New Tax Regime in Spain

[ Sunday, 7th January 2007 ]

New tax regime in Spain

Two bills passed by the Spanish parliament, which took effect on January 1, 2007, will affect non-residents owning or intending to buy holiday properties in Spain. 

The Income Tax Act will change certain articles oft he Non-Resident Income Tax Act affecting, among other things, the capital gains tax (CGT) rate, which will drop from 35 per cent on net gain to 18 per cent, the same rate of tax applicable to residents.
These changes are due to EU pressure on the Spanish government after it received complaints from foreign taxpayers that the existing system discriminated against non-residents by applying a different CGT rate to them than to residents.

Another significant change in the law concerns the withholding tax, which a property purchaser must pay to the tax office on account of the potential CGT liability of a non-resident seller. This will also drop from the existing 5 per cent of the purchase price to 3 per cent.

Also, if a non-resident incorporates property into a Spanish company, it will not be subject to this withholding tax. If payment of the withheld tax is not made by the purchaser, the property will be affected by the lowest of the following sums: either the CGT on the sale or the 3 per cent on the purchase price.

The new Income Tax Act will do away with the special system regulating asset-holding companies. These were companies owned by at least one physical person with most of their assets not affected by economic activities.

The letting of property was not considered an economic activity unless the company had an employee and premises dedicated exclusively to carrying out business.

Under the existing system, any non-resident owner of real estate in this type of company would benefit from the same CGT tax rate as individual residents if assets were disposed of by the company after one year. At present, that rate is 15 per cent.

The second new piece of legislation, the Tax Fraud Prevention Act, creates new obligations when it comes to property transactions. First of all, in order for the land registry to register a transaction, the title deed must include the fiscal identification number (NIF or NIE in the case of non-residents) and the means of payment for the purchase price.

Also, in order to subscribe to basic utilities such as water and electricity, it will be necessary to provide the reference number on the property’s local rates bill (referencia catastral).

These measures represent the Spanish government’s attempt to avoid future money-laundering through real estate transactions and to use utility contracts in order to gain more control over the use of property.

This act also includes important changes affecting offshore companies. These are companies from a list of jurisdictions (known as the ‘black list’) that were the subject of particular attention from the Spanish tax authorities.

These offshore companies are the subject of severe tax legislation, with a 3 per cent tax on the rateable value of property when the company holds real estate, and with any transactions they carry out with third parties valued for tax purposes at market value.

Now the new law is attempting to close the circle by enlarging the list to include not only companies on the black list but also those from jurisdictions of practically nil taxation or those with which Spain has not worked out a double taxation treaty with provisions for exchange of information.

The law will consider offshore companies resident in Spain if their main assets consist of real estate property situated in Spain.

As far as CGT goes, the existing Non-Resident Income Tax Act provides for the taxation in Spain of the share transfer from a company whose main assets are directly or indirectly (through a subsidiary holding) real estate assets in Spain.

Under the new draft bill, if an offshore company is involved, the appraisal of these transactions will be based on the market value of the real estate, regardless of the property price declared, and the real estate assets of the company will be affected by the payment of the tax.

The likely consequences of the new legislation will be significant.

On the one hand, mainly with the drop to 18 per cent of CGT, properties, even the expensive ones, will be purchased in the name of individuals instead of companies.

The reduced rate for capital gains will certainly be an incentive for foreign investors and will be welcomed by real estate professionals.

On the other hand, it should help prevent tax fraud to a great extent.

07 January 2007 By Rafael Berdaguer                                                                                                                                     Sunday Business Post

Rafael Berdaguer is the founding partner of law firm Rafael Berdaguer Abogados, which is based in Marbella on the Costa del Sol.