Overview of tax and legal issues non-residents should consider.
As in other European countries ruled by civil law (e.g., France and Belgium), the process of acquiring real estate in Spain is formal and handled through a contract that contains all the terms and conditions of the transaction. This contract must be signed in the presence of a notary public. The deed of sale is then lodged with the Official Land Registry (Registro de la Propiedad). Additional details and information about the property, such as size, location, boundaries, physical details, etc., can also be found in the Cadastral Office at the local authority (Catastro).
Parties can enter into a pre-sale agreement (Contrato de Arras o Señal) whereby the main terms of the contract are stated.
A deposit is given by the buyer to reserve the property and obtain the seller’s commitment to sell (typically, the amount is equal to 10% of the purchase price). Neither seller nor buyer can be released from the agreement, except in the event of non- fulfillment of specific conditions of sale, in which case there may be penalties as set out in the contract.
In this paper, we highlight the key tax implications involved in purchasing real estate in Spain and examine the taxation of income derived from rental property owned by non-residents.
Purchasing real estate
It is important when buying residential property in Spain to estimate the local taxes you will have to pay. As a general rule, you can anticipate that taxes and fees (for professional services rendered) will amount to about 10% of the overall value of the property you purchase.
There are three main taxes to consider at the time of purchase/ sale of a Spanish property when a non-resident is involved:
- ITP (Impuesto sobre Transmisiones Patrimoniales, or property transfer tax)—Buyers of resale property (as opposed to new construction) are required to pay a resale purchase tax, generally at a flat rate of 6%. The exact rate will depend on the particular region in which the property is located; some regions have established different tax rates, below or above 6%, depending on particular factors (e.g., age of purchaser, family members, purchase price, etc.). Buyers of brand-new property or property being built at the time of purchase are liable for 10% IVA (the value-added tax, or VAT). A stamp duty of 0.5% is also due (this may vary depending on the region). If you buy land, commercial premises or parking spaces in garages, the VAT payable is charged at the higher rate of 21%.
- IRNR (Impuesto sobre la Renta de las Personas Físicas, or non- residents income tax on capital gains)—Upon the sale of a property, for a profit, the seller must pay a capital gains tax. If the seller is a non-resident, the buyer (through the notary) withholds 3% of the total purchase price to make sure that the seller fulfills his or her tax obligations. The amount acts as a deposit for the final bill payable.
The capital gain is calculated as the difference between the declared sale price and the price paid when the property was originally purchased, plus the value of any alterations and improvements carried out since then.
The applicable tax rate for non-residents is 19% for 2016 and onward.
Any seller who is over 65, has been a legal resident in Spain and used the property as his/her normal place of residence, may be exempt from paying this tax.
- IVTNU (Impuesto al Valor Agregado, or local gain tax)—Sellers also pay a local tax that is determined by local authorities (depending on the area where the property is located).
With respect to extra costs involved, these are mainly related to legal fees (approximately 1% of the final price), Notary and Official Land Registry fees. Both Notary and Official Land Registry fees are set by the Spanish authorities, and the final amount will depend on the value of the property. The notary must be present when the parties involved—buyer and seller—sign the sale contract and deeds.
In the past decade, high prices for residential properties with existing pre-built homes often made buying the land alone on which to build a home much cheaper—even though buying land alone is just as complicated as buying property with a house already on it. However, existing home prices have since dropped, so buying undeveloped land may no longer be the most cost-efficient strategy for purchasing property in Spain.
Spanish land laws are complex. It is very important to choose the right plot of land to avoid future problems (e.g., lack of planning permission and revocation risk). Also, once purchased, you would need to find an architect, submit design plans for approval and get planning permission. Finally, you would have to find a reputable building company and oversee the actual construction.
Real estate tenancy
Foreign residents without permanent establishment (PE) in Spain are taxed only on “Spanish-source income,” which is any income accrued directly or indirectly from immovable assets located in Spain, including “theoretical enjoyment income” on properties.
As a general principle, each income item is taxed separately in specific or quarterly returns (there is no annual return). Tax is generally levied on gross income without the deduction of expenses. There are some basic principles of taxation on such investments held by non-residents:
- If held directly by individuals—An enjoyment income (2% of the cadastral value (value assigned to the property in the Cadastral Office) or 1.1% if cadastral value has been updated in the last 10 years) will be attributed to the owner and taxed at 24%. For EU or EEA residents, the tax rate is 19% for 2016 and onward.
