Both Spaniards living abroad and non-resident foreigners who own a property in Spain have to pay taxes regardless of whether the property is rented or whether they use it for their own use. But… What taxes do homeowners have to pay?
To find out what taxes a foreigner who owns a property in Spain will have to pay and how much they will have to pay, the first thing to consider is whether they are a resident or a non-resident in Spain in tax terms.
This distinction between resident and non-resident is of a purely fiscal nature and has nothing to do with the fact of having or not having a residence permit in Spain. We will explain below when Spanish law considers a person to be resident in Spain for tax purposes.
These are the taxes and aspects that a non-resident in Spain must take into account:
– Purchase of a home
– Non-Resident Income Tax (IRNR)
o Renting a home
o Own use or empty home
o Sale of the property
– Personal Income Tax (IRPF)
– Wealth Tax (IP)
– Real Estate Tax (IBI)
– Municipal Capital Gains Tax (Plusvalía Municipal)
– Special tax on property owned by non-resident entities
– Declaration on assets and rights abroad
– Inheritance and Gift Tax
+ Buying a property
There are three different types of taxes when buying a property in Spain, depending on the type of property and who the seller is.
If it is a used or second-hand property sold by a private individual, the Property Transfer Tax (Impuesto sobre Transmisiones Patrimoniales, ITP) is payable, the amount of which varies from one Autonomous Community to another. Normally it ranges between 6% and 10% of the sale price of the property, although there are usually reduced rates for large families, young people or the purchase of social housing and other cases. In Altea and other municipalities in the Valencian Community, a general tax rate of 10% is applied.
In the case of a newly built villa or flat sold by a builder or developer, the buyer will have to pay Value Added Tax (VAT), generally 10% of the price of the property. In addition, sometimes the buyer will also have to pay Stamp Duty (AJD), the amount of which varies from one Autonomous Community to another. It usually varies between 0.5% and 2%.
+ Non-Resident Income Tax (IRNR)
Non-residents in Spain who own real estate in Spain are subject to Non-Resident Income Tax (IRNR).
Let us see below in which cases non-residents will have to pay this tax, when and how much:
a) Rental of housing
If the non-resident rents the property, he/she will have to pay tax on the income from said property, i.e. on the income or rents received. In the case of residents of an EU country, Iceland or Norway, the tax rate will be 19% of this income. For residents of any other country the tax rate will be 24%.
Owners resident in the EU, for example in the Netherlands, who rent out their property will be able to deduct expenses in proportion to the length of time the property has been rented. On the other hand, owners who are NOT resident in the European Union or the European Economic Area must be taxed on gross income (they are not allowed to deduct expenses) and will pay 24%.
The declaration of rental income must be submitted at the end of each quarter, i.e. during the first twenty calendar days of April, July, October and January, in relation to the income that the non-resident owner received in the previous calendar quarter.
In the case of a double taxation agreement with Spain, the owner of the property may deduct the amounts paid for this tax in the income tax return to be filed in his country of tax residence.
b) Empty or owner-occupied housing
If the property is empty or for own use, non-resident owners will have to pay tax on the hypothetical income generated by the own use. The tax rate will also be 19% for residents of the European Union, Iceland or Norway and 24% for residents of other countries. In both cases the tax is calculated on the basis of 1.1% of the cadastral value of the property if this value was revised after 1 January 1994 or 2% in other cases.
Example: Dieter Schmidt, resident in Germany, is the owner of a flat in Altea which he uses for his holidays and whose cadastral value is 250,000 €. The basis of calculation is 250.000 x 1,1% = 2.750 €. The tax rate will be the result of applying 19% to 2.750 €, i.e. 522,50 €.
The period for filing and payment of the non-resident income tax in the case of property intended for own use will be between 1 January and 31 December of the year following the year in which the tax accrued. In general, the gain will be determined by the difference between the acquisition value and the transfer value, and the tax rate will be 19% of this gain.
c) Sale of the property
Within a maximum period of three months from the sale of the property, the non-resident owner must declare his gain and pay the corresponding tax.
The person who buys a property from a non-resident, whether resident or non-resident, will be obliged to withhold 3% of the price and pay it to the tax authorities.
This payment made by the purchaser of the property will have the character of a payment on account of the tax payable by the owner-seller on his gain. In the event that the 3% paid by the buyer is higher than the amount that the owner-seller must pay, he/she will be able to obtain a refund of the excess.
