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ANNUAL TAXES oN A PROPERTY IN SPAIN

• Why Buy Property in the Marbella Area?
• Buyng Property in Spain
• Taxes You Pay Every Year

TAXES YOU PAY EVERY YEAR
All property owners in Spain are liable for three separate taxes every year. These taxes are: 1. Property owners’ imputed income tax; 2. Wealth tax; and 3. Annual real estate tax.

1. Property owners’ imputed income tax

Good news for residents is that Spain’s property owners’ imputed income tax is no longer payable on a principal residence. A non-resident must continue to pay the yearly tax, however, because he is not resident in Spain, so his principal dwelling cannot be here. Residents who own more than one dwelling are also subject to the tax on their second home or other property. Persons subject to this tax have 2% of the valor catastral, the official rated value, of their property attributed to them as imaginary income. This is 1.1% if your rated value has been raised sharply since 1994. Residents pay their tax on this notional income by having it added to their other income as if it were more earnings. This means that they pay tax at their normal income tax rate. If their incomes are modest they will pay 15% and if their incomes are high they will pay 30 or even 40%.The non-resident is taxed always at the flat rate of 25% on any income arising in Spain. Don’t confuse this tax of 25% on earnings with the capital gains tax of 18%, which applies to profits from the sale of assets, such as a house. If a non-resident husband and wife own a villa which has a valor catastral of €120,000, and a real value of €180,000, we find that the Spanish Tax Agency imputes to them separately an ownership of €60,000 each, half of the valor catastral. We then calculate that 2% of €60,000 is €1,200 of imaginary income. Taxed at 25%, this gives a bill of €300.

2. "Wealth Tax"

In addition to his income tax the Spanish resident – and non-resident property owner – is liable for Spain’s tax on capital assets, the patrimonio tax. The name "wealth tax" may not sound like proper legal terminology, but it is an adequate translation of the Spanish name, as it’s exactly that, a tax on all your assets and property, your total wealth. In Spanish, the name is impuesto extraordinario sobre el patrimonio, the extraordinary tax on assets. This tax started in 1978 as a special measure to force many Spanish citizens who had been hiding their wealth, especially property, to bring these assets into the open. Hacienda placed a very small tax on these assets, amounting to only .002, i.e. 2/10 of 1%, or 2/1000 of the taxable base, up to assets of €167,129. After that, the rate goes up as assets go up. Wealth tax is based on the real sale value declared in the contract, which is almost always higher than the valor catastral. You declare for this tax when you declare for your income tax, on the simplified Form 214 if you are a non-resident with only one property or on the separate Form 714. Wealth tax affects residents and non-residents differently. A resident is required to declare his world-wide assets while the non-resident declares only his property and assets in Spain. These taxable assets can include bank deposits, stocks, shares, bonds, ownership of a business, gold bars under the mattress, automobiles, yachts, private airplanes, works of art unless they are owned by the maker, jewels, luxury fur coats or anything else that can be considered wealth. Your home furnishings are exempt unless they are valuable antiques. There are deductions available for debts against your business, mortgages on your property, and any tax of a similar nature paid in a foreign country. The principal deduction for a resident of Spain is that he pays nothing on the first €108,182. A husband and wife each have an exemption of €108,182, and each must make an individual declaration. Further, if the asset in question is a principal residence, each person has an exemption of €150,253. If a husband and wife own together a property valued at almost €300,000, they each declare half the value, take their exemption of more than €300,000, and have no patrimonio tax to pay.As Spanish law views property as individually owned, for wealth tax purposes, this means that a husband and wife who own their home together, must each file a wealth tax declaration declaring 50% of the value as their property. None of these exemptions apply to non-residents. They must pay from the first euro of valuation. The non-resident, however, is taxed only on his assets located in Spain. Non-residents declare on their own special tax Form 214 every year and can declare at any time during the year. In our example above for non-resident property tax, the sale value of the property is €180,000. Two-tenths of 1% of this is €360, or €180 for each of the husband and wife half-owners. Add to that €600 of Spanish non-resident property owner imputed income tax, divided into €300 each, and you get a total of €480 due to the Spanish taxman from each of the co-owning spouses, or €960 total from both spouses. This is in addition to your annual real estate tax. If we imagine that your annual real estate tax, IBI, on the villa is €240, this means that it will cost you €1,200 a year in Spanish taxes simply to own the place. Keep in mind that, if you own two properties in Spain, you cannot use Form 214 and must declare on Form 714 for wealth tax and Form 210 for imputed income tax, and you must declare in the period between May 1 and June 20. If you own two properties, you are still required to name an official representante fiscal, a tax representative in Spain. If you fail to name a representative, you can be fined up to €6,000. One owner who applied for Form 214 was annoyed to discover that he was not eligible because he had purchased his garage separately from his house. Because he has two separate title deeds, he must fill out the standard forms, declare in the regular time period and name an official tax representative. In addition to this, both residents and non-residents pay the annual real estate tax.