- If held through a foreign company—An annual 3% tax is
levied on the cadastral value of property held by a foreign company that has its tax residency or is domiciled in a country that is considered to be a tax haven. Real estate held indirectly through a foreign company, domiciled in a tax haven or in a “zero tax” territory when the Spanish-based assets/interests of that company represent more than 50% of the asset base, will be regarded as being based in Spain and, as a consequence, will be considered a Spanish company for tax purposes. Potential alternatives could be to migrate the company to a less harmful jurisdiction or to dilute the Spanish asset base.
- Wealth Tax—The Wealth Tax (WT), which was suspended between 2008 and 2010, has been restored (in force through 2020). Non-resident individuals (WT is not applicable to corporate entities) are subject to WT on both real estate assets and real estate companies. The taxable base is the net value of the property (the real value decreased only by encumbrances and debts connected to the investment in such asset). The maximum rate for the Spanish territory is up to 2.5% but it may vary from one region to another.
In some regions, certain exemptions, tax credits and benefits may be available. Criteria to determine the credits and benefits applicable will have to be carefully analyzed on a case-by-case basis.
- IBI (Impuesto sobre Bienes Inmuebles, or yearly property tax) —The IBI is set by the local authorities and depends on both the value of the land and the property itself. This tax is payable on a yearly basis and can be paid directly when the property owner receives the yearly notice, or the owner can arrange for it to be paid automatically from a Spanish bank account (this may be the best option if the property owner does not live in Spain year-round). One of the documents required by law in any property sale in Spain is proof of payment of the previous year’s IBI, which must be produced by the vendors.
- Local contributions—Property owners in Spain also are required to pay yearly contributions to street lighting, maintenance of facilities and garbage collection. The amount depends on the area and is paid to the local council.
Renting your Spanish property
If you want to rent your property, it is a good idea to hire the services of a Spanish estate agent (Agente de la Propiedad Inmobiliaria, or API), who will take care of the legalities of renting accommodations in exchange for a fee. The fee is either a percentage of the weekly or monthly rent if you want to rent short term, or the equivalent of one month’s rent if you are going to rent your property long-term (i.e., at least one year).
If you intend to rent your property on a short-term basis (e.g., to tourists), you also will need to check that the property itself has authorization for tourism use and holiday rentals. Licenses for this purpose have to be approved by the local authorities, and any property owner who ventures into holiday rentals without such a license is liable for fines.
Inheritance tax is imposed on the value of all assets deemed to have a “Spanish situs,” owned directly by a foreigner at the time of his or her death. As of 2020, the tax rates vary from 7.65% (up to €8,000), to a maximum 34% on values in excess of €800,000. These tax rates can then be increased by a multiplier of 1.2 to 2.4; the size depends on the existing wealth of the heirs at the time of succession and the relationship to the deceased person. In some circumstances, the result could be an effective tax rate of more than 70%.
Acquiring real estate through a corporate entity could be one approach to reducing the inheritance tax; however, a double chain of companies would normally be needed, as shares of a company (held directly by a non-resident) whose only assets are real estate situated in Spain are subject to Spanish inheritance tax. Caution is advised, however, as substance of the scheme to acquire is required and as other tax issues arise when purchasing Spanish real estate in the name of a foreign corporation. For example, when a company owns the real estate, the individual will need to pay for using “corporate property.”
In some regions, certain tax credits and benefits could be applicable on inheritance and gift tax. Criteria to determine the credits and benefits applicable will have to be carefully analyzed on a case-by-case basis.
Real estate investments
For individuals or corporations interested in investing in Spanish real estate, irrespective of the type of property (e.g., residential, rental, commercial, etc.), other more complex and sophisticated schemes may be beneficial.
For example, an individual may choose to invest through a SOCIMI (Sociedades Cotizadas de Inversión Inmobiliaria), which is similar to a U.S. REIT, or through other collective investment schemes as FII (Fondos de Inversion Inmobiliaria o Real Estate Total Funds).
Special tax regimes apply to both investment schemes, with significant benefits such as reduced tax rates and exemptions.
Additionally, a special tax regime is applicable to Spanish corporations dedicated to housing rentals within the Corporate Income Tax, when some requirements are met.
For more information about these investment vehicles, please contact your J.P. Morgan representative or a member of the J.P. Morgan International Wealth Advisory Team.