What happens if the buyer does not pay the 3%? In this case, the property purchased will be subject to the payment of the tax and the Land Registry will record this in the registration of the property in favour of the purchaser. And this annotation will only be cancelled by expiry, by means of the presentation of the payment letter or administrative certification that accredits the non-application or the prescription of the debt.
The Spanish Tax Authorities do not send non-resident taxpayers any communication, payment notice or settlement relating to Non-Resident Income Tax, but non-residents (or their representatives) are obliged to make the calculation, complete the corresponding self-assessment form and manage the payment of the tax.
It is important to warn property owners who have not filed a Non-Resident Income Tax return that they should regularise their tax situation in order to avoid significant financial penalties.
It is also important to clarify that non-residents who own a property are not only obliged to file a tax return for the ownership of that property but also for any other income obtained in Spain through economic activities.
+ Personal Income Tax (IRPF)
On the other hand, it should be borne in mind that Spanish legislation considers a person to be habitually resident in Spain when any of the following situations arise:
1) That he/she stays more than 183 days a year in Spanish territory.
2) The main core or base of his business activities or economic interests is located in Spain.
3) Their spouse and minor children reside in Spain.
Persons who are in any of these cases, even if they are resident in another country, will automatically be obliged to file their Personal Income Tax (IRPF) return in Spain, regardless of whether or not they have applied for the residence concession.
The IRPF return will include all their income (and their deductible expenses) such as income from work, capital and economic activities, rents, etc., whether they were generated in Spanish territory or in another country, except for the pensions of some civil servants.
This does not mean that these individuals must pay double tax on income generated abroad, but that they can request exemption from tax at source or claim a refund in the country where the income was generated for the amounts paid there in this respect.
+ Wealth Tax (IP)
Wealth Tax is a tax on wealth owned by an individual. For individuals resident in Spain, the Wealth Tax is levied on all their wealth, whether it is located in Spain or abroad.
As for individuals not resident in Spain, Wealth Tax is only levied on the wealth represented by the assets and rights held by non-residents when the assets are located in Spanish territory and the rights can be exercised or must be fulfilled in Spain, without prejudice to the bilateral agreements signed by Spain to avoid double taxation on income and wealth and which have become part of Spanish domestic law.
Even if the owner of a property does not have his habitual residence in Spanish territory, being the owner of a property located in Spain, he will be obliged to pay Wealth Tax, since non-resident individuals who own real estate or hold other assets and rights in Spain are subject to the payment of Wealth Tax, in the same way as residents in Spain.
In the case of real estate, the basis for calculating the amount of tax is determined by the difference between the value of the property and the debts that may encumber the property, e.g. a mortgage, if any. A reduction of €700,000 will be applied to this value as a minimum exemption. In other words, if the property, together with any other assets or rights that a non-resident may have in Spain, is worth less than €700,000, he or she will not have to pay any Wealth Tax.
Thus, a couple or married couple who own 50% of a property valued at less than €1,400,000 will not have to file a Wealth Tax return and will not have to pay any Wealth Tax.
It should be taken into account that sometimes the price stated in the deed of sale or the value verified by the Administration for the purposes of other taxes will be taken as the basis for calculation if they are higher than the cadastral value.
To calculate the amount to be paid for this tax, a variable rate or percentage between 0.2% and 2.5% will be applied depending on the amount of the net base, i.e. on the difference between the value of the property or properties and the mortgages or debts that may be levied on them.
To be taken into account:
Most recent double taxation treaties give Spain the right to tax on the value of a company’s shares when its assets are directly or indirectly composed of more than 50% in real estate located in Spain.
However, some Spanish courts, for example the Administrative Court of the Balearic Islands, have ruled that Wealth Tax is exclusively applicable to assets and rights located or exercisable or enforceable in Spain, and that foreign companies are not covered by the law regulating this tax, despite the fact that the treaties confer such a right on Spain.
+ Real Estate Tax (IBI)
This is a local tax, i.e. levied by the local councils, payable by the owners of real estate, whether or not they are resident in Spain.
All properties in each municipality are included in a census and are assigned a certain value called ‘cadastral value’, on which each municipality applies different rates of taxation.
Every year, the local councils issue a receipt for the payment of the tax. The most convenient and efficient way is to pay the bill by direct debit to a bank account, thus ensuring payment within the deadline and avoiding surcharges. The deadline is different in each municipality, but is normally between September and November each year.
+ Municipal Capital Gains Tax
The official name of this tax is Impuesto sobre el Incremento del Valor de los Terrenos de Naturaleza Urbana.
