All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

The varied holding structures for Spanish residential properties

Sponsored by sponsored-firms-garrigues.png

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% otherwise).

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 band.

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 shareholder.

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.

More from across our site

This week European Commission officials consider legal loopholes to secure minimum corporate taxation, while Cisco and Microsoft shareholders call for tax transparency.
The fast-food company’s tax settlement with French authorities strengthens the need for businesses to review their TP arrangements and documentation.
The full ALP model will be adopted through a new TP regime, which is set to boost the country’s investments and tax certainty.
Tax professionals have called on the UK government to reconsider its online sales tax as it would affect the economy at the worst time.
Tax professionals have called on companies to act urgently to meet e-invoicing compliance targets as the EU plans to ramp up digitisation.
In the wake of India’s ambitious 25-year plan for economic growth, ITR has partnered with leading tax commentators to discuss what the future will look like for India and for the rest of the world.
But experts cast doubt on HMRC's data and believe COVID-19 would have increased the revenue shortfall.
EY’s plan to separate its auditing and consulting businesses might lessen scrutiny from global regulators, but the brand identity could suffer, say sources.
Multinationals are asking world leaders to put a scale on carbon pricing to tackle climate change at the 48th G7 summit in Germany, from June 26 to 28.
The state secretary told the French press that the country continues to oppose pillar two’s global minimum tax rate following an Ecofin meeting last week.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree