Spanish Tax Reforms 2007

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Spanish Tax Reforms 2007

Two bills passed by the Spanish parliament are effective from 1 January 2007, both of which affect non-residents owning or intending to buy holiday property in Spain.

They are:

• the new Income Tax Act
• the Tax Fraud Prevention Act

The Income Tax Act

The Income Tax Act changes certain articles of the Non-Resident Income Tax Act affecting, amongst other things, the capital gains tax rate which drops from 35 percent on net gain to 18 percent, which is the same rate of tax applicable to the residents. These changes are due to EU pressure on the Spanish Government after receiving reports from foreign taxpayers complaining that the existing system discriminates against non-residents by applying a different Capital Gains Tax (CGT) to them than to residents.

Another significant change in the Law is the withholding tax which a property purchaser must pay to the Tax Office on account of the potential Capital Gains Tax liability of a non-resident seller. This drops from the previous 5 percent of the purchase price to 3 percent. This reduction is in line with the equivalent reduction for the CGT rate as the resulting tax is substantially lower than it was under previous legislation.

Note: Do be advised that if a non-resident incorporates property into a Spanish Company it will not be subject to this withholding tax. If payment of the withheld tax is not made by the purchaser, the property will be affected by the lowest of the following sums: either the CGT on the sale or the 3 percent on the purchase price.

Asset Holding Companies

The new Income Tax does away with the special system regulating Asset Holding Companies. These were companies owned by at least one physical person with most of their assets not affected by economic activities.

The letting of property was not considered an economic activity unless the Company had an employee and premises dedicated exclusively to carrying out business. Under the existing system any non-resident owner of real estate in this type of Company would benefit from the same CGT tax rate as individual residents if assets were deposed of by the company after one year. In 2006 that rate was 15 percent. Now there will be a transition period so that owners can opt to wind up the company and acquire the property in their individual names so that they can benefit from the 18% CGT rate when they sell.

The Tax Fraud Prevention Act

The Tax Fraud Prevention Act creates new obligations when it comes to property transactions. First of all, in order for the Land Registry to register a transaction, the Title Deed must include the Fiscal Identification Number (NIF or NIE in case of non-residents) and the means of payment for the purchase price.

Also, in order to subscribe to basic utilities (water, telephone, electricity, gas, etc.) it will be necessary to provide the reference number on the property's Local Rates Bill (Referencia Catastral). These measures exist to avoid future money laundering through real estate transactions and to use utility contracts in order to gain more control over the use of real estate property.

This Act includes important changes affecting Offshore Companies. These are companies from a list of jurisdictions (from the so-called Black List) which were subject to prime attention from the Spanish Tax Authorities. These Offshore Companies face severe tax legislation, with a 3 percent tax on the rateable value of property when the company holds real estate and with transactions they carry out with third parties valued (for tax purposes) at market value. The law attempts to close the circle, enlarging the list to include not only companies on the "Black List" but also those from jurisdictions of practically null taxation or those with which Spain has not worked out a double taxation treaty with provisions for exchange of information. The Law considers Offshore Companies resident in Spain if their main assets consist of real estate property situated in Spain.

As far as CGT goes, the existing Non-Resident Income Tax Act provides for the taxation in Spain of the share transfer from a company whose main assets are directly or indirectly (through a subsidiary holding) real estate assets in Spain. Under the new draft bill, if an offshore company is involved, the appraisal of these transactions are based on the market value of the real estate, regardless of the property price declared and the real estate assets of the company are affected by the payment of the tax.

The consequences of the new legislation are significant. One the one hand, mainly with the drop to 18 percent in the CGT, properties, even the expensive ones, are purchased in the name of individuals instead of companies. The reduced rate for capital gains provides an incentive for foreign investors prone to purchase and sell property with a relatively low tax burden.

Information supplied by Rafael Berdaguer, lawyer from the firm Rafael Berdaguer Abogados based in Marbella, Spain.
Tel: 0034 952 823 085 / Fax: 0034 952 824 246 / Website: www.berdaguerabogados.com
Copyright © 2007 Rafael Berdaguer Abogados All Rights Reserved