Tax obligations for owners of real estate in Spain

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

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

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

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

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?

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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The donatio mortis causa

The death is not predictable, but in certain cases we should be aware of the end, for example in cases of high age or severe disease. In Catalonia the law gives us an almost unknown possibility of partitioning our heritage and foreseeing its costs in advance.

This method is called donation mortis causa and it has many advantages compared to a common donation. The donation mortis causa is a kind of donation which could always be used if the object of the donation is real estate in Catalonia. It has many advantages in comparison to a common donation or the regular heritage. But you have to keep certain rules to ensure its acceptance by authorities.

Mainly it is a donation where the transfer of property at first does not occur but it takes effect in the moment of the donator’s death. The Spanish common law (that is the civil law of the regions of Spain with no own law, such as Catalonia) doesn’t really regard it as a donation: it is simply considered parallel to a legacy. But in Catalonia there is an own legal instrument which admits the donatio mortis causa under the following conditions:

  • Free revocability for the donator, which also means that the transfer of property at first doesn’t occur.
  • Its ineffectiveness if the donee predeceases, which means that the expectation is ineffective if the donee dies before the donator. In this case the property remains at the donator without any limitations.

The most important advantage in comparison to the common donation is a fiscal one. In case of the common donation the tax becomes due in the moment of the property transfer. In case of a donatio mortis causa the due date is not before the death of the donator.  And, on the other hand, the common donation is liable to the gift tax. At this kind of tax there is no amount of exemption allowed. But the donatio mortis causa is treated by authorities in the same way as a legacy, which means that it is liable to the inheritance tax. Here we can take profit of the legally alllowed amount of tax exemption.

But there are even more advantages in comparison to other possibilities of property transfers in the occasion of death, especially the simplicity of handling. It is neither necessary to define the successor exactly, nor to constitute who has to pay out for a certain legacy nor has the efficacy of the testament to be confirmed. This is especially important in cases of property transfers in case of heritage by foreigners. Here the law of the foreign country is always applicable. This is a point where foreign authorities come into play and make things more complicated. With the donatio mortis causa we avoid this in the moment of the formation of the contract and also in the moment of the enforcement of the property transfer as well. The title of ownership is created according to the rules to the lifetime of the donator. And for the enforcement  of the property transfer only the death certificate is needed (and no other documents else).

Carlos Prieto Cid, Lawyer

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The reintroduction of Spanish Wealth Tax

A few months ago, US President Barack Obama announced to Congress: ”This is not class warfare, it’s math.” If the crisis leads to a fall in revenue for public authorities, spending must either be cut or taxes increased.

If we assume that governments cannot cut back on social services because the social rights they have achieved should not be touched due to the crisis, then new tax increases become necessary. Instead of raising existing taxes, the former Spanish government had preferred to try to maintain the level of revenue it needs by reintroducing a recently-abolished tax: the IMPUESTO DE PATRIMONIO, or Wealth Tax.  This tax was never actually abolished, although the full rate was indeed scrapped in 2009 with a 100% rebate. The government has therefore simply done away with this rebate in order to reintroduce Wealth Tax.

The tax applies from 18 September 2011, although the concession is scheduled to increase once more in 2013. This means that Wealth Tax declarations need only be submitted for the years 2011 and 2012 (due on 31 December each year). It is important to remember that non-residents are also obliged to pay this tax. Declarations must be submitted to the tax office each year together with the income tax declaration.

The most important changes to the rules on Wealth Tax introduced in the Real Decreto-ley 13/2011 are the following:

1. Tax allowance on residences: the maximum rate for tax exemptions on the value of the own residence (for residents) has been raised to €300,000 (previously €150,253.03).

2. General tax allowance: unless the autonomous communities rule otherwise, the general tax threshold is €700,000.-

Whether these new rules and the reintroduction of the tax will have any real impact or affect public authorities’ revenues is debatable. It appears that the Socialist Party intended to make political capital through the reintroduction of a ‘tax on the rich’ (elections took place in a short time after de tax reform and they were a spectacular failure for the Socialist Party anyway ), but the real impact of the tax’s reintroduction will not be able to solve the difficult situation surrounding the public finances.

Carlos Prieto Cid, Lawyer

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Income Tax for foreign property owners

Foreign nationals who are not registered for tax in Spain but own property in the country must submit a tax declaration for their income tax to the state tax office every year. This involves the so-called Impuesto de la Renta de No Residentes (Income Tax for Non-residents).

Many property owners do not understand why they must declare and pay tax in Spain even though they earn no income here because they only come here for holidays and therefore neither work nor are involved in any economic activities or receive interest from banks on financial investments. There is usually no rental income from property either. Despite this, in Spain (much like in other European countries), simply owning a property is regarded as income, even when the property is not let or leased out. The state tax system assumes that a profit is made from the property even if it is not rented out, it is not the own home or if the property is not dedicated to economic activity, which for non-residents can never be the case.

