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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Tax Amnesty for Pensioners

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

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

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

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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Further increase in the final costs of the transfer of property in Spain

The costs associated with the transfer of ownership may affect the decisions of both parties, buyer and seller, as the net price that the seller receives after deducting expenses and taxes may be much less than expected in the beginning, and the final price to the buyer by adding costs and taxes may be much higher than previously thought.

The parties of a contract for the transfer of property (usually a purchase contract) can decide freely about these matters. However, we are going to analyze now what the laws say when the parties do not achieve an agreement among themselves:

  • The municipality tax on the added value of the property sold, in the case of urban land, is one of the costs to be paid by the sellers. This is a percentage of the difference between the declared value at the time of purchase and the estimated value of the property at the time of acquiring it by the seller.
  • The income tax on the increase in value is also an expense of sellers. If the seller is non-resident, the buyer must submit a deposit (3% of the price) as an insurance tax directly to the tax office. For this reason, this amount is usually subtracted from the purchase price. Subsequently, we have to calculate the payable tax, which also consists of a percentage of the difference between the declared value at the time of acquisition and declared value of the property at the time of sale.
  • The tax on the transfer of property is the buyer’s responsibility. The tax has been raised again in Catalonia and other regions of Spain, and now the buyer has to pay 10 % of the selling price for this concept.
  • The account of the notary (exclusively for the purchase contract) is according to the law at the expense of buyers, unless the parties agree otherwise. The role of the notary in Spain (unlike other countries) is only a formalization, converting the final contract in a public document. This contract has been issued in advance by the parties with the assistance of a lawyer. The notarization of the contract of sale in accordance with Spanish law is not absolutely necessary, but it is very appropriate, because a contract that is not contained in a public document cannot be registered in the registry of property. And such recordation of the change in ownership is not only a guarantee for the buyer, but also a prerequisite when the buyer has to finance the price with a mortgage.
  • What we have just commented justifies as well that the cost of recording the change in ownership in the registry of property has to be paid by the buyer.
  • The costs of preparing the documents to be submitted along with the case, is to be paid by the seller (these documents are normally processed or checked by lawyers). The cost of a lawyer could be common to both parties, as well as the lawyer provides the following services:
    • To provide consulting and legal assistance during the whole process of transfer of ownership.
    • To translate the will of the parties to the legal and technical language.
    • To make a final agreement of sale and prepare it to be notarized by a notary.
    • To foresee the tax consequences of the transaction for both parties and to prepare and submit formally and in time the tax returns in the most convenient manner.

But it is always better for the parties to agree in advance (even in an oral form) the main terms and conditions of the contract, so that the lawyer is able to represent the interests of both parties without any kind of conflict, simply because he develops the sales agreement already adopted by the parties.

Carlos Prieto Cid – Lawyer

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Residents in Spain are required to declare their assets abroad

Spanish Royal Decree 1558/ 2012, published on 15 November 2012 introduces new reporting requirements for taxpayers residing in Spain: they should declare to the Spanish State tax authority rights and property, such as real estate, bank accounts, stocks, bonds and insurances, held or managed abroad.

This statement should be made exclusively by means of telematics through the Internet, transmitting it with an electronic signature produced when selecting a personal certificate installed in advance in the browser for this purpose. Application deadline is from 1st January to 31st March of the year following that to which the information relates, although the declaration for 2012 will take place during March and April 2013.

The information to be reported to the tax authorities on accounts in financial institutions located abroad includes the following items:
1. Company name or full name of the bank or savings bank and location
2. Full identification of accounts
3. Date of opening or cancellation, or, where appropriate, date of issuance and withdrawal of the permit leading to the liability of the concerned reporter.
4. And, logically, the balance of the accounts at 31 December, and the average balance for the last quarter of the year.

Anyway, no one is obliged to report on the status of the account, if the final balance on 31st December does not exceed, in total, EUR 50.000. The submission of this declaration in the following years will be only required when either of the joint balances of the accounts (the one at 31st December or the average one of the last quarter of the year) experiences an increase exceeding 20.000 euros.

A similar provision is established when the foreign assets are such as securities, stocks, mutual funds, life insurances or disability insurances and temporary or lifelong rents.

For real property located abroad, the information statement will contain the following data:
a. Identification of the property with a brief specification of its typology, as  will be defined by a future order of the competent Ministry.
b. Location of the real estate: country or territory in which it is situated, city, street and number.
c. Date of acquisition.
d. Cost of acquisition.

In the case of timesharing contracts or similar arrangements and in case of usufruct rights the reporter should also indicate the value of the property on the 31st December. The applicable quantitative liability limits are the same as in the previous cases.
This obligation to declare assets is accompanied by a closer cooperation and a increased mutual assistance between tax authorities. We are going to discuss about that in a future article.

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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New legal requirements for holiday homes

Our costs welcome millions of visitors during each season. Not all of them are owners of an apartment or a property or stay in a hotel. The majority of them decide to rent a holiday home during the stay. A new legislation fights against the black market on this sector and wants to guarantee the maintenance of our touristic brand.

The new legislation addresses to the touristic sector not (like in the past and without any great success) to the housing sector itself. This law considers a “vivienda de uso vacacional” those properties that are conceded by the owner, directly or indirectly, to other persons in exchange of a consideration. Because of this, every accommodation must have a “cédula de habitabilidad” and ensure that there is enough furniture and equipment according to the number of offered places for visitors. The “cédula de habitabilidad“ is a proof of flat’s habitability which is prepared by the architect and has to be proposed at local housing authority.

How to convert a house or an apartment into a „vivienda de uso vacacional“? The law simplifies this procedure by using the so-called „régimen de comunicación previa“. Hereby it is only necessary to display the intention to rent the flat at the local administration and without any delay it could be started with renting. In this display the owner declares the responsibility to ensure the necessary amount of above-named equipment. He also needs, besides the identity card, the „cédula de habitabilidad“, a confirmation of energy supply and an insurance contract with an adequate coverage.

In this point the municipality is getting involved. This means that it is possible that the community charges a certain fee which could be established in the financial regulation. It would be desirable that administration wouldn’t take advantage of this to generate new revenue. The law intends to secure the quality of the offered holiday homes and it doesn’t want to increase costs which could have the opposite effect namely a promotion of shadow economy. The success of this law depends on an easy handling without further costs as well as on a resolute control.

A holiday homes status as a “vivienda de uso vacacional” means that it could not be turned into a main or secondary residence. The owner has to register guests’ personal data and, in accordance to local security service, send them to the central administration of the police. The stay in a holiday home with this status could not last longer than three months.

Another question that should be answered is that it is not allowed to split the holiday homes. Some owners of larger estates usually rent single rooms to different persons. Or in some cases there are different segregated fully furnished apartments. In these case the law states that rent is only possible if there is an own „cédula de habitabilidad“ for each lodging. If there is none, the „régimen de apartamentos turisticos“ is applicable. For this it is necessary to show a reception with at least 10 square meters. Furthermore the minimum standards for hotels like weakly cleaning are to be maintained.

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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