Real estate conveyance and capital gains tax for non-Spanish residents

Raymundo Larraín Nesbitt, June, 1. 2005

Article published in Essential Magazine Marbella in June 2005.

The following article is out of date, it has been summarised to avoid unnecessary tax technicalities. The quoted tax rates are subject to change from one year to the next. Seek professional legal advice on your matter – see disclaimer below.

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
Essential Magazine Marbella, June 2005

The system ruling taxation on income obtained in Spain by non-Spanish residents is governed by Decree 5/2004, a statute approving a previous piece of legislation, the revised Income Tax Law for non-residents. This statute groups regulations from many sources into one single law, though it doesn’t sufficiently alter the substance of the law as previously stipulated in Law 41/1998.

The most common taxes on conveyance (house purchase) transactions include the following:

1. Taxation levied on real estate sold by the owner, whether to an individual or a legal entity, to a third party

This category can be divided into the following scenarios:

Conveyance made by an individual who is a non-Spanish resident.
Conveyance made by an individual who is resident in one of the territories considered as a ‘tax haven.’
Conveyance made by a non-Spanish resident company.
Conveyance made by a company resident in one of the territories considered as a ‘tax haven.’

All the cited cases are subject to the payment of income tax for non-residents. Thus the capital gains or Plusvalia accrued in the conveyor’s net worth is taxable in Spain, at a rate of 35 per cent of the profit obtained. In order to calculate the capital gains when making the tax return, if the conveyance value is lower than the market value, the latter amount will be applied.

Any purchaser of real estate is obliged to withhold 5 per cent on account towards the income tax a non-resident seller is liable to pay. This amount must be deposited at the Tax Office. The seller then files the corresponding tax return, and if the deposit is higher than the payable tax (35 per cent of the capital gain), the seller may request that the difference be refunded.

2. Taxation applicable to the transfer of shares of a company resident in Spain whose assets are mainly real estate located in Spain

This category can be divided into the following scenarios:

A share transfer by a non-Spanish resident.
A share transfer by a ‘tax haven’ resident.

In the former case, the capital gains obtained by the share’s transference are not always subject to Spanish taxation, but it will depend on the double tax treaty entered into by Spain and the seller’s country of residence (for example, if the shares’ transferor is a British of German citizen, according to the double taxation treaty between Spain and the said countries, the capital gains obtained from the sale of the shares shall be taxable in the United Kingdom or in Germany). In cases where the countries of residence have not ratified a double taxation treaty with Spain, the Income Tax Law for non-residents shall be applied and the capital gains is taxable in Spain. The tax rate in these cases is also 35 per cent.

In the second case, the applicable legislation is the Income Tax Law for non-residents, and, therefore, the capital gains obtained from the share’s sale will always be taxable in Spain at a tax rate of 35 per cent.

Finally, we must point out that the non-Spanish individuals who are Spanish residents may fall within the transitional regulation prescribed in the Income Tax Law for property purchased before 31^st December 1996 and benefit from certain reduction percentages to the capital gains generated by that property, depending on the period of ownership, both in the case of shares and real estate.

On a side note, a lawsuit for fiscal discrimination, was recently brought before the European Authorities. The European Commission reacted by sending a resolution to Spain that establishes that Spain unfairly discriminates against non-residents. For Brussels, this leverage of a large fiscal pressure on non-residents, having to pay more capital gains tax than residents, is unconstitutional. They stated that due amendment of the law would ne necessary.

Non-residents with taxable income in Spain can therefore look forward to some beneficial changes in the law in the near future.

P.S. I am most grateful to Essential Magazine Marbella, and in particular to Sussane Whitaker, who went through the hassle and pain of sifting through several old editions to retrieve these old legal articles. Thank you, much indebted.

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