Tag Archives: income

The impact of real estate transfers on personal income tax

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It’s commonly known that real estate sales are subject to tax. Less widely known is that any property transfer can affect your income tax. To avoid unpleasant surprises months or even years after signing an agreement for conveyance, be sure to get legal advice on the consequences of the transaction.

Any change of ownership of real estate affects your personal income tax. This is clear for selling a house. The difference between what you paid for it and what you get when you sell is normally a gain that, logically, amounts to taxable income. Less obvious is that income tax is due even when there is no capital gain because the change of ownership does not occur via a sale. For example, when the property is transferred as a gift or in the dissolution of a joint ownership arrangement. Yes, that is correct! Even though if there is no capital gain in a transfer of ownership, you still have to pay income tax on it.

It is also not easy to understand why income tax is payable when you sell a house for less than market value or the difference between the purchase and sale price is exclusively owing to inflation. There are even many contradictory court decisions on these questions. Possibly, in the near future, tax rules like these that don’t make much common sense will be found to run against the Spanish Constitution or EU law. As occurred with municipal capital gains taxes. In the meantime, though, we must keep in mind that any change of ownership on our property may be subject to income tax, sometimes for a hefty sum. So we must enter any real estate transaction with our eyes wide open.

Carlos Prieto Cid – Your legal adviser in Spain

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European court rules Spain must soften penalties on Spanish residents who fail to declare assets held abroad

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In a recent decision, the Court of Justice of the European Union ruled that the fines imposed on Spanish residents for not declaring assets held abroad were “disproportionate”. As a result, last February, the Spanish parliament approved new, less discriminatory penalties.

Last year on this blog, we wrote about the obligation of Spanish tax residents to declare in Spain the assets they held abroad when the total value of these assets exceeded €50,000. This declaration had to be updated for changes in value of over €20,000.

Not filing this declaration meant facing fines of up to 150% of the undeclared assets, really amounting to a confiscation. And if you filed the declaration but made a mistake on it, you could be fined up to €5,000 for every error or omitted detail.

This regulation was imposed at a time of deep financial crisis when the government feared the freezing of bank accounts and offshore tax evasion. But these penalties have not held up to EU scrutiny for being clearly discriminatory against overseas investors. The new regulation adopted owing to the decision of the Luxembourg court brings the penalties in line with general tax regulations, without any discrimination for these assets being held abroad.

The time limits for these offences have also been brought into line with general tax regulations. Previously, there was no time limit on facing prosecution for offshore tax evasion.

Carlos Prieto Cid – Your legal adviser in Spain

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Tax headaches from receiving a foreign pension

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Many Europeans spend much of their holidays in Spain throughout their working life. Therefore, it’s understandable that once retired they want to have holidays all year round by becoming residents in Spain. What obligations do these retirees have with the Spanish tax authorities?

If you spend more than 183 days in Spain, you are considered a resident for tax purposes. In this case, you must declare all your income to the Spanish tax authorities, both income generated in Spain and any coming from abroad. However, even though the Spanish tax agency must be informed of all your income, this does not mean that you have to pay tax in Spain on all your earnings.

The international agreements between Spain and other countries to avoid double taxation aim to make sure that the tax you pay is legitimate and fair, and you can deduct tax paid abroad previously from tax owed in Spain.

Retirement pensions receive a special treatment that has caused much controversy in recent years because the double taxation rules were not given the same interpretation in different countries. For instance, public pensions can only be taxed in the country in which they are generated. But in recent years, public pensions have come to be interpreted to be only pensions received by retired civil servants.

Another problem is caused by pensions paid as a lump sum without any kind of withholding, typical in Germany. In this case, when the paying country wants to collect the tax it is legally owed, the lump sum may have already been taxed in Spain, without there having been any deduction of the foreign tax due because it had yet to be paid.

Given such complexities, you should always seek the advice of a tax specialist for clearing up any doubt surrounding your situation to avoid unpleasant surprises from the tax authorities in Spain or your home country.

Carlos Prieto Cid – Your legal adviser in Spain

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European tax offices strengthen their ties

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Over the years, we have observed from our law firm how the Spanish Tax Office has improved its channels of cooperation with other European tax offices to the point that they are now sharing all types of information on taxpayers.
 
Until now, this cooperation was limited to chasing real estate assets located in Spain owned by taxpayers of other countries who had outstanding tax bills with their home tax office. The Spanish Tax Office collected the debt that a taxpayer had abroad by claiming against real property owned in Spain, regardless of whether the person was a resident.
 
