Throughout the later decades of the twentieth century and the early 2000’s, it was very common for individuals acquiring Spanish real estate to do so through (mainly offshore) corporate structures. However, over the past ten to fifteen years Spanish tax law has moved on considerably. The fight against tax evasion, money laundering, and the recent publication of the Panama Papers means this kind of planning is no longer perceived as acceptable.
As a result, punitive tax laws have been introduced over the years to discourage the use of offshore corporate ownership in Spanish tax planning.
Unfortunately, many UK nationals have not reviewed the initial offshore company planning they put in place. The following questions and answers illustrate why this approach should be urgently revisited.
Q&As on the taxation of Spanish residents
How would a Spanish resident shareholder be taxed if a British Virgin Islands (BVI) or other tax haven company with liquid investments makes a gain but it is retained within the company? What if the gain is retained until a dividend is paid to the Spanish resident shareholder?
In this case, much of the planning put in place will involve an offshore trust owning the offshore company. However, as Spain treats trusts as transparent for tax purposes, the trust is effectively ignored here.
The first thing to ascertain is whether the Spanish ‘international tax transparency’ regime applies to the BVI company shares. This regime means that any income received by a foreign company is taxed in Spain at shareholder level as general income (progressive tax rates generally from 19% to 45%, depending on the region) when the income/gain accrues, even if they are retained by the foreign entity and not distributed.
Spanish resident individuals are subject to this regime where all the following requirements are met:
- They, together with their close relatives, hold at least 50% of the equity of the company.
- The tax paid by the foreign company was lower than the 75% of the Spanish tax that would have accrued had the company been Spanish resident.
- The foreign company does not have the required level of human and material resources for the performance of business activities, i.e. it is a passive holding company and performs no taxable economic activity.
When the foreign company is located in a tax haven jurisdiction such as the BVI, the above requirements are presumed as met, unless proven otherwise.
The investment/savings income received by the BVI company would be taxed in Spain at the individual level, as general income (generally from 19% to 45%, depending on the region) when they accrue.
On the contrary, if the investment/savings income is received personally by the Spanish resident individual, it would be taxed at the corresponding investment/savings income rates (19%, 21% and 23%).
What about if the company owning the assets is based in the UK or another country holding a double tax treaty (‘DTT’) with Spain?
Assuming that the UK/DTT company was the legal and economic owner of the assets, the tax treatment would be different from the example above. Here, the investment/savings income received by the foreign company would not be taxed in Spain at the individual level when they accrued as the ‘international tax transparency’ regime is not applicable. This is on the basis that the company would be subject to corporation tax in the UK/DTT country. If the management and control of the company were in Spain (i.e. Spanish resident directors/shadow directors) then it would be subject to Spanish corporation tax.
What are the tax consequences if the company owns a Spanish property and it is available to the shareholder?
Provided the shareholder of the company is Spanish resident, the structure is very inefficient for Spanish tax purposes, even more so when the property is the shareholder’s main home in Spain.
The shareholder is required to pay a market rent to the company due to transfer pricing rules. A commercial rental agreement based on the market value of the property would need to be in place. The company in turn, will be required to pay Spanish corporation tax. If rent is not paid, the tax office could impute a deemed rent at market value. If there is a distribution of profits to the shareholder, they will be subject to Spanish income tax at the savings income rates.
Another consequence for the shareholder is if this is their main home in Spain they will not be eligible for main residence relief from capital gains tax on eventual disposal.
The shares in the company will effectively be included for wealth tax purposes in Spain. In addition, the shareholder will not be entitled to the main home allowance of €300,000 for wealth tax purposes.
For succession tax purposes, beneficiaries will not be entitled to the main home relief.
Is the BVI/tax haven company fully subject to Spanish corporation tax if they sell the property?
The sale of a real estate asset located in Spain by a BVI company would be subject to taxation in Spain. The capital gain obtained from the real estate disposal are taxable at the corresponding corporation tax rate for non-resident companies (19%).
What would the tax treatment be for the above scenario if a UK or other double tax treaty (DTT) company owns the real estate assets?
Again, the sale of real estate located in Spain by a UK/DTT company would be subject to tax in Spain. The capital gain on the real estate disposal would be taxed at the corporation tax rate for non-resident companies (19%). Tax relief should be given in the UK/DTT country for any Spanish taxes paid.
This is because most DTTs signed by Spain so far establish the right of Spain to tax the capital gain on the disposal of real estate located in Spain.
How is wealth tax affected?
If the individual was Spanish resident, his entire wealth would be subject to Spanish wealth tax.
How is the Modelo 720 affected?
As with other offshore assets, the interest (shares) in the company should be declared by a Spanish resident on the Modelo 720.
Q&As on the taxation of non-residents
Provided a non-resident is the shareholder of a company that owns Spanish real estate assets, what are the tax implications?
If the property is available to the shareholder, he should pay a market rent to the company as per the transfer pricing rules, with a commercially based rental agreement based on the market value of the property. The company in turn, will be required to pay non-resident tax. In addition, if there is a distribution of profits to the shareholder, they will be subject to Spanish income tax at the savings income rates (subject to the limits imposed by any double tax treaty).
The rental income or capital gains derived from the Spanish real estate would be taxable in Spain at company level, applying the tax rate for non-resident companies of 19%.
If the real estate was available to the non-resident individual or any relative but no rent was paid, the Spanish tax office could tax the rental amount that would have been paid in market conditions and potentially the deemed dividend distribution.
What are the implications for wealth tax?
A non-resident with Spanish assets would only be subject to Spanish wealth tax on those Spanish assets.
In some double tax treaties (DTTs) signed by Spain (including with the UK, Germany, France and Norway), a provision was included to allow Spain to tax shareholdings of foreign companies owning mainly Spanish real estate. Additionally, the Spanish DGT (Dirección General de Tributos) published binding rulings for German tax residents (the Germany-Spain DTT provision is similar to the UK-Spain one), concluding that the shares of a company held by a German resident would be subject to Spanish wealth tax provided most of its value is made up of Spanish real estate.
So, if the individual was resident in the UK, the shares of the company (either UK, BVI or other company) would be subject to Spanish wealth tax. In this case, the company will be effectively ignored for wealth tax purposes if more than 50% of the company’s assets consist of Spanish real estate.
Other taxes to be considered
Spanish real estate owned by companies resident in territories classified as tax havens by Spain (e.g. BVI) is subject to an annual 3% tax calculated on the value of the Spanish real state. This is called ‘gravamen especial sobre inmuebles de entidades no residentes’.
Additionally, companies owning Spanish real estate and resident in territories classified as tax havens must have an authorised representative for dealings with the Spanish tax office. Failure to comply with this requirement would result in a €6,000 penalty.
Assuming the company does not have any genuine economic activity, and merely holds Spanish real estate, its assets would be subject to Spanish succession tax.
A binding DGT ruling from November 2013 (V3350-13) considers the tax position when Spanish real estate is transferred into a UK company for the purpose of avoiding Spanish succession and gift tax on death, where the shares of the company are inherited (non-Spanish assets) by a non-resident.
The DGT states: “there cannot be a response by this department in relation to the lawfulness of the scheme. Only via the appropriate inspection procedures will the tax office be able to establish whether the scheme conforms to the law or, as the case may be, infringe it in which case, the tax office will be able to regularise the anomaly by initiating the required procedures to combat tax fraud.”
The view is that the use of an offshore company to hold Spanish real estate purely to avoid Spanish succession tax is not acceptable, and the real estate will be fully subject to Spanish succession tax.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.