ANNUAL TAX LIABILITIES FOR NON-RESIDENTS
A person who is not a fiscal resident in Spain but who owns a property in this country is liable on some Spanish Taxes and thus must fill in annually individual tax return.
A) FISCAL RESIDENCE IN SPAIN
The law holds fiscally resident an individual who spends 183 days in a calendar year (including sporadic absences) in Spanish territory or whose business, professional or economic interests are based in Spain. Those whose spouse and/or dependent children are habitually resident in Spain will be presumed resident.
B) FISCAL IDENTIFICATION NUMBER
Everyone in Spain is assigned a Fiscal Identification Number which is used for all tax returns and correspondence with the Tax Administration. For non-residents, the fiscal identification number is what is called NIE which can be obtained at the local General Directorate of Police.
When a property is owned by a married couple or by various persons, each of the owners is considered as an independent taxpayer and then each co-owner must fill in a tax return.
C) ANNUAL REAL ESTATE TAX (COUNCIL TAX)
In the Spanish language, it is known as I.B.I for Impuesto sobre Bienes Inmuebles. This tax is a local tax handled by the Town Hall of the municipality where the property is situated. This tax has to be paid once every year. The payment period varies according to the municipality (from September to November of each year).
The price to be paid is determined by many factors; location, size and nature of the land (urban or rustic nature) and a tax scale established by the Town Halls has to be applied. It is important to make sure that the Town Hall provides you with all I.B.I receipts which must be kept.
Any reliable real estate agency should think to provide the purchaser with a copy of the last I.B.I. receipt of the seller in order to simplify the conveyance process.
D) INDIVIDUAL INCOME TAX
This tax is due for the potential letting value of the property owned in Spain. The tax return has to be filled in whether the property is actually let or not. If you are not letting your property, why pay an Income Tax when there is no income?
Actually, the Tax Authority estimates an imaginary income for the owner of the property regardless of the fact that it is let or not.
This tax has to be paid once a year. The tax base is 2% or a 1.1% of the cadastral value (see I.B.I receipt) and then a 24.75% tax rate will have to be charged to obtain the amount payable to the Spanish Tax Office.
If you have not owned the property for the entire year or if it was leased for part of the year, you must declare the corresponding proportion.
However, in the case that the property is let, the income to be declared is the total amount collected from the tenant, without deducting any expenses. The tax rate charged will be the 24%.
E) CAPITAL GAINS TAX
The seller of the property is additionally liable for what is called the Capital Gain Tax, levied on the profit of the sale of the property. A tax rate of 18% is to be applied on the profit obtained from the sale.
The value to be taxed is the difference between the acquisition price of the property and the selling price. In both cases all the expenses raised from the transfer of ownership e.g. Notary fees, Land Registry Fees, Transfer tax, etc. have to be included.
F) 3% WITHHOLDING TAX
This tax is directly linked with the one mentioned above. It applies only when the seller of the property is non-resident in Spain. In this case, the purchaser must retain the equivalent of 3% of the purchase price declared on the deed and deposit this amount with the National Public Treasury. This 3% retention is made by the purchaser on behalf of the seller, who receives 3% less on the price agreed.
This tax has to be seen as an advance payment made to prevent the seller from running away without paying the tax corresponding to the transaction.
In case of capital losses or in the case that the amount withheld exceeds the tax due, it is your right to receive a tax refund of the excess withheld. A tax lawyer will help you to fill in the corresponding tax return and, if necessary, attend an Inspection from the Tax Authorities.
BUYING A PROPERTY IN SPAIN
What is called the acquisition process includes all the steps that go from the choice of a property until the complete registration of the notarised Title Deed at the Land Registry of the area where the property is located. This process generally starts with a preliminary agreement.
By this agreement, commonly called “Reservation Contract" or “Deposit Agreement", the seller and the purchaser express reciprocally their intention to draft, in the near future (one or two months) a private purchase contract on a specific property. However the signing of a preliminary agreement is not a compulsory step within the purchase process, on many occasions a private purchase contract is directly signed between both parties. At this stage, the purchaser is normally asked to pay a deposit, which will be deducted from the final price.
Once the contract has been signed, both parties are entering into a contractual relationship and must fulfil the legal obligations arising from it. In the event that the purchaser decides not to buy the property, the deposit paid is not always refundable.
