When analyzing the tax burden that may be derived from foreign real estate investments in Spain, several taxes and circumstances should be taken into account. On the one hand, there are various direct and indirect taxes that may apply with different effects. On the other hand, a distinction must be made between foreign individuals and foreign entities directly holding a property in Spain. Finally, the possibility of channelling real estate investments in Spain through a Spanish resident entity and the tax consequences for the foreign individual or entity should be assessed.
The aim of this article is to provide an overview of the applicable taxes in Spain focusing on the different potential scenarios.
Chart 1: Progression of foreign real estate investments in Spain |
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Foreign investments
As mentioned before, there are many taxes, direct and indirect, which become applicable to real estate investments or disinvestments in Spain. Here we describe such potential tax liabilities and the situations in which they would apply, as well as the rates and possible ways to minimize the same.
Direct taxes
Non-residents' income tax
The non-residents' income tax (NRIT) applies to Spanish source income obtained by non-Spanish resident individuals or entities.
The rental of a property in Spanish territory by a non-resident individual is considered Spanish source income, thus taxable under the NRIT in Spain. The tax burden varies depending on whether the non-resident's property in Spain is considered a permanent establishment, in which case a 35% rate is applied on the net income, or not, in which case a 25% rate applies on the gross income (with no deductibility of expenses).
A foreigner is also considered to obtain Spanish-source income when realizing a capital gain as a result of selling the property, or when the property was acquired without consideration in return. The gain derived from a sale of Spanish property by non-residents is taxed at the rate of 35%. Furthermore, a payment on account of this tax should be borne for an amount of 5% of the selling price (not of the gain), which the purchaser is legally obliged to withhold and pay to the Spanish Treasury.
Foreign individuals owning Spanish real estate not related to the carry-out of a business activity are subject to NRIT once a year at the rate of 25%, applied on a 2% of the cadastral value or on a 1.1% if said value was revised after January 1 1994. On the contrary, if the Spanish real estate is held by a foreign entity, the NRIT also accrues once a year but at the rate of 3% of the cadastral (municipal records) value, even though certain exemptions exist.
| Scenario 1: Direct ownership by foreign individuals Ownership In this scenario, for mere ownership, the NRIT would apply at the rate of 25% on 2% of the cadastral value or on 1.1% of such cadastral value in the previously explained circumstances. Furthermore, real estate tax and net wealth tax would apply as well. Lease income As mentioned above, the NRIT would apply either at the rate of 25% on gross income or at the rate of 35% on net income. The latter tax regime applies when the property is considered a permanent establishment in Spain. Under this situation, and even though the rate is higher than if the foreign individual is not considered to operate through a permanent establishment in Spain it must be noted that in many occasions it represents a lower tax burden in Spain thanks to the possibility of deducting expenses related to the leasing activity. Transfer The NRIT would apply at the rate of 35% on the gain obtained, if any, prior to withholding by the purchaser of 5% of the selling price. However, if the individual acquired the real estate before December 31 1994, the potential gain arising could be totally or partially exempt, depending on the precise date of acquisition. Furthermore, the tax on the increase of value of urban land would apply to the transferor as long as the real estate was held for more than one year. This tax can only be assessed on a case-by-case basis. As regards indirect taxation, if the seller were a non-resident individual, transfer tax would apply to the burden of the purchaser, unless the seller is a professional or businessperson for VAT purposes and the circumstances are met to make the transfer subject to VAT, in which case transfer tax would not apply, but VAT and stamp duty would. Finally, should the party acquiring the real estate receive it through the death of the former owner or by donation, neither VAT nor transfer tax would apply, but the inheritance and gift tax would. |
