amendments to certain provisions relating to privately used residential properties owned through companies. In some circumstances, deemed rent or dividends may be treated as if they have been paid and Spanish tax charged accordingly. There may be significant penalties if specific backup records are not duly kept. Those owning property in Spain also need to reassess their overall position in terms of tax compliance, including the provisions regarding the obligation to appoint a tax representative in Spain. Is there any way out?
There are strategies to deal with the issues which have arisen. For example, individuals who are not resident in Spain but are considering a direct purchase of a Spanish property might take up a suitable mortgage in order to manage the wealth tax and inheritance tax exposures. Investors in Spanish Passive Investment companies should consider the possibility of realising all or part of the gain under current transitional rules. Individuals with offshore structures should consider company migration strategies or mechanisms to dilute the overall Spanish asset base of the structure.
One of the main objectives of the reform is to increase tax revenues by addressing offshore real estate holding schemes. This, paired with the noticeable (and highly publicised) increase in Spanish tax audits on offshore structures which have significant Spanish real estate investments, makes it necessary for international private investors with Spanish real property to perform a detailed review of their existing arrangements to determine how the tax changes affect them, and how best to accommodate their current holding structures within the revised Spanish tax framework.
Key points to note
In summary, the key points to note are:
- Review the way in which Spanish property is held;
- Prepare and keep specified backup records to avoid penalties; and
- If need be, appoint a Spanish tax representative.