Non-resident real estate owners in Spain – the wealth tax implications
Spain has completed a wealth tax reform, with far-reaching repercussions for non-resident owners of real estate companies. Juan Luis Zayas and Jose Ignacio Ripoll of Garrigues drill into the detail.
According to the wealth tax legislation applicable until 2022, where the taxpayer was a non-resident, only the holding of shares in resident entities was considered subject to wealth tax in Spain (i.e., non-resident taxpayers were taxed exclusively on assets and rights that were located, could be exercised, or must be fulfilled in Spain).
However, there were some precedents where the tax auditors considered the holding in non-resident companies which owned Spanish real estate to be subject to wealth tax (WT).
This situation of uncertainty had recently been resolved by the Spanish Directorate-General of Taxes which confirmed (by means of, among others, its binding rulings numbers V2070-21 of July 9 or V1947-22 of September 13) that the ownership by non-residents of shares in non-resident entities was not subject to WT in Spain regardless of the composition of their assets.
This issue was triggering situations in which the mere interposition of non-resident entities could avoid WT becoming chargeable (WT was chargeable where the non-resident individual was the direct owner of a property located in Spain). In view of this situation, the Spanish lawmakers have reacted by amending the WT legislation (with effect from 28 December 2022) to treat as subject to WT – as non-resident taxpayers – shares in unlisted entities (regardless of the entity’s residence) where at least 50% of the entity’s assets consist (directly or indirectly) of real estate located in Spain.
To calculate said 50%, the net asset value of all the assets will be replaced by their market value on the date the tax becomes due (December 31), except for those corresponding to real estate assets, which must be replaced by the larger of:
The cadastral value of the property;
The value determined or verified by the authorities for the purposes of other taxes; or
The acquisition value / construction cost.
This amendment, according to the preamble of the law, aims to correct an unfair discrimination against residents given that non-residents, by simply interposing a non-resident legal entity, can avoid being subject to WT. This amendment will apply to non-resident individuals who are shareholders of entities that directly or indirectly have a significant amount of underlying real estate assets located in Spain, being irrelevant for these purposes whether or not such real estate assets are affected by business activities, or whether there is any aim to avoid tax.
Consequently, it seems advisable for non-resident individuals who invest in unlisted entities with a high volume of real estate assets in Spain to review their investments to determine whether they may be subject to tax. Moreover, in those cases where a tax treaty exists, it will be necessary to analyse the potential impact of its provisions.