If you’re thinking of using a company to own Spanish property, understand the consequences as the tax rules have changed in recent years.
If you’re thinking of using a company to own Spanish property, make sure you understand all the consequences as the tax rules have changed in recent years.
It used to be fairly common for people to own Spanish real estate through onshore and offshore corporate structures, particularly properties valued over €1 million.
While there may be different reasons for choosing this ownership method, many people were aiming to avoid taxation, particularly Spanish wealth tax and/or succession and gift tax.
But we are living in a very different world now. Over the last decade governments the world over, including Spain, have successfully implemented methods to crack down on tax fraud, to both prevent future tax evasion and uncover past transgressions. They have now also set their sights on ‘aggressive tax planning’ structures.
Spain’s 2019 tax inspection plan focuses in particular on international investors using opaque structures. The Spanish tax authorities are therefore actively reviewing properties in Spain owned though corporate structures, with most inspections taking place in the Balearic Islands and Malaga and Cadiz provinces. Various commentators are describing this type of ownership as a ‘ticking timebomb’.
Anyone owning property through a company should review their tax position and ensure they are meeting their tax obligations in Spain accordingly.
Tax on Spanish properties owned through corporate structures
If a property is available for the shareholder’s use (especially if it is their main home) and they are resident in Spain, this structure is actually very inefficient for Spanish tax purposes.
Here is a summary of the key tax implications:
- The shareholder must pay market rent to the company, for the use of the property, through a commercial rental agreement based on its market value. If the individual does not pay market value rent, the tax office can determine a deemed rent.
- The company has to pay Spanish corporation tax.
- Any distribution of profits to the shareholder is liable to Spanish income tax (i.e. dividend income) at the savings income rates, subject to any limits imposed by a double tax treaty.
- Since the individual is resident in Spain, their entire wealth is subject to wealth tax, including their shares in the property-owning company. Also, they do not benefit from the up to €300,000 main home wealth tax allowance normally available to Spanish residents.
- When selling the property, the shareholder is not eligible for the main residence relief from capital gains tax, even if it is their main home.
- For succession tax purposes, the beneficiaries would not be entitled to the main home relief.
- Shares in foreign companies need to be accurately listed on the Modelo 720 – the informative declaration of non-Spanish assets.
The key tax implications for non-Spanish residents who are shareholders of a company that owns real estate assets are:
- If the property is available to shareholders, they should pay a market rent to the company.
- If no rent is paid, the Spanish tax office could potentially claim the deemed rental amount.
- The company in turn, is required to pay non-resident tax.
- Distributions of profit to the shareholder (if any) are liable for Spanish income tax at the savings income rates.
- Rental income and any capital gains are taxed in Spain at company level, applying the tax rate for non-resident companies of 19%.
- When it comes to wealth tax, non-Spanish residents are only liable on their Spanish assets and rights. However, note that Spain’s double tax treaties with the UK and Germany (as well as some other countries) include a clause allowing Spain to tax shareholdings of foreign companies which mainly own Spanish real estate. Therefore, individuals resident in the UK or Germany would be liable for Spanish wealth tax on shares in the company, wherever the company is based.
Additional tax considerations
Spanish real estate owned by companies based in a territory classified as a ‘tax haven’ by Spain (e.g. British Virgin Islands, Gibraltar) is subject to an annual 3% tax (calculated on property value). The company must have an authorised representative to deal with the Spanish tax office (or pay a €6,000 penalty).
Additionally, the company’s assets are subject to Spanish succession and gift tax if it does not have a genuine economic activity and is merely a holding company for owning a Spanish property. The Spanish tax authority has shown in the past it will not accept the use of a non-Spanish company to hold property in Spain purely to avoid succession tax – i.e. the Spanish property will be fully subject to tax.
The tax authorities’ new tool – the Beneficial Owner Register
We know that the Spanish tax authority has been making use of information received through the Common Reporting Standard’s automatic exchange of information regime. Now it can also use the new ‘Beneficial Owner Register’, which came into force in 2018 following some EU Directives.
Each country’s register lists the ‘Ultimate Beneficial Owner’ (UBO) of companies, trusts, foundations and other similar legal arrangements. Spanish companies are now obliged to disclose the beneficial owner as part of their annual corporate tax return and detail any shareholders who own 25% or more of the share capital.
The Spanish authorities are using the register to scrutinise opaque structures, to be able to determine cases where the beneficial owner was actually using the property, but this was not accounted for correctly.
In today’s world, it is more important than ever to ensure that all the structures you use to hold your assets, whether property or investment capital, are compliant in your country of residence and the country where the assets are located, and that you are correctly meeting your tax obligations.
See more about global tax transparency
Effective tax planning for Spain
There is no perfect solution for reducing tax on properties in Spain unfortunately, especially not a ‘one-size-fits-all’ one. However, you can you often take steps to reduce your overall tax position, but you need to take personalised, specialist advice based on your situation and objectives. You need to establish the best plan of action for your circumstances.
With 40 years’ experience advising UK nationals in Spain on effective tax planning, Blevins Franks has an in-depth knowledge of the Spanish tax regime and the compliant tax planning opportunities available here. We can review your wealth management and how you hold your assets, to recommend ways to reduce your overall tax liability and make Spain a more tax-efficient place to live than you expect.
Contact your local adviser for a tax planning review
The 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; individuals should seek personalised advice.