Abstract This article deals with the cross-border tax issues resulting from (i) the purchase of real estate, (ii) the holding of this real estate and its renting out to lessees, and (iii) a sale of the real estate at some point in time in the future, as well as (iv) gratuitous transfers through gifts or by way of death, and all of this under the tax laws of Spain. The real estate may be purchased directly or indirectly through the acquisition of shares in a local company holding the real estate. The purchaser of the real estate may be a non-resident company or a non-resident individual. Introduction The four combinations mentioned in the Abstract above may be depicted graphically as on page 40 of this issue of Trusts & Trustees, in the article ‘Cross-Border Planning For Real Estate: Austria’ by Niklas Schmidt. Direct acquisition Real estate transfer tax, value-added tax, and stamp duty A transfer of Spanish real estate is subject to either real estate transfer tax (Impuesto sobre Transmisiones Patrimoniales)1 or value-added tax (Impuesto sobre el Valor Añadido).2 The transfer of buildings by entrepreneurs (empresarios o profesionales) is subject to value-added tax.3 First transfers are subject to value-added tax, while second transfers are exempt.4 The general value-added tax rate is 21 per cent.5 However, the first transfer of buildings is subject to a reduced value-added tax rate of 10 per cent.6 A second transfer of real estate would be exempt from value-added tax, as mentioned, but subject to real estate transfer tax.7 The buyer is responsible for paying real estate transfer tax,8 which is charged on the value of the real estate acquired.9 The tax rate depends on the region where the property is located and it may vary from a rate of 6% in the Madrid Region to a rate of 11% in Cataluña. The buyer must file the transfer tax return (currently Form 600) and pay the tax within a month from the date the purchase deed is signed.10 A first transfer of a Spanish property is also subject to stamp duty (Actos Jurídicos Documentados), calculated on the value of the real estate.11 The rate depends on the region where the property is located. A second transfer, which is subject to real estate transfer tax, would not be subject to stamp duty.12 Additionally, stamp duty is charged on officially documented acts formalized in Spain through a notary public (eg a public deed documenting a property transfer, whether first or second transfer).13 The buyer pays this tax,14 which is usually insignificant (EU 0.15/EUR 0.30 per stamped sheet of paper).15 Withholding obligation on non-resident seller If the seller is a non-resident of Spain, the buyer would be obliged to withhold 3 per cent of the purchase price remit such amount to the treasury.16 This would be considered a payment of the seller’s Spanish non-resident income tax17 (Impuesto sobre la Renta de No Residentes) on the sale of the property. The non-resident income tax must be paid within one month from the date the property is sold. In case the acquisition is executed through a Spanish company, where the seller is a taxpayer for purposes of value-added tax, it could waive this exemption in case of a first transfer if the buyer proves it is an entrepreneur for value-added tax purposes with the right to fully deduct input tax for its activities.18 This is regardless of whether the company is Spanish or incorporated and resident in any other jurisdiction. Indirect acquisition Real estate transfer tax, valued-added tax, and stamp duty We refer here to our comments above in this Article regarding direct acquisition of Real Estate. Corporate income tax In the case of an indirect acquisition (ie acquisition of Spanish company holding Spanish real estate), the following applies: Corporations subject to unlimited corporate income tax liability in Spain are taxable, as a general rule, at a rate of 25 per cent on their worldwide income.19 Following Spanish Corporate Income Tax,20 the tax base would be calculated by adjusting, ‘pursuant to the provisions established in this Law’, the accounting result in accordance with the rules provided for in the Commercial Code, in all others laws concerning the determination thereof and in any provisions enacted implementing those rules. In recent times, the Spanish tax administration has started to challenge the allocation in corporations of real estate devoted to private use of the ultimate beneficial owner of the corporation, considering that the private use of the house by the ultimate beneficial owner should be linked with the existence of a market value rental payment to the corporation. In absence of such payment, the Spanish tax administration would consider that the amount of the market value rental should be considered as income of the Spanish corporation, subject to taxation in Spain. It is important to point out that this market value rental should be calculated not only for the effective time when the ultimate beneficial owner has been using the real estate, but also for the time when the real estate is available to him. In cases where the real estate is not rented out to a third party, the aforementioned means that the whole year has to be considered when calculating the market value rental for the ultimate beneficial owner. If the property is rented for a part of the year, then the market value rental should be determined for the rest of the year. Holding of real estate Direct holding Non-resident income tax Under the Spanish non-resident income tax, non-resident individual taxpayers owning residential buildings in Spain, used for personal use or vacant, are subject to such tax on any income (deemed income).21 Deemed income is calculated as 1.1 per cent22 of the property’s cadastral value (Valor Catastral).23 It is not possible to deduct expenses when determining the taxable base;24 the tax rate is 24 per cent.25 Wealth tax Wealth tax (Impuesto sobre el Patrimonio) was recently reintroduced in Spain, but, in principle, only for 2015 and 2016, although the legislation has been amended to extend it to include 2017. Accordingly, a non-resident individual who owns assets (real estate property) in Spain will be subject to Spanish wealth tax on the net value26 of the assets located in Spain on 31 December 2015, 2016, and 2017.27 However, this tax, although regulated at a national level, is administrated by the different Spanish regions, which decide whether to impose the tax; eg in Madrid, there is a 100 per cent tax deduction, so there is no taxation, while Catalonia grants a 99 per cent tax deduction only for protected properties, but includes a minimum exempt base of EUR 500,000. When applicable, ie depending on the legislation of the region in which the real estate is located, the wealth tax has a progressive rate going from 0.2 per cent to 2.5 per cent. However, there are various exemptions or deductions to take into account. For real estate, the taxable base will be the highest of the following three values:28 cadastral value; value established by the administration for other taxes; or acquisition value. Real estate tax Individuals and corporations owning real estate in Spain must pay a local real estate tax: the amount is determined based on the cadastral value and the applicable tax rate, which, depending on the municipality where the real estate is owned, is in the range of 0.3–1.1 per cent. The administration submits the tax assessment on a yearly basis and the taxpayer must pay the tax owed during the summer (between July and September). Indirect holding Corporate income tax When the property is held by a Spanish legal entity, income earned from the property (rental income) is taxed:29 Corporate income tax (Impuesto sobre Sociedades) would be levied on the company’s net result (income minus expenses) at a general tax rate of 25 per cent.30 The Spanish tax administration (Administración Tributaria) has started to challenge the allocation in corporations of real estate allocated for private use of the corporation’s ultimate beneficial owner, as the ultimate beneficial owner’s private use of the house should be linked with market value rent payments to the corporation. If this payment is not made, the Spanish tax administration would consider the market value rent as income for the Spanish corporation, subject to taxation in Spain. This market value rent should be assumed not only for the period during which the ultimate beneficial owner is using the real estate, but also for the time during which the real estate is available for the ultimate beneficial owner’s use, even if not being used. If the real estate is not leased to a third party, the rent would be considered for the full year when calculating the market rental value for the ultimate beneficial owner. If the property is rented only part of the year, then the market rental value should be considered for the rest of the year. Wealth tax Individuals owning shares in a Spanish company whose main assets are real estate in Spain are liable for Spanish wealth tax.31 Non-residents owning shares in a Spanish corporation whose assets are mainly real estate located in Spain are also subject to taxation in Spain. In the case of non-listed shares from a non-audited corporation, under the Spanish Wealth Tax Act, the taxable base will be the highest of the following three values:32 nominal value; net equity value; and value resulting from the capitalization, at 20 per cent, of the average profit from the last three closed periods. Real estate tax We refer here to our comments above in this Article regarding Real Estate Tax under direct holding of Real Estate. Sale of real estate Direct sale Under Spanish non-resident income tax rules, capital gains are considered income earned in Spain and taxable in Spain when they result directly or indirectly from the transfer of real estate in Spain or from the transfer of rights related to that real estate.33 The taxable base would be formed by the difference between the acquisition and the transfer price, which should be equal to market value.34 The tax rate is 19 per cent.35 If the seller is a non-resident of Spain, the buyer would be obliged to withhold 3 per cent of the transfer price and submit it to the public treasury, which would be considered a payment of the seller’s non-resident income tax on the sale of the property.36 Additionally, a direct sale of the real estate may trigger the tax on increase in urban land value (Impuesto sobre el Incremento de Valor de los Terrenos de Naturaleza Urbana). The seller is obliged to pay such tax.37 The appreciation in the value of the land is calculated based on the land’s cadastral value and the number of years the seller (ie giver) has owned the property.38 The chart below shows the different percentage rates applicable based on the years the owner has held the property.39 Number of years % 1–5 3, 70 6–10 3, 50 11–15 3, 20 16–20 3, 00 More than 20 years 3, 00 Number of years % 1–5 3, 70 6–10 3, 50 11–15 3, 20 16–20 3, 00 More than 20 years 3, 00 Number of years % 1–5 3, 70 6–10 3, 50 11–15 3, 20 16–20 3, 00 More than 20 years 3, 00 Number of years % 1–5 3, 70 6–10 3, 50 11–15 3, 20 16–20 3, 00 More than 20 years 3, 00 The increase in the land’s value is calculated by multiplying these percentages by the number of years and the land’s cadastral value. The tax rate on the resulting amount depends on the municipality where the real estate is located; eg the tax rate in the municipality of Madrid is 29 per cent, while in Barcelona it is 30 per cent and in the municipality of Seville it is 26.8 per cent, although the taxpayer may benefit from certain tax concessions in all of these. The tax rate cannot exceed 30 per cent.40 Indirect sale Corporate income tax If the transferor is a Spanish company, the profit resulting from the sale would be subject to Spanish corporate income tax.41 The taxable base is the difference between the acquisition price—with some particularities—and the transfer price, which should be equal to the fair market value. The tax rate is 25 per cent.42 Non-resident income tax Transfers by non-residents of shares in a Spanish corporation whose assets are at least 50 per cent real estate located in Spain would be subject to non-resident income tax.43 The taxable base is formed by the difference between the acquisition and the transfer price of the shares, which should be the same as the fair market value. The tax rate is 19 per cent.44 Gratuitous transfer of real estate Direct transfer An individual acquiring assets and rights by gratuitous transfer through inheritance or bequest (or inter vivos gift or other ways) is taxable under the Spanish inheritance and gift tax45 (Impuesto sobre Sucesiones y Donaciones).46 The person liable for inheritance and gift tax is the individual recipient of the real estate, the donee (donatario), in the case of a gift, and the heir or legatee (legatario), in the case of an inheritance or bequest.47 Recipients who are not Spanish tax residents are subject to Spanish inheritance and gift tax only on assets located in Spain and rights that may be exercised or satisfied in Spain.48 The taxable base is the real estate’s fair market value. For inter vivos gifts, the assessable base corresponds to the taxable base; for inheritances, it is calculated by deducting fixed allowances from each qualifying beneficiary’s taxable base. This tax, although regulated at a national level, is administrated by the different Spanish regions, which decide whether to charge the tax or not. Under this scenario, a progressive tax rate is applicable, ranging from almost zero for gifts and inheritances between parents and direct descendants, to approximately 80 per cent on inheritances and gifts between unrelated parties; eg in Madrid, a tax concession of 99 per cent applies to both inter vivos gifts and inheritances when the recipient is a direct descendant. However, in Catalonia, the tax treatment is different for inheritances and inter vivos gifts. For inheritances, a higher deduction applies to the taxable base and there is a 99 per cent tax concession for the spouse, whereas a 20–99 per cent tax concession would apply to direct descendants, depending on the taxable base. For inter vivos gifts, the tax rate would be 5–9 per cent for direct descendants, and up to 32 per cent in other cases. In addition, on 3 September 2014, the European Court of Justice (ECJ), in its case C-127/12, condemned Spain regarding inheritance and gift tax.49 It held that the Spanish inheritance and gift tax regime infringed upon the free movement of capital, as it created substantial differences between the taxation of residents and non-residents (with the taxation of non-residents being much higher currently). This was because non-resident taxpayers were obliged to apply the inheritance and gift tax under the national legislation and not the region’s tax legislation, which generally has a lower tax burden. As a consequence of the ECJ ruling, the Spanish law was modified to avoid discriminatory situations for those resident in other EU Member States. Accordingly, EU residents owning real estate in Spain will benefit from the exemptions and deductions that apply to Spanish residents in those regions. Indirect transfer Transferring the shares of a Spanish resident corporation through inheritances or gifts triggers inheritance and gift tax for non-resident taxpayers. The taxable base is formed by assets located in Spain and rights exercisable in Spain.50 The taxable base corresponds to the shares’ fair market value. For inter vivos gifts, the assessable base corresponds to the taxable base; for inheritance, it is calculated by reducing fixed allowances from each qualifying beneficiary’s taxable base. This tax, although regulated at a national level, is administrated by the different Spanish regions, which decide whether to charge the tax. Under this scenario, a progressive tax rate is applicable, ranging from almost zero for gifts and inheritances between parents and direct descendants, to approximately 80 per cent on inheritances and gifts between unrelated parties, as described for direct transfers in the above section. Deductions and exemptions applying in the different regions will apply to residents in other EU Member States.51 Florentino Carreño, is a Partner at Cuatrecasas in Madrid, Spain. Footnotes 1. Royal Decree-Law 1/1993, of September 24, approving the consolidated wording of the Transfer Tax and Stamp Duty Act. 2. Act 37/1992, of December 28 on value-added tax. 3. cf art 4(2)(a) of the Spanish Value Added Tax Act. 4. cf art 20(1)(22º)(A) of the Spanish Value Added Tax Act. 5. cf art 90(1) of the Spanish Value Added Tax Act. 6. cf art 91(1)(7º) of the Spanish Value Added Tax Act. 7. If the seller is the VAT taxpayer, it can waive this exemption if purchaser proves it is an entrepreneur for VAT purposes and has the right to fully deduct input tax in its activities. art 4(4) in connection with 20(2) of the Spanish Value Added Tax Act. 8. cf art 8(a) of the Spanish Transfer Tax Act. 9. cf art 10(1) of the Spanish Transfer Tax Act. 10. cf art 102(1) of the Spanish Transfer Tax Regulation. 11. cf art 30(1) of the Spanish Transfer Tax Act. 12. cf art. 4 of the Spanish Transfer Tax Act. 13. cf art 28 of the Spanish Transfer Tax Act. 14. cf art 29 of the Spanish Transfer Tax Act. 15. cf art 31(1) of the Spanish Transfer Tax Act. 16. cf art 25(2) of the Spanish Non-Residents Income Tax Act. 17. Royal Decree-Law 5/2004, of March 24, approving the consolidated wording of the Non-Residents Income Tax Act. 18. cf art 4(4) in connection with art 20(2) of the Spanish Value Added Tax Act. 19. cf art 29 of the Spanish Corporate Income Tax Act, Law 27/2014, of 27 September. Under certain circumstances the tax rate might be reduced to 20%. 20. cf art 10 (3) of the Spanish Corporate Income Tax Act. 21. cf art 13(1)(h) in connection with art 24(5) of the Spanish Non-Residents Income Tax Act in connection, in turn, with art 87 of the Spanish Personal Income Tax Act. 22. 1.1% is the common rate. However, if the cadastral value has not been reviewed (ie re-adjusted) since 1 January 1994, the rate will be 2%. 23. The cadastral value is an administrative value used for tax purposes. 24. cf art 24(1) of the Spanish Non-Residents Income Tax Act. 25. cf art 25(1)(a) of the Spanish Non-Residents Income Tax Act. 26. Any debts directly related to the acquisition can be deducted to determine the tax due, provided there is proof of the debt according to the Spanish legislation (public deed or registered in a public registry) and the debt relates to the acquisition of the property. 27. cf art 3 in connection with art 1 of the Spanish Wealth Tax Act. 28. cf art 10(1) of the Spanish Wealth Tax Act. 29. cf art 4(1) of the Spanish Corporate Income Tax Act. 30. The Spanish General Taxation Directorate has indicated that the reduced tax scale is only applicable when the corporation carries out an economic activity. In other cases, the 28% general tax rate is applicable from the outset. 31. cf art 5(1)(b) of the Spanish Wealth Tax Act. 32. cf art 16(1) of the Spanish Wealth Tax Act. 33. cf art 13(1)(g) of the Spanish Non-Residents Income Tax Act. 34. cf art 24(4) of the Spanish Non-Residents Income Tax Act in connection with art 34(1)(a) of the Spanish Personal Income Tax Act. 35. cf art 25(1)(f)(3º) of the Spanish Non-Residents Income Tax Act. 36. cf art 25(2) of the Spanish Non-Residents Income Tax Act. 37. cf art 106(1)(a) of the Ley de las Haciendas Locales. 38. cf art 107(1) of the Ley de las Haciendas Locales. 39. cf art 107(4) of the Ley de las Haciendas Locales. 40. cf art 108(1) of the Ley de las Haciendas Locales. 41. cf art 4(1) of the Spanish Corporate Income Tax Act. 42. cf art 5(1) of the Spanish Corporate Income Tax Act. 43. cf art 25(1)(i)(3º) of the Spanish Non-Residents Income Tax Act. 44. cf art 25(1)(f)(3º) of the Spanish Non-Residents Income Tax Act. 45. Act 29/1987, of 18 December, on Inheritance and Gift Tax. 46. cf art 3(1) of the Spanish Inheritance and Gift Tax Act. 47. cf art 5(1) of the Spanish Inheritance and Gift Tax Act. 48. cf art 7 in connection with art 6 of the Spanish Inheritance and Gift Tax Act. 49. Judgment of the Court (Second Chamber) of 3 September 2014. Case C-127/12 European Commission v Kingdom of Spain. 50. cf art 7 in connection with art 6 of the Spanish Inheritance and Gift Tax Act. 51. Following the above ECJ ruling of 3 September 2014. © The Author(s) (2018). Published by Oxford University Press. All rights reserved.
Trusts & Trustees – Oxford University Press
Published: Feb 1, 2018
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