All property owners in Spain are liable to pay three separate taxes every year.
These taxes are:
- Property owner’s imputed income tax
- Wealth tax
- Annual real estate tax (IBI)
Property Owner’s Imputed Income Tax
Spanish property owner’s imputed income tax is not charged on a resident owner’s principle residence; however, a second home would be taxed. In the case of a non-resident, since this property will not be considered to be the principle residence, the tax must be paid on a yearly basis.
The tax payable is 2% of the rateable value of the property attributed to the property owner as a fictitious income on rental. This is reduced to 1.1% if the rateable value has been raised since 1994 – and many of the values have been raised. Residents pay tax on this notional income by having it added to their other income as if it were more earnings. Lower incomes pay 15% tax and higher incomes 30% or even 40%. A non-resident is always taxed at the flat rate of 24% on any income arising in Spain.
This tax of 24% on income must not be confused with the capital gains tax of 19% which applies to profits from the sale of assets, such as a house or shares in a company.
In addition to income tax, the Spanish resident – and non-resident property owner – are liable for Spanish tax on capital assets – the “patrimonio” tax. The name “wealth tax” is the adequate translation of the Spanish name, as it is actually a tax on all your assets and property, your total wealth.
Wealth tax was based on the real sale value declared in the title deeds, which tends to be higher than the “valor catastral”.
Wealth tax affects residents and non-residents differently. A resident is required to declare worldwide assets while the non-resident only has to declare property and assets in Spain.
The principal deduction for a resident of Spain is that the first 108,182 euros is exempt.
Annual Real Estate Tax (IBI)
This tax is based on the “valor catastral” and can vary widely from town to town for the same type of property because it is a municipal tax. This real estate tax is called the IBI, the “Impuesto sobre Bienes Inmuebles”. The tax is increased every year in line with inflation.
For a non-resident, the best solution is to have the tax paid by standing order from a bank account. The bank will provide a form which authorises them to pay the tax, and a copy of the form is deposited with the local council. This ensures that taxes are paid when they are due, just as with the other utility bills of your property. In addition to the assessed value of your property (“valor catastral”), the IBI also lists your referencia catastral number, which will identify your property at the “catastro” office together with its officially documented size. 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.
These three taxes cannot be avoided as the Spanish tax agency, “Hacienda”, will audit the books at the time of the property sale. They will be holding your deposit of 3% of your total sale price, which is a guarantee against your imputed income tax and wealth tax obligations for the previous four years, as well as against your capital gains tax liability. You will also be required to present the current real estate tax receipt, the IBI, when you sign the sale contract.
Special Tax on Off-Shore Companies (3%)
There are thousands of offshore tax havens used for the sole purpose of owning a property in Spain. Tax exempt companies formed in Gibraltar to own Spanish property will no longer be recognised by the end of 2010.
The strict controls on tax havens and money laundering have made these changes necessary. There is a new form of non-resident company that offers many of the same advantages. The special tax on properties owned by offshore companies is 3% of the “valor catastral”. For companies registered in Gibraltar or other tax havens there are no exemptions.
Non-Resident Rental Tax
It is legal and acceptable for you, as either a resident or non-resident property owner in Spain, to rent out your property. However you must remember that you must declare your rental income to the tax authorities. You are actually required to declare the income within 30 days of receiving it, but can instead apply to make quarterly tax declarations in order to save paperwork.
It is true that almost all owners who let their properties do not declare this income to the Spanish tax authorities and the chances of getting caught are slim. Nonetheless, Spanish income tax is due on any profits arising in Spain.
If you are non-resident, you are liable to pay 24% from the very first euro of rental income. You cannot take advantage of the reduction of 50% for resident landlords.
If you are a resident, you should include your rental income with your other income when you make your annual Spanish income tax declaration.
If you register your property as a tourist letting operation, you can charge the maintenance expenses of your property as a business expense and offset it against tax.
If you are a non-resident, but own and operate a business in Spain, such as a restaurant, or a bar etc., you are also liable for Spanish tax on your profits.
Your Fiscal Representative
The non-resident property owner of only one property is no longer required by Spanish law to appoint a fiscal representative who is resident in Spain. Owners of two or more properties, however, must do so – under penalty of fines that can go as high as 5,000 euros in the event of noncompliance.
The fiscal representative guarantees to the Spanish tax authorities that they have a reliable contact inside Spain for the non-resident tax payer. Most non-residents appoint their tax consultant or legal representative as their fiscal representative.
Non-Residents Fiscal Identification Number (NIE)
If you are a non-resident property owner, you must pay the above-mentioned taxes and may have to name a fiscal representative. In order to pay these taxes, you must apply for a NIE (Numero de Identificacion de Extranjero), which is your Spanish tax identification number. Non-Spanish residents of all nationalities also have such a number.
You should apply for this number when you purchase your property. The number identifies you to the Spanish authorities and is required when you pay taxes or have any dealings with “Hacienda”. To obtain it, you need to make an application at the nearest police station, or “comisaria”, which has a foreigner’s department and to submit a photocopy of the relevant pages of your passport. If you are an EU citizen coming to live in Spain, you will be assigned your NIE number when you obtain your new certificate of registration which has replaced the residence card.
Part5: Tax Advantages For Residents – Available Friday 23rd
Foreigners sometimes believe that taking out an official residence permit in Spain will cost more money and expose them to Spanish taxes which non-residents can avoid. The reverse is actually true. The resident property owner has a number of tax advantages over the non-resident. Continued tomorrow…
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