Spain: Taxation of Real Property in Spain

Last Updated: 13 September 2004
Article by Pablo Baschwitz

1. Introduction.

Over the last few years, the Spanish real estate market has been very dynamic. Among other reasons, foreign investors have made important investments in the acquisition of real estate in Spain, both in housing and commercial premises. Analysts believe that this level of investment will continue over the next few years. Detailed below are the main issues from a Spanish tax point of view that non-residents, both private individuals and companies, should bear in mind when investing in Spanish real estate.

2. Spanish Taxation.

Real estate in Spain is subject to both direct taxation, in the form of tax on profits earned, and indirect taxation, levied on the operations carried out thereon.

From the Spanish tax point of view, there are two kinds of taxpayers:

  • Spanish residents (companies or individuals) subject to taxation in Spain on their worldwide income. This means, for example, that if a US citizen becomes a Spanish resident, then he/ she will be obliged to pay tax in Spain on his/ her worldwide income, regardless of (i) the type of income, or (ii) where the income was generated. There is, however, an exception in that, since January 1, 2004, employees transferred to work in Spain can now opt to pay tax in Spain as non-residents for the first five years, so long as they have not been resident in Spain during the ten years prior to their transfer and that such transfer derives from an employment contract.
  • Non-residents are subject to taxation in Spain only on income obtained in Spain.

3. Taxation of Real Estate Located in Spain and Owned by Non-Resident Companies or Individuals.

Below is a summary of the various taxes that are currently in effect and that are applicable to non-residents, either private individuals or companies, that own real estate in Spain.

3.1. Corporate Income Tax

Non-resident companies without a permanent establishment in Spain will be taxed at the fixed rate of 25% for revenues earned by renting rural or urban real estate located in Spain.

In general, capital gains arising from the transfer of real estate are taxed at the rate of 35%. Certain updating coefficients are applied to the acquisition value depending on the number of years that have elapsed. Should the owner of the real estate in Spain be a State, tax payment exemption may be requested in Spain from the Spanish Ministry of Foreign Affairs.

Usually, the Double Taxation Treaties signed by Spain allow the Spanish Authorities to tax in Spain both the capital gains and the income obtained by non-residents from the sale/use of real estate located in Spain.

Resident and non-resident entities that own real estate in Spain will not be subject to Net Worth Tax.

3.2. Special Property Tax for Non- Resident Entities Owning Real Estate in Spain

Non-resident entities that own or hold real estate in Spain, whether or not it is rented, pay taxes in Spain on such real estate.

The tax base is the "Valor Catastral" (value of the property as recorded in the municipal records, which is normally less than market value, broadly equivalent to the English rateable value), and the fixed tax rate is 3%. Tax is due on December 31 of each year.

States, public institutions, international organisations, entities quoted on officially recognised stock exchanges, non-profit entities and entities carrying out business activities on a regular basis, other than the leasing of real estate, are exempted from this tax.

Likewise, entities residing in a country that has signed a Double Taxation Treaty with Spain that includes a clause for the exchange of information may be exempted from this tax if they file a tax return in Spain listing (i) the real estate located in Spanish territory that they own, and (ii) the individuals who ultimately control the capital of the company, who must also be residents of a country that has signed a Double Taxation Treaty with Spain that includes a clause for the exchange of information.

Special Property Tax for non-resident entities owning real estate in Spain shall always be applicable to entities residing in a tax haven.

3.3. Individual Income Tax

Non-resident individuals that own urban real estate that is not rented in Spain must include in their tax base each year certain presumed revenues, which are calculated as an invariable 2% of the "Valor Catastral." These earnings are taxed at a fixed rate of 25%. If the "Valor Catastral" has been updated by the municipal authorities, the annual revenue will be calculated as an invariable 1.1% of the updated "Valor Catastral."

When rural or urban real estate is rented by an individual to third parties, the rent obtained will be taxed at the rate of 25%. The tax return must be filed for every rent received within a month of the date on which the owner can request payment of the rent.

3.4. Net Worth Tax

Net Worth Tax is only applicable in Spain to individuals and is levied on the value of assets situated in Spain, unless exempted by a Double Taxation Treaty. The tax rate is progressive and varies from 0.20% to 2.50%. Property assets must be valued at the highest of the following three values: "Valor Catastral," acquisition value or the value estimated by the tax authorities for other taxes.

3.5. Tax on Immovable Property

This municipal tax is levied annually on rural and urban real estate. The taxpayer is the property owner (an individual or a company, resident or not). The tax is due on January 1 of each year. The ordinary rate is 0.40% for urban zones and 0.30% for rural zones. However, municipalities have the right to increase such rates in accordance with population density and other relevant factors (provincial capitals, public transport, other municipal services, etc.).

4. Taxation of the Transfer of Real Estate.

4.1. Valued-Added Tax (VAT) and Transfer Tax

The sale of new and refurbished buildings for housing purposes is subject to VAT at the rate of 7% and Stamp Duty, in general, at the rate of 1%. The sale of business premises and offices is subject to VAT at the rate of 16% and Stamp Duty at the rate of 1%.