Now the cooperation is even stronger. Administration and inspection proceedings are triggered via the data provided by foreign tax offices. Recently we’ve seen the German and British tax offices inform their Spanish counterpart of known income of nationals of these countries who apparently reside or have their domicile in Spain. Based on this information, the Spanish tax agency sends a claim demanding payment of the undeclared tax and the corresponding penalties, which can reach 50% of the sum owed plus interest on the debt from the deadline for paying the tax. If you have received one of these claim letters in recent weeks, don’t hesitate to get in touch with your tax advisor.

Carlos Prieto Cid – Lawyer

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Working in Spain for non-resident employers

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Providing services remotely is, thanks to today’s technology, increasingly common. You can live in one country and provide services to a person or company based in another. However, this scenario can be confusing with regard to taxation and social security.

Today’s technology allows you to provide someone with services without ever having to physically meet them. For instance, communications, consultancy work and the transfer of knowledge are all services that can be provided remotely via the Internet, with no physical or geographical barriers. If you are a Spanish resident, which, as a rule, means that you live here for more than 183 days a year, you are subject to Spanish labour, tax and social security regulations with regard to the services you provide.
But there are grey areas in the Spanish legislation when it comes to remote working. It is straightforward if you are self-employed. In this case, you are simply registered and treated as self-employed by social security and the tax office. You have the same obligations as any self-employed resident.
However, you may not technically be self-employed if:

  • You only provide services for one person or company.
  • The receiver of your services trained you or provided you with or paid for the tools required to carry out the work commissioned.
  • You carry out the work according to the instructions of the service receiver, and the resulting products are sold on by them.

If these cases, the service receiver is actually your employer, and they are required to register you with the social security as an employee and meet their tax and employer obligations in Spain. It doesn’t matter if the company or person receiving your services does not have a permanent premises in Spain. Their obligations are clear, and you can report them for not meeting them.

Carlos Prieto Cid – Lawyer

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Tax obligations for owners of real estate in Spain

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Owners of real estate in Spain must pay tax on their properties regardless of their place of residence. In practice, resident and non-resident property owners pay the same taxes in Spain, although the names and collection mechanisms of these taxes differ.

A real estate property can generate earnings, either through renting or as a result of sale. Also, under tax law, just owning a property generates a notional income that is taxable. All these incomes have to be declared in Spain, and Spain is the competent state for collecting any tax due. This is according to all the double taxation treaties signed by Spain. These treaties follow the general OECD model under which income from real estate property can be collected in the country it is located in, regardless of the country of tax residence of the taxpayer.

In addition to paying any income tax due to the national Spanish tax agency, the property owner must also pay all other taxes due to other agencies. This includes, for instance, the municipal property tax collected each year by the local council. And, when you sell your property, the capital gains tax you also have to pay to the council.

Lastly, in Catalonia and some other autonomous communities, there is a further tax on an activity widespread among foreign investors in coastal properties: the short term leasing to tourists. The tax is a small amount due per night for every person staying in the property, which must be registered for tourist use with the local council.

Carlos Prieto Cid – Lawyer

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Tax Amnesty for Pensioners

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Reminder from the Spanish Tax Agency on the tax rules for foreign pensioners living in Spain.

In recent weeks, many recipients of foreign pensions residing in Spain have received letters from the Spanish tax authorities reminding them of the obligation to pay tax on their foreign pensions, which are no longer exempt following recent changes to the “Treaties for the Avoidance of Double Taxation”. The letter is as follows:

On becoming aware of the existence of taxpayers liable to pay income tax on undeclared overseas pensions, the Spanish Tax Agency has had to take control actions.

Given the socially vulnerable nature of the group affected, i.e., pensioners, the Sole Additional Provision to Spanish Law 26/2014 of 27 November (published in the BOE Official Gazette on 28 November) introduces two exceptional measures of which you, the pensioner, are informed so you may determine whether you can take advantage of them.

The first measure entails the waiver of all penalties, surcharges or interest arising from a regularisation, regardless of whether the regularisation results from action taken by the Tax Agency or on the taxpayer’s initiative.

The second measure, aimed at encouraging the voluntary regularisation of these cases, entails granting a special deadline of 30 June 2015, before which income tax declarations that correctly declare all the pensions received for all non-expired periods up until 1 January 2015 may be presented.

