The varied holding structures for Spanish residential properties
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.