| Scenario 2: Foreign individuals investing through a Spanish entity In this scenario, Spanish capital tax will be applicable since the incorporation of companies is subject to capital tax at a rate of 1%, applied to the share capital and share premium, if any. Ownership The net wealth tax would apply once a year in relation to the value of the shares of the Spanish company that owns the real estate. Furthermore, real estate tax would also apply, whose taxpayer would be the Spanish company owning the real estate. Lease income The CIT would apply on the net income of the Spanish entity owning and leasing the real estate, at the general rate of 35%. If the Spanish entity is a sociedad patrimonial, the lease income would be taxed at a rate of 40%. Finally the previously mentioned tax incentives approved by the Spanish Royal Decree-Law 2/2003 should be taken into account if applicable. Transfer The Spanish company would be subject to CIT on all its profits, including an eventual sale of the real estate. In case of transfer of the real estate by the Spanish company owning such property, the CIT would apply at the rate of 35%, 40% or 15% depending on the type of entity (regular or sociedad patrimonial) and the holding period of the property, as well as the activity of the selling company. If the stock of the Spanish company owning such property was transferred, as opposed to the property itself, whatever gain arising from such transfer would be considered Spanish source income, taxable at the rate of 35% under NRIT. Again, non-resident individuals who acquired the shares before December 31 1994 can benefit from a reduction in the taxable gain. Should an income tax treaty apply, the gain derived from the transfer of the shares of the Spanish company is usually exempt of Spanish taxation, although some treaties allow Spain to tax such gain. Furthermore, the tax on increase of value of urban land would apply to the transferor if the property is sold directly but not in case of sale of the stock of the Spanish company owning the said property. With regard to indirect taxation, a distinction must be made between the transfer of the property itself by the Spanish entity and the transfer of the stock of such Spanish entity. In the first scenario, transfer tax alone or VAT plus stamp duty would apply (depending on the circumstances). In the event of transferring the stock of the Spanish entity owning the property, transfer tax alone would accrue if more than 50% of the shares of the Spanish company were acquired by a sole purchaser and to the extent that the majority of the assets of the Spanish company consisted of Spanish real estate. Finally, should a party acquire (indirectly) the real estate through acquisition of the stock of the Spanish entity as a result of death of the former owner or by donation, no VAT or transfer tax would apply, but the inheritance and gift tax would. |
Corporate income tax
Corporate income tax (CIT) would only be applicable in the scenario whereby the investment in Spanish real estate is channelled through a Spanish entity. Spanish CIT applies in two situations:
in relation to the lease or rental of the property; and
in relation to the gain that may be derived from selling the property.
Concerning the lease of Spanish real estate, the CIT would apply on the net income at the rate of 35%. But if the turnover of the Spanish entity owning and leasing the property in Spain is below ?6,000,000 ($7,000,000) a 30% rate applies on the first ?90,151 ($104,000) of tax base, applying the 35% general rate on the excess of that tax base.
However, should the Spanish entity be considered a sociedad patrimonial (asset holding entity), the Spanish CIT applies in a special manner, regular income being taxed at the rate of 40% and the net income being determined accordingly with the Spanish Personal Income Tax Act. We must stress the fact that a Spanish resident entity cannot be a sociedad patrimonial when all its shareholders are entities that do not fall in the status of Spanish sociedad patrimonial.
With regard to the transfer of real estate, the same rate would apply on an adjusted gain (the adjustment is made by way of applying certain multiplying coefficients to offset the effect of inflation). Nevertheless, under certain circumstances, the Spanish resident entity can be taxed at a flat rate of 15% provided that the entire consideration obtained from the sale of the property is reinvested in certain assets. In case of transfer by a sociedad patrimonial, the rate of taxation would be 40% unless the real estate was held for over a year, in which case a reduced fixed rate of 15% applies regardless of whether the above mentioned reinvestment takes place.
Finally, it must be noted that based on recently enacted legislation (Royal Decree Law 2/2003 dated April 26 2003) a package of tax incentives have been introduced in the Spanish Corporate Income Tax Act to promote the lease of real estate in Spain consisting of permanent home (viviendas). Under such incentives and subject to the fulfilment of certain requirements, the CIT on the lease as well as on the transfer of the referred type of real estate can be as low as a 3%.
Net wealth tax
This tax only applies on individuals, not on corporations. The taxable event is the ownership of goods or rights. With regard to non-resident individuals, the tax only applies in relation to goods and/or rights placed, exercisable or to be fulfilled in the Spanish territory.
The applicable rate is determined pursuant to a progressive tax chart, with a minimum burden of 0.2% and a marginal rate of 2.5%, applying the latter when the net wealth exceeds ?10,695,996 ($12,400,000).
It must be mentioned that this is a tax given to and collected by the corresponding Spanish regions. Therefore, the special provisions of the competent Spanish region should be taken into account on a case-by-case basis.
Finally, in the event of indirect investments on Spanish real estate channelled through a Spanish resident entity, the provisions of the income tax treaty, if existing and applicable, should be observed.
| Scenario 3: Direct ownership by foreign entities In relation to the taxation of Spanish real estate investment directly made by a non-Spanish resident entity, we only focus the analysis on the Spanish tax aspects, disregarding the tax issues related to the incorporation and tax regime of the foreign entity. Ownership As mentioned before, net wealth tax would not be applicable as it applies only to individuals, but the NRIT would, at the rate of 3% of the cadastral value of the real estate. However, an exemption of this tax applies in certain cases. Furthermore, real estate tax would also apply. Lease income The NRIT would apply at a rate of 35% on net income or at the rate of 25% on gross income, depending on whether or not the property constitutes a permanent establishment in Spain. Transfer The NRIT would apply to the capital gain obtained by the non-resident entity selling the real estate. The tax rate applied on the gain would be 35%. Furthermore, the selling entity would be subject to the tax on increase of value of urban land if the real estate was held for over a year. Finally, transfer tax alone or VAT together with stamp duty would apply. In both cases, as mentioned before, the tax is levied on the purchaser of the property. |
Inheritance and gift tax
The accrual of this tax takes place when an individual acquires goods or rights on a no-consideration basis (lucrative acquisition). Corporations are not subject to this tax.
Similar to the net wealth tax, individuals who are non-resident in Spain are only subject to this tax in respect of the goods and/or rights placed, exercisable or to be fulfilled in the Spanish territory, as well as for the amounts received in relation to life insurance agreements signed in Spain or with Spanish insurance companies.
The rate is determined according to a progressive tax chart, ranging from 7.65% to 34%, applying the latter on the excess of ?797,555 ($925,000). However, it must be noted that the final tax due can be as high as 81.6%, as certain subjective aspects are taken into account to determine the final tax applicable, which may increase as much as 2.4 times the gross tax due.
It should be added that this is also a tax given to and collected by the respective Spanish regions, which requires taking into account the special provisions that the competent region may have with regard to the general Inheritance and Gift Tax Act. Concerning this tax, Spain has treaties with France, Greece and Sweden.
Real estate tax
This is a municipal (local) tax that applies once every year to individuals and entities, either resident or non-resident. The taxable event is the ownership of real estate, or the holding of a right of usufruct or a right on surface on real estate, or being the owner of an administrative concession in the case of publicly held property. The taxpayer is the owner of the property or the holder of the right or of the administrative concession.
Tax on increase of value of urban land
This is also a municipal tax that accrues when a Spanish real estate is transferred after a holding period exceeding one year or when certain rights over the land are either set or transferred. The tax burden derived from this tax can be a cost to consider. Finally, it must be said that the taxpayer is the transferor.
Tax on economic activities
Lastly, there is another municipal tax whose taxable event is the performance of business activities in the Spanish territory. However, all individuals and entities with a turnover below ?1,000,000 ($1,160,000) are exempt from this tax. The cost of this tax has to be determined on a case-by-case basis.
| Scenario 4: Foreign entities investing through a Spanish entity Incorporation The incorporation of the Spanish entity is subjected to capital tax at a rate of 1% of the share capital plus share premium, if any. Ownership Under the concept of ownership, only the local real estate tax would apply, as neither the net wealth tax nor the NRIT at the rate of 3% would become applicable. Lease income CIT would apply on the Spanish entity owning and leasing the real estate, being in principle applied at the rate of 35%. Again, should the requirements be met, the tax incentives of the Royal Decree-Law 2/2003 could apply, lowering the rate applied to the lease income to 15% or to 3%, depending on the case. Transfer In the event of sale of the property directly by the Spanish company owning the same, CIT would apply at the rate of 35%. Here, again, should Royal Decree-Law 2/2003 apply, the rate applied on the transfer could drop to 15% or to 3%. If the sale consists of the stock of the Spanish company owning the property, the potential gain derived from such a transaction would be subject to the NRIT, unless an exemption applies pursuant to an income tax treaty signed by Spain. We must stress the importance of claiming the application of treaty provisions, since capital gains derived from an indirect transfer of a Spanish real estate via the sale of the shares of a Spanish entity owning such property is considered Spanish source income, and thus subject to tax under the NRIT at the rate of 35%. Furthermore, the local tax on the increase of value of urban land would apply to the transferor if the property is sold directly but not in case of either selling the stock of the Spanish company owning said property or the foreign entity holding the Spanish company. Finally, the transfer would trigger either transfer tax alone or VAT and stamp duty with the previously explained effects. |
Indirect taxes
Value-added tax
Spanish value-added tax (VAT) applies on the transfer of real estate in Spanish territory, provided that the transferor is a businessperson (for VAT purposes) and that the transfer is not exempt from VAT. In certain cases, it is more convenient to have the purchase of the property subject to VAT. To such extent, when the transfer of the real estate is exempt of VAT, subject to certain requirements, the parties can renounce said exemption and make the transfer subject to VAT.
