Taxation of non-residents for properties in Spain

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On many occasions, when a foreign person who is not a tax resident in Spain comes to our Lawyers and Economists Office in Marbella for advice on buying a property in Spain as an investment (let’s not forget that their habitual residence is outside Spain), they ask us to advise them about the best purchase option. 

Whether to do it directly or indirectly through Spanish limited company.

First of all, let’s say that neither is better than the other and that each one has its pros and cons.

The purchase and possession of a property in Spain is subject to a series of taxes, some of them incompatible with each other, if one or the other is paid. It may seem very messy, but we’ll clarify it right away:

The taxes and fees are as follows:

1. – VAT (Tax on VAT). 

2. – ITP (Property Transfer Tax). Indirect Tax, of an autonomous nature.

3.-AJD (Stamp duty tax). Indirect Tax, of an autonomous nature.

4. – IBI (Rates – Property Tax). Local tax. It is paid to the Town Hall of the town where the property is located.

5. – Garbage collection fees. Local rates. It is paid to the Town Hall of the locality where the property is located.

6.-IRNR (Non-resident Income Tax). National Direct Tax.

7. – IS (Company tax).

8. – Wealth Tax. (State Tax ceded to the Autonomous Communities)

WARNING! You do not have to pay all these taxes for buying and owning a property in Spain as a non-resident, but depending on how you purchase it, directly or indirectly; or depending on whether it is a first sale or a second sale, you will pay one or the other. This is explained in detail below.

For the home to purchase:

1. – First sale of this property.

Regardless of the legal form that is chosen to buy a property, either as a natural person (direct), or as a legal person, Spanish limited company (indirect), if it is a first sale of that property, (Direct sale made by the real estate developer who builds the buildings and sells them to a third party -our client-), you will always pay Spanish VAT, at a tax rate of 10% on the sale price. This is a national direct tax and as the Autonomous Communities do not want to be left without their “share”, the AJD (Stamp duty tax) concept is enabled, so that they can also collect something from this purchase. Now in Andalusia, this tax rate is at 1.5% on the purchase price.

2. – Second or subsequent sales of a property.

Regardless of the legal form chosen to buy a property, either as a natural person (direct) or as a legal person, Spanish limited company (indirect), ITP (Property Transfer Tax) will always be paid. In this case, as the autonomous community takes all the “share”, this sale is not subject to AJD.

The Spanish Transfer tax rate region of Andalucía varies depending on the sale price of the property. It is 8% for property prices below €400,000, 9% for prices above €400,000 and below or equal to €700,000 and 10% for prices above €700,000. The tax liability is obtained by applying these rates to the sale price.

Tax base
up to €
Full payment
Rest of the net base
up to €
Applicable rate
%
0.000.00400,000.008.00
400,000.0132,000.00300,000.009.00
700,000.0159.000.00Henceforth.10.00

For the tenancy in ownership of the property:

1.-Taxes and Fees common to any legal form.

Regardless of the legal form that is chosen to purchase the  property in Spain, either as a natural person (direct), or as a legal person, Spanish limited company (indirect), IBI (local rates)  will always be paid (Property Tax), it’s a local tax and is paid to the municipality where the property is located. 

The local rates in Spain has annual periodicity, and it is calculated in function of the Cadastral Value of the property. This value is an administrative value, assigned by the Public Administration, through market studies carried out every 10 years approximately, whose purpose is to assign a cadastral value to each property that is approximately 50% of its market value.

Also, regardless of the legal form in which the property was purchased, the corresponding Garbage collection costs will always be paid to the Town Hall where the property is located. They are local taxes for collecting organic waste left in garbage bins.

2.-Taxes according to the legal form of buying the property.

2.1.- As a natural person (IRNR + IP (some cases))

A foreigner, who is not a tax resident in Spain, as a result of owning a property in our country, is always subject to the IRNR (Non-resident Income Tax) and in certain cases, if the value of the property exceeds €700,000, will be subject to the Wealth Tax.

