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NEW TAXATION REFORMS IN SPAIN

 

 

Recent changes to the Spanish Taxation System have brought about substantial benefits for the non resident investor…

 

Last January 2007 two important bills came into effect in Spain:

 

The new Income Tax Act and

The Tax Fraud Prevention Act

 

Both of which affect non-residents owning or intending to purchase property in Spain.

 

The most significant change resulting from the Income Tax Act is the one affecting the Capital Gains Tax which has been substantially reduced from 35% to 18%. This change has put an end to previous practices by which non resident taxpayers were expected to pay a much higher rate than resident tax payers. The new Tax Act eliminates this difference by applying the same Capital Gains tax rates to both of them. Therefore, Capital Gains Tax is charged at 18% irrespective of the residency status of the owner and also of the period of ownership.

 

Among other important changes in the Law is the withholding tax that a property buyer must pay to the Tax Office on account of the potential Capital Gains Tax liability of a non-resident seller. This has also been reduced from 5% of the purchase price to 3% - a reduction that is in line with the equivalent reduction for the Capital Gains Tax.

Taxation on rental income has also dropped from 25% to 24% calculated on the gross amount received.

 

The new Income Tax also eliminates the previous existing system regulating Asset Holding Companies. These were companies owned by at least one individual with most of their assets not affected by economic activities. Letting a property was not considered an economic activity unless the Company had an employee and premises used for operating the business. The result was that any non resident owner of real estate in this type of Company was able to benefit from the same Capital Gains Tax rate as individual residents if assets were disposed of by the company after one year. 

Under the current regime, profit made by small companies (with a net turnover under €8,000,000) will be taxed 25% up to €120,202 of profits (previously 30%) and the excess will be taxed at 30% (previously 35%).

A transition period will allow owners to acquire the property in their own names. The payment of Stamp Duty will be exempted during this period and the Capital Gains Tax and Plusvalía will be deferred up to the moment the individual sells the property in the future.

 

The Tax Fraud Prevention Act represents the Spanish Government’s attempt to fight against money laundering through real estate transactions and to prevent the use of utility contracts as a means of gaining more control over the use of a property.

The new Law makes it obligatory to include in the Public Deed important information about the people involved in purchasing a property such as: the Fiscal Identification Number (NIF or NIE for non residents) and the means of payment.

Similarly, in order to subscribe to basic utilities such as water, electricity, etc., individuals will have to provide the “Referencia Catastral” (property reference number in “the Catastro” which is a department of the local Tax Office). This procedure will also allow the Spanish Tax Office to track property owners that are not declaring rental income from their property.

 

In Summary....

 

The considerable reduction of the Capital Gains Tax and withholding tax for non residents represents an important incentive for foreign investors who can now benefit from a relatively low tax burden. Besides boosting the property market this new legislation will also prevent tax fraud and facilitate real estate transactions.