The second or subsequent transfers of buildings are, in principle, exempt from VAT and, consequently, subject to Transfer Tax at the rate of 6% or 7% (depending on where the real estate is located) on the market value of the real estate. The sale of more than 50% of the shares of a Spanish real estate company is subject, in principle, to Transfer Tax at a rate of 6% or 7%.

4.2. Withholding Tax on the Transfer of Real Estate by Non-Residents

In general, a party acquiring real estate located in Spain, whether or not such party is a resident of Spain, where the selling party is a non-resident (individual or company), will be obliged to withhold and pay 5% of the agreed price as a withholding on account of Individual Income Tax or Corporate Income Tax (capital gains) for which the nonresident seller is liable.

Exception exists to the obligation to make the withholding when, for example, the seller is an individual and has owned the property since before 1986.

In addition, the withholding tax is not applicable in the case of contribution of real estate to Spanish companies.

The non-resident must subsequently file the definitive tax return for the capital gain or loss resulting from the sale of the real estate, deducting the amount withheld by the acquiring party from the payable tax and, as the case may be, applying for a refund of any excess that was withheld.

4.3. Inheritance and Gift Tax

Unless a Double Taxation Treaty exists to provide otherwise, a non-resident individual who inherits real estate located in Spain will, in principle, be taxed according to the scale for Inheritance Tax, which is as follows in "common territory" (Spanish territory, excluding the Basque Country and Navarre Region): sliding scale from 7.65% to 34% (in excess of •797,555.08) and application of a multiplier rate depending on the degree of kinship.

4.4. Tax on the Increase in the Value of Land

This is a municipal tax on the transfer of urban land under any title (onerous or gifts). The tax is payable upon the deemed increase in the value of the land that forms part of the immovable property in question and is borne and paid by the transferor within 30 days of the day of transfer.

The deemed increase is calculated by taking the value of the land that appears in the municipal records at the time of sale and applying to this figure a percentage, fixed by the municipality, which varies depending upon the number of complete years that the land has been held by the transferor.

5. Alternatives for Acquiring Real Estate in Spain.

Having summarised the taxation system for non-residents investing in real estate situated in Spain, we will now explain the various alternatives for investing in Spanish property and the advantages and disadvantages of each.

5.1. Acquisition by Non-Resident Individuals

The first alternative consists of the investment by a non-resident individual in real estate situated in Spain.

Annual maintenance costs of the real estate: • The non-resident owner must pay Individual Income Tax annually at the fixed rate of 25% on either 2% or 1.1% of the "Valor Catastral." As explained above, as owners of real estate in Spain, individuals must include a presumed income each year, regardless of whether they make use of the property or not.

  • The non-resident individual must also pay Net Worth Tax annually.
  • Lastly, the non-resident must pay the Tax on Immovable Property. This Tax will not affect tax planning, since it must be paid in any case by the owner of the real estate (nonresident or resident individuals and companies), unless any of the tax exemptions established by Law are applicable.
  • Spanish Inheritance Tax is payable by any person who inherits or receives by way of gift any assets situated in Spain. The advantage of this option is that it is the most simple and direct. However, it has important disadvantages, such as the obligation to pay Individual Income Tax and the Net Worth Tax, which are only applicable to individuals, as well as Inheritance Tax.

5.2. Acquisition by Non-Resident Companies

In the case of a non-resident company owning real estate in Spain, this company need not, as in the previous case, pay Net Worth Tax and Individual Income Tax. However, these companies, if exemption is not applicable, must pay each year the special tax for non-resident companies owning real estate in Spain at the rate of 3% of the "Valor Catastral" of the real estate. If the "Valor Catastral" of the real estate has already been updated by the local authorities, this tax can total a significant amount.

The Tax on Immovable Property explained above is also applicable to non-resident companies.

In the event of the transfer of real estate by a non-resident company, the purchaser, as in the previous case, must withhold 5% of the purchase price.

The main advantage of the investment in Spanish real estate through a non-resident company is that Individual Income Tax need not be paid, nor is Net Worth Tax or Inheritance Tax applicable to such companies. Therefore, should the owner of the company die, heirs would not be liable for Inheritance Tax in Spain.

The disadvantage is that the non-resident company must pay the Special Tax for nonresident companies owning real estate in Spain if exemption is not applicable.

5.3. Acquisition via a Spanish Company

This last alternative consists of the incorporation of a Spanish company by a nonresident company, which will be the owner of the real estate situated in Spain.

This alternative implies a higher initial cost, since it will be necessary to pay incorporation costs and, subsequently, the annual maintenance costs of the Spanish company. However, the Spanish company will not have to pay in any case, (i) the Special Tax for non-resident companies owning real estate in Spain, (ii) Net Worth Tax, or (iii) Individual Income Tax. Additionally, Inheritance Tax would not be applicable. This can imply significant tax savings, which would have to be compared with the incorporation and maintenance costs of the company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions