Spanish property investment; tax rules
March 11, 2022
Sector: Real Estate & Construction
Investment in Spanish property, particularly by British investors, has been growing in popularity since the early 2000s, as expats look to retire in the sun, or spending cold winters in Spain and returning in the Spring.
This common practice could be subject to double taxation rules and those looking to invest in Spanish property should consider how long they intend to stay at the property to determine the Non-Resident Income Tax (NRIT). Habitual residency is defined as spending more than 183 days in Spain during a calendar year or when the main core or base of their activities or economic interests is located in Spain. Residency in Spain is assumed when the spouse and minor children are habitual residents in Spain.
Researching tax residency and any double taxation laws between the domicile country and Spain is critical before buying or selling property, however, double taxation treaties signed by Spain tend to claim tax on the sale of a property, in accordance with the Non-Resident Income Tax (NRIT).
Next, a distinction must be made between leased and non-leased property. Residential property can be subject to Personal Income Tax (PIT), meaning that non-residents must declare them each year as real estate capital gains:
- Normally 2% of the cadastral value of the property.
- 1.1% of the cadastral value when this has been revised in the same tax period or in the previous 10 years.
- If there is no cadastral value or this has not been notified to the owner of the property, 1.1% will be applied to 50% of the higher of the following values: the value ascertained by the Administration for the purposes of other taxes or the price, consideration or value of the acquisition.
It should be noted that the tax rate for citizens of the EU and European Economic Area (EEA) states is 19%, with effective exchange of tax information (Iceland and Norway). For all other taxpayers, the tax rate increases to 24%.
Rates as above, but commercial properties must pay withholding tax to the Tax Authorities on rent. This withholding tax, 19% in the case of EU citizens or Iceland and Norway and 24% in all other cases, will exempt the owner from making the aforementioned quarterly declarations. Rental-related expenses are tax-deductible for EU citizens and Iceland and Norway.
The 60% reduction provided for in the PIT is not applicable to income from rental housing and that is per property, so it is not possible to offset them.
Value added tax (VAT)
Non-resident landlords, subject to VAT, are defined as
- If the lessor is obliged to provide complementary services typical of the hotel industry (eg Airbnb).
VAT will be charged at 10%, will need to register and file VAT returns quarterly.
- If the lessor is not obliged to provide services typical of the hotel industry, two situations can be distinguished:
a) Renting to a long-term tenant is VAT exempt.
b) If the rental of the property is not exempt, the Central Economic-Administrative Court in its ruling of 20 November 2016 applies, endorsed by the Directorate General of Taxation in various consultations (CV1145-17, CV2915-17 and CV 2897-18). VAT obligations therefore only apply to long term rental agreements. Simply owning a property in this instance does relieve landlords from VAT. Rental of subject and non-exempt leases (offices, commercial premises, warehouses, etc.), are as follows:
- If the rental is managed: the non-resident owner must register as a lessor, will have to charge VAT at 21% on invoices and must submit quarterly returns for this tax.
- Non-managed: no VAT obligations. The tenant will be obliged to declare both VAT due and input VAT at the same time in his returns.
Usual VAT recovery on purchase and maintenance of properties apply, depending on if the non-resident is established or not in Spain:
a) Non-resident/permanent establishment – should input tax paid in the VAT forms that he/she files periodically (form 303).
b) Non resident/non permanent establishment- should apply for a VAT refund through the non-established refund procedure:
- If the non-resident is established in a country outside the EU, a reciprocal treatment agreement must be in place in order to apply for input VAT payments (Canada, Israel, Japan, Monaco, Norway, Switzerland and the United Kingdom). The application must be made to the Spanish Tax Agency, using form 361, no later than 30 September of the year following the year in which the VAT was borne.
- If the non-resident is established in the EU, he/she may apply for a refund of the VAT paid in Spain in his/her Member State of residence, without any additional requirement, on the form that the Tax Agency of his/her country has indicated for this purpose.