The mere holding of a Spanish residential property by a
non-tax resident gives rise to tax on an annual basis,
regardless of whether the property is held directly by the
individual or through a corporate structure.
If the property is held directly by the individual, a deemed
income arises under non-resident income tax (NRIT). Such income
is calculated in general terms as 1.1% of the cadastral value
of the property, and taxed at a rate of 19% if the individual
is resident in the EU or European Economic Area (EEA) (or 24%
Additionally, the direct holding of the property by a
non-tax resident individual may also trigger net wealth tax
(NWT). According to state tax law, the taxable base is the
acquisition value of the property, with a nil-rate band of
€700,000 ($794,000). The tax rates are progressive rates
between 0.2% and 2.5%.
However, the taxpayer may choose to apply the regional tax
laws of the region where the property is located instead. In
this regard, some regions have decided not to impose NWT at all
(e.g. Madrid), whereas others have reduced the nil-rate band
(e.g. Catalonia, Valencia or Extremadura) or increased the tax
rates (e.g. Andalucía, Catalonia, Cantabria, Galicia,
Valencia, Extremadura, Murcia or the Balearic Islands).
Thus, a non-tax resident individual who holds residential
property in Spain would be subject to tax under NRIT and NWT.
In relation to NWT, no tax would be due if the property was
located in a region which does not impose NWT or if the
acquisition value of the property is below the nil-rate
On the other hand, holding a residential property through an
entity (whose use is made available for a shareholder) would
also give rise to taxable income according to Spanish transfer
pricing rules. The taxable income would be the fair market
value of the annual rental income minus deductible expenses.
Should the reported taxable income be lower than the fair
market value, a secondary adjustment could also be made in
relation to the benefit in kind obtained by the
Should the holding company be resident in Spain, the
applicable tax rate under corporate income tax (CIT) would be a
fixed rate of 25%. Should the holding company be resident in
the EU or EEA, the applicable tax rate under NRIT would be a
fixed rate of 19%. Otherwise, the applicable tax rate under
NRIT would be a fixed rate of 24%, and the taxable base would
be the gross income (expenses would not be deductible).
If the holding company is resident in a tax haven, a special
tax on properties owned by entities resident in a tax haven
would also apply under NRIT (special tax). The taxable base
would be the cadastral value and the tax rate a fixed rate of
3%. This special tax may be deducted as an expense for any
amount payable under NRIT.
According to the wording of Spanish NWT, the holding of
property through non-tax resident entities is not taxable in
Spain since the shares in the non-tax resident entity are not
considered Spanish located and there is no special anti-abuse
rule for real estate rich companies. However, where the sole or
main purpose of the existence of the foreign entity is the
avoidance of taxes in Spain, the Spanish tax administration may
disregard it and, therefore, request NWT from the shareholders.
Should the property be held by a Spanish company, NWT would be
applicable since the shares would be considered to be located
in Spain for NWT purposes.
Therefore, a holding company which holds Spanish residential
property may be subject to tax under: (i) NRIT or CIT, if there
is a letting of the use of the property to the shareholders;
(ii) under the special tax on properties if the holding entity
is resident in a tax haven; and (iii) under NWT if the entity
is resident in Spain (or outside Spain where its sole or main
purpose is the avoidance of taxes in Spain).
As a result, a case-by-case analysis should be performed in
each particular situation. When investing in a region with NWT,
the decision of whether one ought to invest directly or through
a company depends primarily on the value of the property. Above
a certain value, investing through a company pays off on the
basis that the structure is respected (because it is founded on
good business reasons, such as it being the holding structure
for the investor's property portfolio). Besides the associated
holding issues, one should have regard for the taxation on the
property's exit, either by way of sale or succession.
It is worth mentioning here that the Spanish inheritance and
gift tax (IGT) has the same connecting factors as NWT.
Pedro Fernandez (email@example.com) and Alvaro Checa
Garrigues, Taxand Spain