3. Annual real estate tax (IBI)

The annual real estate tax on your Spanish property must also be paid. This tax, based on your valor catastral, can vary widely for the same type of property as it is a municipal tax. You can expect to pay much more for a townhouse in Marbella than you would pay for the same accommodation in an inland provincial town. If you live in a typical village house set back from the coast, your annual real estate tax could be as little as €60. If you have a well-positioned villa on a large plot you could pay as much as €3,000. This real estate tax is called the IBI, the Impuesto sobre Bienes Inmuebles. The tax is raised every year, as a result of inflation. If you are a non-resident, the best solution for you is to have the tax domiciliado in your bank. This is a standing order to the bank to pay the tax – and you can include any other municipal charges as well. You obtain a form at the bank that authorises them to pay the tax bill, and deposit a copy of the form with your ayuntamiento. This tells them where to send the bill. You are thus assured that your taxes are paid when they are due, the same as the telephone, water and electric bills. If you prefer to pay the bill in person, you will have to go to your town hall and pay it each year. Some towns offer a discount for early payment, so be sure to ask. In addition to the valor catastral, the assessed value of your property for tax purposes, the IBI also lists your referencia catastral number, which will locate your property at the Catastro office, along with its officially measured dimensions. This can be important in buying and selling property because sometimes the physical description does not agree with the description given in the property title.If you think that you can simply forget about these three taxes because you are not a Spanish resident and someday will sell your home in the sun anyway, think again. The Spanish tax agency, Hacienda, will check the books at the time of the property sale. They will be holding that deposit of 5% of your total sale price, remember. It is a guarantee against the owner’s imputed income tax and wealth tax obligations for the last 4 years, as well as against the capital gains liability. You will also be required to present the current real estate tax receipt, the IBI, when you sign the sale contract.

RENTAL OR BUSINESS INCOME (FORM 210)
All non-residents who are making money by renting out their Spanish property are subject to tax on this income arising in Spain. They are required to declare their Spanish income on Form 210. They are supposed to declare within 30 days of receiving the income, but they can apply to make their declarations quarterly to save paperwork. Such non-resident income is taxed at the flat rate of 25%. If you are a non-resident but you own and operate a business in Spain, such as a restaurant, bar, or cement factory, you are also liable for Spanish tax on your profits.

COMMUNITY CHARGES
The fees charged annually by your Community of Property Owners, to pay for your share of maintaining the community property, are not taxes of course, but they need to be factored into your totals when you are calculating the annual running costs of your Spanish property. These fees might be as little as €400 a year for a small flat or more like €4,000 a year for a luxury villa on an elegant estate in Marbella.

YOUR FISCAL REPRESENTATIVE
The non-resident property owner of only one property no longer needs to name a fiscal representative who is resident in Spain. Those who own two or more properties must do so, however, under penalty of fines that can go as high as €5,000 if he doesn’t comply. The fiscal representative assures the Spanish tax authorities that they have a reliable contact inside Spain for the non-resident taxpayer. Although most non-residents name their tax consultant or lawyer as their fiscal representative, it can be anyone, even a foreigner, as long as he is officially resident in Spain. Any gestoría or tax office has the simple forms necessary.

NON-RESIDENT’S FISCAL IDENTIFICATION NUMBER
If you are a non-resident property owner, you will have the above-mentioned taxes to pay and perhaps a fiscal representative to name. In order to pay these taxes, you must apply for a número de identificación de extranjero, a NIE, your Spanish tax identification number. Residents, of course, have a number as well, and Spaniards do, too. In fact, you should apply for this number when you purchase your property. The number identifies you to the Spanish taxman and is required when you pay your taxes or have any dealings with Hacienda. To obtain it, simply present yourself at the nearest police comisaría with a foreigners’ department, along with a photocopy of the first pages of your passport. Fill in the form and wait a few weeks for your number to be assigned. You can also have your gestoría do this for you. Then you will be registered with Hacienda’s central computers just like the rest of us in today’s electronically observed society.