If the property in Spain is not rented, the natural person not resident in Spain, but resident in the European Union, will settle a tax rate of 19% on a taxable base that is calculated by multiplying the cadastral value of the property by a rate of 1.1% if this value is revised less than 10 years ago and 2% if it is revised more than 10 years ago. 

In other words, a fictitious income is imputed to the property in order to “checkout”.

Example: Cadastral value 200,000 €, Revised 7 years ago. (Marbella). The fee payable for this tax (IRNR) will be 200,000 € x 1.1% x 19% = 418 €.

If the natural person not resident in Spain is resident outside the European Union, the tax rate would be 24%.

Example: Cadastral value €200,000, Revised 7 years ago. (Marbella). The fee payable for this tax (IRNR) will be €200,000 x 1.1% x 24% = 528 €.

To this non-resident income tax (IRNR), should be added for those properties whose price was equal to or greater than €700,000 the tax on wealth, also of an annual nature and which is national in nature, but ceded to the autonomous communities.

The wealth tax rate applicable in Andalusia is as follows:

Net base Total quota Remaining net base Applicable rate Percentage
0.000.00167,129.450.24%
167,129.45401.11167,123.430.36%
334,252.881,002.75334,246.870.61%
668,499.753,041.66668,499.761.09%
1,336,999.5110,328.311,336,999.501.57%
2,673,999.0131,319.202,673,999.022.06%
5,347,998.0386,403.585,347,998.032.54%
10,695,996.06222,242.73Henceforth.3.03%

Example: A property with a purchase price of €800,000. The applicable exempt minimum would be €700,000. Therefore, the Net Asset Tax Base would be €100,000 and the total amount for this tax will be €100,000 x 0.24% = 240 €.

Now, in the previous example, where the purchase price is €800,000, if the natural person not resident, buys it at 50% with his wife, then, the value of the same would be €400,000 for each of them, and be avoided in this case to pay Wealth Tax each of them, because they do not reach €700,000 which is the minimum exempt to file and pay such tax.

2.2. – As a legal entity, Spanish Limited Company.

In this case, the property would not be subject to IRNR, but to IS (Spanish company tax, Spanish legal entity).

At first glance, it may seem a great advantage over the previous legal form, especially for properties in Spain with a very high price, since it would avoid paying IRNR. 

Since no real estate income is imputed, and although company tax has to be formally filed every year, it would not pay corporate income tax either, because this property is not rented, nor does it have a real estate imputation. Therefore, we would be talking about a pecuniary company, with a tax rate of 25% on the profits of the society, which turn out to be zero euros every year.

However the foregoing, which seems to be all advantages, becomes all inconvenient when the Spanish Tax Inspectorate enters, because according to the provisions on related transactions, it turns out that, even if the property does not have a real rental income, it would be necessary to value a rental at market value, because the property will be used by the sole partner of the society or his family, or his administrator and family.

Consequently, what seem to be all advantages become inconvenient before a Tax Inspectorate. 

In order to avoid them it is necessary the appraisal of an expert (In our Office we also offer this service), that values the market value of rent of this property, in such a way that in the tax on societies the income is imputed as income this “fictitious” rent to value of market. From this fictitious income at market value, we can deduct those expenses necessary to obtain it, such as: IBI, Garbage Rates, Community of Owners, Amortization of Property, Fees for fiscal and accounting advice, for the management of the accounting, insurance of the property, etc.

The difference will normally give a positive result to which the 25% tax rate will be applied.

Nor should we forget that the NON-RESIDENT, even if he does not have a property in Spain, has the shares of a legal entity that has a property in Spain, and that, depending on the value of the same, could also be taxed in the Wealth Tax.

Therefore, no form is better than another, depending on its price, in PERICIA ABOGADOS Y ECONOMISTAS, we advise you on the best way to do it, to optimize your taxes in Spain.

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