The convenience of making the transaction subject to VAT is that input VAT can be offset against output VAT, and should input VAT exceed output VAT, a refund for the difference can be claimed at the end of the year. But if the transaction is subject to transfer tax (the other main indirect tax), this tax burden can only be recovered by depreciation of the property, which takes place over the long term, thus becoming a considerable burden. However, when a transaction initially exempt of VAT and subject to transfer tax is finally subject to VAT, this triggers adverse stamp duty consequences in some regions of Spain.
The general rate applicable in concept of VAT is 16%, although certain real estate transfers are subject to a reduced rate of 7%. Finally, it should be noted that a tax-exempt (of VAT) transfer of a property might trigger adverse tax consequences for the seller in terms of deductibility of input VAT.
Transfer tax
Spanish transfer tax applies either by default of VAT (for example, when a real estate transaction is exempt of VAT) or when a non-businessperson (for VAT purposes) makes an onerous transfer of the real estate. The rate varies between 6% and 7%, depending on the region of Spain where the real estate is located.
It is important to note that not only direct transfers of real estate are taxed but also indirect transfers. It is understood by the Spanish transfer tax legislation that an indirect transfer of a real estate occurs when transferring more than 50% of the capital of a Spanish entity whose main assets (more than 50%) consist of Spanish real estate.
Transfer tax is not compatible with VAT or with inheritance and gift tax, as the latter only applies on lucrative (not on onerous) transfers. Finally, the taxpayer of the transfer tax is the purchaser.
Stamp duty
If a real estate transfer is subject to VAT (and thus not subject to transfer tax), stamp duty applies on the first copy of the notarial deed executing such transfer. The burden derived from this tax varies between 0.5% and 1%, depending on the competent Spanish region collecting this tax. However, certain regions of Spain apply a higher rate of stamp duty when the transfer of a property initially exempt of VAT is finally carried out subject to VAT.
The taxpayer of the stamp duty is the party acquiring the good or right, and, by defaults, the party requesting the notarial deed.
Directly by foreign individual |
Indirectly (through Spanish company) by foreign individual |
Directly by foreign company |
Indirectly (through Spanish company) by foreign company |
|
Non-resident income tax |
X |
X |
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Corporate income tax |
X |
X |
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Capital tax |
X |
X |
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Real estate tax |
X |
X |
X |
X |
Tax on increase of value of urban land |
X |
X |
X |
X |
Tax on economic activities |
X |
X |
X |
X |
Net-wealth tax |
X |
X |
||
Inheritance and gift tax |
X |
X |
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| Notes
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Reporting obligations
It must be said that there are reporting obligations to be fulfilled before the Spanish General Directorate on Foreign Investment.
Direct investment in Spanish real estate and indirect real estate investment through a Spanish company are transactions that must be declared to the aforementioned General Directorate. Furthermore, previous clearance should be obtained in certain situations when the investor is a tax haven resident.
In relation to tax havens, it must be noted that Spain has a closed list of tax havens approved by a Royal Decree from 1991. But if any of those tax havens reaches an exchange of tax information agreement with Spain or an income tax treaty with exchange of information clause, such country or territory will no longer be considered a tax haven for Spanish purposes.
Real estate registry
Prior to the acquisition of the real estate, it is highly advisable to certify the ownership and burdens related to the property. Furthermore, it is also recommendable to check the town planning that might affect the real estate in the present and/or future.
Safe investments
A real estate investment in Spain involves many taxes, direct and indirect, state, regional and local, which makes it advisable to receive proper tax planning in advance. Furthermore, the precise circumstances of the investor (individual or entity) and the intended goals to be achieved (for example, full deductibility of VAT, transfer by death in a tax-efficient manner, saving net wealth tax and so on) should be taken into consideration from the beginning.
Finally, the reporting obligations, the information provided by the land registry in terms of burdens of the property and declared owners, and checking the legal situation of the property with the town hall authorities, are recommended steps to be taken in order to fulfil the legal obligations and to make a safe investment.
José María Cusí (josemaria.cusi@cliffordchance.com) and Carmen Gómez de Cadiñanos (carmen.gomezdecadinanos@clifford chance.com), Barcelona