PRIVATE PURCHASE CONTRACT
Once the parties have agreed on the property and the price, a private purchase contract is drafted. Before signing the contract and making it executable, it is important for the parties to fully understand and agree the nature of the obligations and rights arising from the contract. It is recommended to have the contract checked by a Spanish Lawyer before signing it.
A private purchase contract that complies with Spanish law should state among other things, the personal details of both parties, the buyer and the purchaser, the price of the estate and the different stage payments to be made as well as the description of the property, object of the contract and the date of completion and simultaneous hand over of the keys.
If a preliminary agreement has not been signed before, the first payment to be made would be the equivalent of a deposit which normally corresponds to a percentage of the total purchase price.
A legal requirement in Spain is that you hold an NIE (Numero de Identificacion de Extranjeros – Identification number for non residents). This number is necessary for taxes purposes. You will be required to have this N.I.E. number if you want to acquire a property in Spain, to apply for a mortgage, to set up a business, inheritance process, to buy a Spanish car, a mobile phone... Therefore, this number will also be considered your Spanish Fiscal number once your fiscal representative registers it with the competent Tax Office. Please, bear in mind that the registration for the NIE number is compulsory.
BANK GUARANTEE/INDIVIDUAL INSURANCE – BUYING A PROPERTY UNDER CONSTRUCTION
The inconvenience of buying a property under construction is that it usually takes over 18 months to be built. Meanwhile many things could happen that may put your investment in a difficult situation: the promoter may go to bankruptcy, problems with suppliers or partners, strikes or even legal discrepancies with the competent Town Hall or delay in obtaining the required licences and permissions. In those circumstances the purchaser is exposed to lose the funds invested if they have not been guaranteed by a Spanish Bank or registered Insurance Company through the mentioned bank guarantee or individual insurance.
That is the reason why, when paying any monies on account for properties under construction, proper bank guarantees or insurance policies should be arranged between the Building Promoter and the Bank/Insurance Company. A Spanish Act enacted in 1968 (Law 57/1968) obliges whoever builds to guarantee all payments made by the purchaser before signing the Title Deed. That is to say that if something goes wrong, the payments already made should be refunded to the purchaser with a 6% annual interest rate by the Spanish Bank or Insurance Company. Your Spanish Lawyer will help you to obtain this document and also execute it in the worst case scenario.
SIGNATURE OF THE PUBLIC DEED
The Public Notary, who is the only person entitled to grant a Public Deed, issues a Deed based on the terms privately negotiated by the parties in the private purchase contract. Contrary to the private contract, the Public Deed produces effects and is enforceable before third parties; it can also be registered at the Land Registry of the area where the property is situated. Copies would be issued to accredit ownership.
The Notary will not certify the Title Deed if the parties does not identify themselves by presenting an original passport or identity card showing their nationality. The parties can attend the signing in person or appoint someone, usually a Lawyer, as Power of Attorney, if they cannot attend the signing.
TAXES & LAND REGISTRY
After signature, the notarised Deed should be presented and registered at the local Land Registry. However before doing so, taxes such as Stamp Duty Tax, Transfer Tax, Local Gain Tax (also called Plusvalía) or V.A.T. have to be paid. Those taxes differ whether the property is a resale or is firstly sold by the Building Promoter. Without the tax return stamped by the Tax Authority, the registration will be refused.
In addition, if the seller is not fiscal resident in Spain (company or individual), they buyer is obliged to withhold from the sale price a 3%, and pay it through the model 211 to the Spanish Tax Office in the following 30 days since the signing of the deeds, being responsible in front of the Spanish Tax Office if they fail. Your lawyer can help you in this case.
According to Spanish law and prior to the signing of the deed, the Notary is obliged to ensure with the Land Registry that there are no undisclosed charges or encumbrances on the property. The Land Registry is in charge of maintaining all the details of the property and recording financial charges and other matters that may affect the title. The registration of the deed provides the highest public level of protection not only to owners but also to third parties.
COMMUNITY OF OWNERS
If you have bought an apartment or villa, if it is part of a building complex, keep in mind that these will be subject to the Spanish Law of Horizontal Division (Ley de Propiedad Horizontal).
According to this law, every apartment or villa-owner is co-owner of the common elements of the building complex (stairs, lifts, gardens, swimming pool, cleaning services, drains, supply of water, electric cables etc;), together with the rest of owners.
All property owners are part of a Community of Property Owners which has legal personality just like a company or a person. This Community of Owners must maintain the common elements of the building.