The capital gains tax is a tax that depends on the increase in value of the land and the tax rate set by the local council in which the property is located and must be paid whenever there is a transfer of a property, whether by sale, inheritance, exchange or donation.
Councils used to charge this tax regardless of whether there was an increase in wealth or not, but recently the Constitutional Court declared this tax unconstitutional in those cases where there was no increase in value in the price of the property, i.e. between the sale price and the purchase price.
How is the amount of capital gains tax calculated?
For the calculation of the capital gains tax, the following will be taken into account:
– The cadastral value of the land at the time of transfer. This value is indicated in the IBI receipt.
– The number of years that have passed since the acquisition of the property. Depending on this number of years, a coefficient will be applied to the value of the land. These coefficients are different in each Town Hall but may not exceed the following limits:
o Period between one and five years: 3,7
o Period of up to 10 years: 3,5
o Period up to 15 years: 3,2
o Period of up to 20 years: 3
– The rate of taxation: will be fixed by each local council, but this rate may not exceed 30%.
Who has to pay the capital gains tax?
In the case of inheritance or donation, the heir or the person who receives the property.
In the case of sale, the owner-seller, but if the owner-seller is a non-resident in Spain, the buyer is obliged to pay this tax, but the seller must reimburse the amount. In this case, the buyer, if well advised, will usually withhold part of the price of the property in order to pay the tax and thus prevent the non-resident owner-seller from leaving Spain without paying the tax.
When does this tax have to be paid?
– In the case of inter vivos transactions, for example a sale, exchange or donation, the deadline is thirty working days.
– In the case of inheritances, the deadline is six months from the date of death, but the heirs may request an extension of this period for a further six months.
+ Special tax on real estate owned by non-resident entities
Non-resident companies that own real estate in Spanish territory and whose tax domicile is in a country considered to be a tax haven are obliged to file the corresponding tax return and pay this tax.
The tax rate is 3% of the cadastral value of the property. This type of company is obliged to pay the tax annually before 31 January following the year in question.
On the other hand, non-resident companies that own real estate in Spanish territory, but are exempt from the special tax because they reside in countries that have signed agreements with Spain to avoid double taxation, are obliged by law to provide the Tax Agency with an e-mail address where they will receive all communications and notifications.
+ Declaration of assets and rights abroad
Individuals and companies resident in Spain who own assets and rights located in another country are obliged to file an information return on these assets with the Tax Agency, unless the total of their assets and rights is less than €50,000 in each of the following three blocks:
1) Immovable property and rights over immovable property.
2) Bank accounts
3) Securities, annuities, life or disability insurance, stocks or shares, trusts and trusteeships.
Only those blocks which together exceed €50,000 need to be declared, so, for example, accounts in foreign banks need not be declared if their combined balance is less than €50,000, but real estate needs to be declared if its value exceeds €50,000.
The declaration of assets and rights located abroad must be submitted electronically via the Internet.
Failure to submit this declaration, or submitting it after the deadline or with incomplete or false data, constitutes a serious tax infringement and carries significant financial penalties.
+ Inheritance and Gift Tax (ISD)
Inheritance and gift tax is a tax payable by those who receive an inheritance or a gift.
It is a tax ceded by the Spanish State to the Autonomous Communities as part of the autonomous financing system. The Autonomous Communities can establish the tax rate, exemptions, allowances and other elements of the tax, so the amount to be paid can be very different from one place to another and it can even be the case that there is no tax to pay at all.
The persons obliged to settle and pay inheritance tax are the heirs or legatees.
Due to its complexity and the different cases we may encounter, we will try to clarify the characteristics of this tax in another post, although we must anticipate that in Spain, unlike what happens in other countries, there is no automatic exemption between spouses, i.e.: in principle, the widow or life will have to declare and pay this tax.
You now know the different taxes that foreign homeowners must pay in Spain. You also know the differences between being a resident and a non-resident when it comes to the taxes you have to pay, how much you have to pay and when you have to pay them.
However, you should be aware that tax issues are complex and changeable and therefore we strongly recommend that when buying or selling a property you rely on the help of true professionals who have the necessary training and experience in all matters related to real estate and its taxation and do not entrust your affairs to a simple ‘house salesman’.
At ALTEAINVEST we have the necessary – and accredited – training and experience of more than 40 years that will guarantee you effective help when buying or selling your home and plan your taxation in the best possible way to reduce (legally) the amount of your taxes and avoid possible penalties.