Tag Archives: tax law

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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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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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 because of sale. Also, under tax law, just owning a property generates a notional income that is taxable. All these incomes must 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 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 should 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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The red tape involved in letting a holiday home in Catalonia

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Renting out a coastal property to holidaymakers in summer has become quite complicated, although most foreigners are unaware of the many obligations involved.

In recent years, the Catalan regulations on letting tourist accommodation has become particularly strict. The main political reason for this toughening up of the legislation is a cracking down on tax evasion as many letters of holiday accommodation do not declare their rental earnings in Spain (which is required by law, regardless of whether the owner of the property is a resident in Spain for tax purposes).

However, there is an even more compelling reason for the Catalan government to want to control access to the holiday accommodation market. On the coast and in the old parts of the larger cities, particularly Barcelona, tourist flats have become a social problem, owing to the not always civil behaviour of the holidaymakers (who change from week to week), and also an economic problem, owing to the unfair competition such accommodation represents to the hotel sector.

Before you can let your property to tourists, you must register it in the local council’s register of tourist accommodation. Not doing so makes you liable for some very stiff fines (even for just advertising the accommodation online without anyone actually coming to stay). To be listed in the register, you need to certify that the dwelling complies with certain conditions of habitability and energy efficiency. You also need to register the property with the tax authorities so the corresponding tourist tax (paid per night by each tourist) and income tax can be collected.

Registering a property as tourist accommodation can result in unexpected complications (which may even make it impossible to let the property). If you have a flat or house you want to let to tourists, we offer services to assist you in registering the property with the local council, drafting the letting agreements and ensuring compliance with all the official and tax obligations for total peace of mind.

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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Spain condemned to end the tax discrimination in the inheritance of non-residents

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On November 16, 2011 we published an article on this blog about the accusation presented by the European Commission to the European Court against the Kingdom of Spain of discrimination against non-resident at the time of inheritance. After a long process, the judges in Luxembourg finally gave the reason to the Commission.

On September 3, 2014 the Court of the European Union ruled in the case C127/12, concerning an appeal of the European Commission against the Kingdom of Spain for not complying with the founding treaties of the European Union. In its statement, the Commission requested the Court to declare the breach of obligations of the Kingdom of Spain as European partner because of the introduction of differences in the tax on inheritance and in the gift tax, depending on the place of residence of the participants, that is, whether or not they are resident in Spain. In practice, upon the acceptance of the inheritance or donation in Spain, non-residents generally pay much higher taxes than residents.

This requirement of the European Commission was the end result of a process initiated in 2007, in which the European government had already asked Spain to change its laws concerning the taxation of the gift or inheritance. A little change was made, but it did not satisfy the Commission of the European Union, who filed a lawsuit in the Court of the European Union against Spain. The state attempted to defend itself, but the court concluded that the state law in the application of inheritance and gift tax discriminates against non-residents, and this discrimination is an affront to the freedom of movement of capital, one of the fundamental freedoms, which should save the Union.

Carlos Prieto Cid – Lawyer

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New campaign of the Tax Agency to demand the payment of income tax to non-residents

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Even if they are fiscally non-resident, owners of real estate in Spain must file a separate income tax return each year and pay the so-called income tax for non-residents (IRNR) for revenues earned from the property .

The Spanish state tax authorities have not been very demanding until now regarding the payment of income tax to fiscally non-resident property owners. Many homeowners are not aware of the existence of this tax liability and can not understand why they have to file a tax return and pay this tax in Spain, despite the fact that they are not getting any income. They come to Spain just to spend their holidays: they do not work, they do not receive interest income from cash deposits in the bank, they do not rent their property. However, the mere possession of a property in Spain, as in other European countries, is considered by the law as income, even if the property is not rented. State tax rules require that the owner gets benefit of his own real estate anyway, even though these objects are not leased. The only exceptions are the cases in which the property is one’s own domicile or if the property is devoted to economic activity. Both cases can never happen with non-residents.

