The housing of non-resident foreigners in Spain is also taxed

by Lorraine Williamson
non-resident foreigners
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MADRID – The draft tax on large fortunes hides an unpleasant surprise for non-resident foreigners who own property in Spain worth more than €3 million: they too must pay this tax. 

Experts fear that the adoption of this regulation could shake the market for luxury homes in Spain. Wealthy people are the main buyers of real estate in the top segment of the market. Furthermore, the government wants to introduce this tax, which will be temporary, as early as this year. 

Assets over €3 million

However, final approval of the tax could take place in parliament this week. The tax affects fortunes that exceed €3 million. Moreover, Spain currently has approximately 23,000 such fortunes. 

Different sections are established based on net worth: 

  • The first tax bracket will be 1.7% for assets between €3 and €5.34 million. 
  • The second tranche is 2.1% and concerns the bandwidth between €5.34 and €10.69 million. 
  • For assets greater than €10.69 million, a tax rate of 3.5% is applied. 

This new tax affects not only residents but also non-residents of Spain. The latter will be burdened by business obligations, concerning the assets and rights they own that are located in Spain. Moreover, these foreign taxpayers may not reduce the tax base by the exempt minimum provided for in the Wealth Tax. And that’s because this benefit is only provided to taxpayers who are personally taxed. 

Related post: Spain will temporarily tax large fortunes extra 

Other countries with more favourable taxes

Moreover, in the case of non-resident foreigners, paying this new tax may discourage them from investing in property in Spain. Consequently, they may prefer other countries with a more favourable tax rate. 

“If someone from Latin America decides to invest in a luxury property in Spain and has to pay wealth tax, this tax paid will not be able to compensate him in any way in the country where he is tax resident,” says economist and tax advisor José Miguel Saavedra in idealista. 

Therefore, experts fear the entry into force of this tax could shake the market for luxury real estate in Spain. Especially if the main applicant is a foreigner who wants to own and enjoy a home on the Spanish Costas. 

For foreigners living in Spain, the effect of this tax related to the purchase of a property may be smaller. This is because the difference between the assets and liabilities (debts) of the taxpayer is taken into account when paying this tax. That is, it does not matter whether the wealth is held in money, jewellery or real estate. 

What taxes does a non-resident foreigner who buys a luxury home in Spain have to pay? 

When a non-resident foreigner buys a property in Spain, he must pay the price of the property and other mandatory expenses. This includes the appraisal of the property or the taxes on this transfer. But also the following taxes: 

IRNR (non-resident income tax). When a person who is not a tax resident in Spain owns a house in Spain, he must also pay his taxes. This is done by filing the corresponding forms individually or through a representative in Spain. 

The Spanish Association of Tax Advisers (AEDAF) points out it stipulates that 1.1% of the property’s cadastral value is charged to the IRNR tax base. If the property has a market value of €5 million and a cadastral value of €2.5 million (example), €27,500 must be added to the taxable base and a tax rate of 19% must be paid if the owner lives in the EU or 24%, if the maximum tax is €6,600 per year. 

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Taxation of large fortunes if finally passed 

The large fortune tax provides for different sections depending on wealth, ranging from 1.7% to 3.5%. Non-resident foreigners will not benefit from the exemption of the first €700,000 that residents do have. 

If the tax comes into effect, the non-resident foreigner who buys a villa worth €5 million will pay €34,000 in the draft of this new tax at the time when the properties worth more than €3 million are purchased. 

José Pedreira, an IRPF expert of AEDAF, points out that for owning a house in Spain worth € 5 million, a non-resident natural person paid about €40,600 in taxes per year (€34,000 + €6,600). 

VAT on new homes 

The tax levied on this type of property is 10% VAT. Therefore, on a house worth €5 million, €500,000 will be paid in tax if the house purchased is new. 

ITP on used homes 

The tax levied on used real estate is the transfer tax (ITP). This varies per autonomous community between 5% and 10% of the registered price. Therefore, this works out between €250,000 and €500,000 for the example used. 

AJD 

Both the purchase of new and used properties, if made through a mortgage, are subject to the payment of another tax, the Actos Jurídicos Documentales (Documented Legal Deeds) (AJD), which represents approximately 1% of the purchase price. 

IBI (property tax) 

This is a municipal tax that must be paid by the natural or legal persons who own the property as of January 1 of the current year. The tax is levied on the value of the real estate. The tax must be paid to the municipality where the property is located. The amount of the IBI is calculated based on the cadastral value of the property. The percentage of the tax to be paid differs per municipality and the personal situation of the owner of the property. 

What happens to non-residents who indirectly own property in Spain?

The General Directorate of Taxes (DGT) has confirmed that the ownership of shares or participations in companies by non-residents who directly or indirectly own investment properties in Spain does not generate any wealth tax (IP) in Spain. 

This is provided for in the binding resolution number V1947-22, which concerns non-resident persons in Spain who indirectly, ie through foreign entities, own property in this country. 

However, AEDAF points out that “wealth tax will be changed to tax in Spain the ownership of shares in companies whose assets are 50% real estate in Spain.” 

How this new tax will affect the luxury housing market?

Experts believe that “foreigners who are considering moving to Spain for myriad reasons will have to factor these new variables into their equation. Therefore, this could make other international destinations more attractive.” They point to the legal uncertainty associated with this change in the rules of the game. 

The tax is avoidable 

Apart from the temporary nature of two years and the fact that the tax will be applied from €3 million, not much more is known than what is stated in the amendment. Another economist points out in Idealista that the tax can be avoided based on the knowledge that it is temporary. For example, a villa could be rented with a compulsory purchase that would have to take place after that period. Thus avoiding payment of that tax. 

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