SPECIAL TAX ON OFFSHORE COMPANIES
During the property boom of the 1980s thousands of luxury homes on the Spanish Costas were sold on the basis of ownership through a non-resident company. Many of these offshore companies are located in the "tax havens" where little or no local taxes are charged and the names of the owners are confidential. On the Costa del Sol, entire urbanisations were marketed with Gibraltar companies already formed to own the property. The buyer purchased the Gibraltar company, in Gibraltar, and his real name never appeared on any Spanish documents, only the name of the Gibraltar company. Estimates are that at least 12,000 companies exist, in Gibraltar alone, without mentioning other offshore tax havens, for the sole purpose of owning property in Spain. These companies were created, legally, to avoid a number of Spanish taxes while concealing the identity of the true owners of the property. Other non-resident companies are located in European countries where they are subject to tax like any other company, including tax on their assets in Spain. There is nothing incorrect about this sort of operation, and it means that all Spanish transfer taxes (which can amount to 10% of the price) are bypassed when property owned by such companies changes hands. This is because only the offshore company is bought and sold, a transaction that takes place outside Spain. As far as the Spanish government is concerned, the property is still owned by the same company, and no change has taken place, so no tax is due.This offshore company ownership also avoids Spanish inheritance tax. The company is not registered in Spain, even though it possesses an asset here, so no Spanish inheritance tax is charged when the company is bequeathed to its inheritor, who then continues to own the company through Gibraltar or some other country. This is all perfectly legal. Nevertheless, it is not quite cricket and finally the loss of tax revenue has irritated the Spanish authorities so much that they have enacted a special tax on offshore companies. They are not the first to do so. In fact they were just about the last country in Europe to permit these operations. This special tax on offshore companies is 3% of the valor catastral. This means that, if your property is valued at €100,000 (with a real market value of perhaps €150,000) your annual tax is €3,000. For companies registered in Gibraltar or other tax havens around the world, there are absolutely no exemptions. Spain’s tax ministry has a list of jurisdictions regarded as "tax havens". When both the company and its real owners are fiscal residents of "normal" countries which have taxation treaties with Spain, the company can claim exemption from the tax of 3% by revealing all details of the owners, and presenting certification that the company pays its taxes in its country of registration. The law is designed to crack down on those persons taking advantage of secrecy provisions in tax havens while permitting normal EU companies to continue to own property in Spain as long as they pay their taxes at home. This leaves perfectly legitimate owners of tax haven companies, however, in the position of either having to pay the stiff tax or divest themselves of their companies. If they "sell" the property to themselves as the new individual owners, this operation attracts tax at about 10% of the total operation, just like any normal property sale. Some lawyers have been able to wind up the Gibraltar company and distribute its assets to the owners, under a small business tax of 1%, plus a few other charges that bring the total expense to about 3%. This leaves you as an individual owning your home in Spain, just like almost everyone else, and subject to all the usual Spanish taxes we have discussed. As the tax is based on the valor catastral, paying the tax might be a viable option in situations where this value is much lower than the real value. There are still cases where properties that are worth €200,000 on the market have an assessed value of €50,000. In such cases and where the individual has special need for confidentiality in his ownership, it could be a possible course of action. Be warned, however, that Spain continues its process of raising the valor catastral towards normal market prices. Furthermore, European Union commissions are now studying the possibility of stricter controls over tax havens as part of the EU campaign to discover the hiding places of black money obtained through various types of illegal operations. Each case will need individual study and some careful planning.

From YOU & THE LAW IN SPAIN, published by Santana Books
For details contact Santana on: Tel. 952 485 838, Fax: 952 485 367 www.santanabooks.com or email them on sales@santanabooks.com

• Why Buy Property in the Marbella Area?
• Buyng Property in Spain
• Taxes You Pay Every Year

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E + O E: The information provided on this web site has been checked carefully and is updated regularly. But no liability or guarantee can be accepted to the effect that all of the information is complete, correct and up-to-date at all times. Please do not hesitate to contact us if you have any questions or discover any factual errors and we will endeavour to correct them promptly.