There is another tax, the municipal tax on property ownership, the so-called IBI (Spanish Impuesto Sobre Bienes Inmuebles), the payment of which the local municipality requires to property owners each year, and which is calculated and declared by the administration itself. In contrast, in the case of the state income tax for non-residents – IRNR-, the tax inspection is not mandated to prepare tax returns for the non-residents, but it is the taxpayer himself who is required to provide an annual tax return, and calculate and pay the property taxes on its own initiative.

This month, many homeowners who spend their holidays in their own apartments or private homes in Spain, received a letter from the Spanish tax authorities, reminding of the existence of the tax on the income of non-residents and the obligationy of paying it. Earlier, the state tax agency was very generous regarding this tax. Now, however, given that the economic situation is so bad, it appears that IRS has become stricter, requiring submission of tax returns and payment of this tax by all non-residents who own property in Spain.

Carlos Prieto Cid – Lawyer

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The risk in buying inherited real estate

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Buying real estate is always an important decision because it involves a significant investment. Thus, you should always think about the consequences and know exactly what you risk in your case.

Each case has its own set of problems. Today I want to consider a very specific situation: the children or the surviving spouse inherit a house or an apartment, where the deceased person had his or her permanent residence. During the signing of the necessary notary documents, to reduce the high Spanish inheritance tax, heirs are happy to listen to the proposal for including a declaration in the document of acceptance of the inheritance saying that they have no intention of selling the property in the next five years: this way, it will save quite a large sum for payment of the tax or even pay nothing, and the instrument of acceptance of the inheritance may also be registered in the land registry without problems.

As time passes, the heirs forget that at the time of the acceptance of the inheritance they have signed this declaration to take profit of this exemption from the tax, which was notarized, and then someone appears offering  a very reasonable price for the property (it has happened often so in the golden days, long before the crisis began). Then the heirs decide to sell, and therefore the buyer acquires the property and agrees to pay a high price. It can even be possible that a bank finances the operation with the warranty that the property the buyer is going to acquire is theoretically free from encumbrances. But this is not quite true: there are responsibilities in respect of the property, which are recorded in the register of deeds but of which very often no one thinks (nor the buyer who acquires, nor the notary who certifies the transaction, neither the bank who risks his money): State tax authorities have the right to review the tax declarations filed in each transfer of ownership, and if they do not agree with the calculation and the amount paid at the time of the acquirement, they can unilaterally make a new calculation of the tax, having the warranty, that the property is encumbered in any case to cover potential liabilities to tax authorities, regardless of who nowadays the owner is.

This would mean in our example that the tax authorities could present to the buyer a nasty surprise if it turned out that the conditions for exemption at the time of acquisition of the property by inheritance have not been met: as the real estate acquired by inheritance using the tax deduction should now be charged with a liability to which the current owner has nothing to do. And the tax, which is calculated by the tax authorities unilaterally to be paid by the children or the spouse of the deceased person, the former owners of the property, may represent a high percentage of its value.

That is why we always recommend not signing any contract or pre-contract of sale without first checking with the lawyer the problems that may arise in each case. This case is just one example of the many troubles, lying in wait for buyers at the time of signing the contract without diligence. However, there are many other cases, which include a big risk. The tax authorities are currently in need of resources due to the crisis and have at their disposal a large number of idle officials, who are currently engaged in audits of all types of legal transactions in the last four years (inheritance, sale, donation, etc.), looking for an excuse to be able to submit payments of additional taxes that are still enforceable, and require the additional appropriate amount.

Carlos Prieto Cid – Lawyer

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The European tax authorities strengthen their cooperation

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Over the years, we have seen from our office how the Spanish tax office has improved its channels of cooperation with other European tax agencies to the extent that they now share all kinds of information about their respective taxpayers.

This cooperation was limited so far to the prosecution of real estate registered in public inventories in Spain under the name of taxpayers of other countries who had debts in the stage of execution owed to their corresponding state treasury. The Spanish tax office acted as a debt collector to recover the foreign debt, which remained unpaid by the taxpayer, being resident or not, through an action against his property in Spain.