How is this fictitious return calculated? Spanish law stipulates that income earned from the simple possession of a property equates to a certain percentage of its cadastral value. This percentage is either 2% or 1.1%, depending on the year in which the Spanish Land Registry (or rather, the respective municipality), updated its property values. The Land Registry (Catastro) is a national register of properties, answerable to the Spanish tax office, which gives the authorities information about these properties (owners, size, use, year of construction, boundaries, etc.). The information stored at the Land Registry can be submitted by Land Registry officials themselves, the municipalities or the owners of the property. One of the most important pieces of information on every property is in fact the cadastral value. This value is dependent on many other objective details and here on the coast can generally be a lot lower than the market price that we would set for the property.

Despite this, this objective value is decisive for almost all authorities and provides the basis for many taxes, including income tax for non-residents. This percentage of the cadastral value is therefore the basis for income tax for non-residents, which is currently 24%. Every year, the owners must pay the resulting sum by 31 December the following year. This means that foreigners who own a property in 2011 must submit their tax declaration to the tax office and pay the tax by 31 December, 2012. In 2008, the tax office changed the forms for this declaration, which caused problems for many foreigners who did not hear about this amendment in time. Until then, Form 214 was used, but now Form 210 must be completed. The change was a consequence of recent tax reforms, which saw the abolition of property tax. However, the tax for non-residents was retained because it is regarded as a form of income tax rather than a property tax.

Otherwise, for non-residents there are only the local rates, the so-called IBI, which are paid as a municipal tax that every municipality demands from property owners each year and which is calculated and demanded by the local authority itself.

Carlos Prieto Cid, Lawyer

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Save taxes by planning your inheritance

After years giving advice to foreign residents with property in Spain, we can offer our experience to those with a little forethought who want to save their loved ones a lot of problems and, above all, a lot of money, by planning the inheritance. A good tax planning can significantly reduce expenses and taxes payable by the heirs. This is true in all cases, but especially when dealing with a legacy of non-residents, that is, assets in Spain who are or have to be registered to the name of people without tax residence.

If you have property in Spain (real estate or personal property, such as deposits in banks or cars) you must expect that your descendants or the people you have appointed in a will as heirs, will have to arrange various legalizations after your death to officially become ownerships of the inherited assets (so that the heirs of these estates can actually take profit of them, that is, sell them or obtain a mortgage). Each of these instruments is taxed. If we want to avoid problems to our heirs, we can plan a few things so that our heirs can simplify everything at the moment of the acceptance of inheritance.

A possibility is to try to transfer the property during our life to save taxes: but we must be sure which taxes are also to be paid in the case of a free transfer or a donation of real estate, to avoid that this transfer of ownership in lifetime does result more expensive than the acceptance of inheritance in case of death. In a purchase contract, there is another tax, but it can have also as a result a very significant amount. As a rule, in case of non-residents who have purchased the property many years ago, the sales tax can be cheaper than the gift or inheritance, but each case must be examined separately.

For non-residents it is a typical procedure to pass the net property to the younger during the life of the older ones. We recommend to formalize a transfer of bare ownership, because despite the age of the parents it is a bit cheaper anyway than to sell the whole property (nuda proprietas or bare ownership plus usufruct) and much cheaper than a gift or an inheritance of the object (pay attention: we are talking exclusively about non-resident: for the resident, thanks to the recent tax reforms, the inheritance is seen as the best mode of transmission as a rule). If we formalize a sale of the bare ownership to the eventual heir, the taxable return for the transfer (that means the purchase price declared in the deed), is the value of this bare ownership, actually the result of the full value of the property minus the value of the usufruct, because the older ones just maintain this usufruct on and what the purchaser gets then is only the bare ownership (ownership without usufruct). We save taxes because the value of the usufruct is deducted, although this value is usually very low due to the age. The usufruct, which is not transferred in this moment, can be deleted after the death of the parents without tax costs.

In any case, it is highly recommended to get advice from a lawyer, as only he can provide proper advice and legal assistance when translating the will of the parties in the legal and technical language, formalizing the definitive agreements, preparing the deed of the notary and foreseeing the fiscal implications of the business. We want to reiterate that the role of lawyer and notary in Spain is totally disconnected (unlike in other countries). Here in Spain, the notary must never represent the interests of a party, even consultation is not allowed. He is only one official, who certifies the businesses that are already negotiated, accepted and formalized and who controls that all required taxes are properly paid by the parties. For this very reason, the involvement of a lawyer is so important, because he represents only your interests and gives you independent advice.

Carlos Prieto Cid, Lawyer

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