Presenting declarations before the deadline requires paying all tax due but not the payment of any penalties, interest or surcharges.

After this special deadline, all regularisation procedures will be subject to general tax rules without exception.

Carlos Prieto Cid – Lawyer

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The Spanish Tax Office has declared a tax amnesty for pensioners

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The Spanish government is granting a special deadline for income tax declarations to all foreign nationals who are resident in Spain, as well as to any Spanish pensioners who have returned to the country after emigrating. These persons can now pay the whole amount of tax owed to the tax authorities with any penalties or fines for late payment waived.

If you reside in Spain for more than 183 days in a year, you are automatically classed as a resident for tax purposes, and as a consequence your worldwide income must be taxed in Spain. This also includes your pension. If you are retired and you do not have presented a tax declaration in Spain yet, you have until the middle of next year to submit a declaration and pay the tax, free from any penalties or interest.

There are now minimum amounts below which no income tax needs to be declared. For 2013, this minimum annual income for foreign pensions stood normally at €11,200. This amount is irrespective of whether you want to be assessed on your own or together with your spouse. However, this does not apply to government pensions (for civil servants), as these must always be taxed in your country of origin.

The increasingly closer exchange of information and data between the various Eropean tax authorities had made the Spanish Treasury aware of how many foreign pensioners, and emigrants who have returned from abroad, do not pay tax at all on their foreign pensions here or at least do not do it according to the rules. Pensioners are often elder and have greater difficulties understanding the legal situation in Spain, as they have been living abroad for many years. On the other hand they generally do not have many assets. That is why the Spanish government has set a special deadline of 6 months, beginning on 01.01.2015 to give such persons an opportunity to clear their debts with the tax office by paying 100% of their tax spar­ing themselves any interest and penalties for late pay­ment.

Carlos Prieto Cid – Lawyer

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Setting up a business in Spain as a way to obtain a residence permit

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The conditions for non-EU foreign nationals who wish to set up a business in Spain and obtain a residence permit which includes permission to carry on an activity on their own account are a guarantee of the business owner’s solvency and the legality and viability of the business.

A residence permit for Spain (which also allows free movement within the Schengen area) can be obtained by setting up a business.  The legislation aims to prevent potential fraud by ensuring that the applicant for the residence permit with permission to carry on an activity on their own account is not planning to establish a dummy company, and that the business will generate jobs and contribute to the nation’s prosperity.

How can it be proved that the business has sufficient funds with which to implement the planned investment?  How high is the expected return on the investment?  How many jobs will be created?  Here, an opinion should be sought from a business association registered in Spain or an association for self-employed workers and freelancers.  The application for a residence permit with permission to carry on an activity on one’s own account, together with additional proof of the legality and viability of the business, must be submitted to the Spanish consulate in the respective country in which the applicant usually resides.  Only once the office approves the application will a visa be issued for travel to Spain and the establishment of a business.  For this reason, the process is usually undertaken in collaboration with Spanish partners, who will work on the setting-up of the business until a residence permit has been issued.

Carlos Prieto Cid – Lawyer

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Opening a business in Spain as a foreign citizen

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When setting up a business in Spain, EU citizens have to meet similar conditions to those required of Spaniards.  In contrast, other foreign nationals, such as Russian citizens, for example, are subject to a special procedure if they want to carry on a business activity in Spain.  In future, it is likely that this procedure will also apply to business start-ups by Swiss nationals.

Unlike employees of third parties, who could be seen as a threat by job-seekers, investors are always welcome.  Investors are both those who make use of their investments personally (a holiday home or retirement residence, for example), and those who invest as entrepreneurs in order to carry on a business activity on their own account.  However, when setting up a business in Spain, foreign entrepreneurs are not all subject to the same conditions.

A lot of dust has been kicked up by the news that a referendum was held in Switzerland in which it was decided to shortly make changes to the law to restrict immigration and the free movement of EU citizens.  One direct consequence of this restriction is that the agreement on free movement and free choice of residence within the Schengen area will have to be revised.  As always used to be the case, Swiss nationals will then no longer be able to settle in Spain and carry on a business without meeting the same conditions as other non-EU citizens, such as Russian citizens, for example.  In contrast, EU citizens from member states in the Schengen area can set up a business in Spain virtually unhindered.

Carlos Prieto Cid – Lawyer

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