Now, cooperation between tax agencies is going ahead and is being developed in the framework of management or control processes initiated on the basis of data and indicators provided by foreign tax authorities.

The most common case is the experience of foreign retirees living in Spain, with rents, which are in principle tax free, but who are obligated to declare them due to the progressivity of taxes on personal income. Double taxation agreements between Spain and other countries declare as exempted from payment of tax on personal income in the State of residence the pensions paid from public funds of the other State. Starting from this premise, many foreign pensioners living in Spain considered unnecessary to comply with the obligation to provide an annual declaration of personal income. However, many of these retirees receive income from the rental of real estate or bank interests, which must be declared to the Spanish tax authorities. In addition, most of these retirees supplement their income paid out of funds created by the state with other pensions paid from private funds, which are generally much higher than the amount that is considered exempt. Due to the progressivity of the tax on personal income, the percentage that would correspond to the total income earned by a resident in Spain is the one to be applied to calculate the tax on these other private rents which are not exempted. As a result, the final amount of tax paid to the fiscal authorities may be much higher.

In these difficult times, the Spanish state has resorted to claiming the difference between the amount really paid and the ones that should have been paid. It also requires the respondents to perform their official duties. And all this thanks to the valuable cooperation it receives from foreign fiscal authorities, who once benefited from the pursuit of real estate in Spain to their countrymen.

Carlos Prieto Cid – Lawyer

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If I rent my holiday house in Spain, what kind of taxes should I pay?

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Most tourists who visit Spain choose for their accommodation a holiday flat or a holiday home. If we own a property in Spain and we want to rent it during the touristic season to others, we must know what taxes we are required to pay to the Spanish public finances.

The most common situation is that we rent a holiday home for a period of time not longer than three months. In this case, the income from the leasing of this property will always be considered property income and must be included in the annual declaration of our income tax. The expenses necessary to maintain the holiday home and for its promotion in the touristic market will be deductible from this declared revenues, but only if these expenses are billed in the time period in which the holiday house or apartment is leased to a third party. Nevertheless, we must not forget that even in periods when the holiday homes are not rented, they generate anyway revenues that must be declared according to the income tax regulations. That is because the Spanish tax laws regard as property income the mere possession of a property that is not used as regular residence, also when it is not leased. This fictitious revenue is the amount that results from applying a small percentage to the cadaster value of the property, a target value that established by public finance authorities under certain valuation rules. During these periods of time when the property is not rented, no deduction of expenses allowed.

Presenting an annual statement of the income tax of individuals to the Spanish Tax Office is mandatory for all owners of property in Spain, if this dwelling is not officially considered the regular residence. This means that all owners of a holiday home in Spain, whether resident or non-resident, whether or not renting it, are anyway required to file annually with this statement. Many foreign owners are not aware of this obligation. They think everything is solved, when paying the community tax (called IBI) and they oft forget to pay this compulsory income tax.
Despite all this, holiday house renting could be considered an economic activity and would have to be declared as such according to the income tax regulations when entered into under the following circumstances:

  •   There is at least one room dedicated exclusively for the management of the activity.
  •   There is at one full-time person hired to work in the development of the activity.

Everything we have said refers to income tax of individuals. With regard to the added value tax, the general rule is that renting of holiday home is considered tax-exempt as long as the landlord is not required to provide any of the services of the hotel industry, such as cleaning the dwelling and changing the bed linen and towels at least once a week. However, we must clarify that although we rent the house only for one week, the law does not consider as complementary services of the hotel industry both cleaning the inside of the apartment and changing its bed linen and towels at the time of the check-in and the check-out of the period hired by each tenant, as well as cleaning the common areas of the building and the technical assistance services for repairs and maintenance of plumbing, electrical, glass, blinds, locks and appliances.

Carlos Prieto Cid, Lawyer

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