Buying Property in Spain: In my Own Name or Using a Company?
Buying a property in a company name is, in many respects, a good proposition, unless you ask certain lawyers who will tell you that it is always beneficial (for them, that is, from a financial perspective). Logically, giving incorrect, wrong or biased advice is never the desired option if you want to stay in business for the foreseeable future and therefore, in our case, we tend to use the following tax and legal points, or parameters, so that a client can make a judged decision.
Buying Property in Spain: In My Own Name?
Most property transactions in Spain have physical persons as buyers, for the reason that mortgage lenders are not keen to lend to property-holding companies and when they do, loan-to-value ratios rarely exceed 50%.
- Less upfront cost (no company incorporation cost).
- No associated company running costs.
- Improved ability to obtain finance.
- Lower Capital Gains Tax (average of 19% on net profit).
- For non-residents, Personal Income Tax (PIT) is applicable to the property: this annual tax is calculated by applying the tax rate (24%) on the base rate (between 1.1% and 2% of the rateable value or 50% of the purchase price, if the former value has not been approved).
- Visibility: The Spanish land registry system is accessible by anyone who registers with them, via internet, or without registering, by applying directly in their offices. This may not be in the interest of people who wish to remain anonymous for any reason (defaulting on contractual obligations abroad, matrimonial disputes etc.).
- Reduced ability to request a VAT refund, as the Tax Office will view a non-resident self-employed foreigner (registration as such will be required) as a less likely candidate for a refund, given the historical records of unfounded VAT claims on holiday property and a financially strained Tax office.
- Increased difficulty when attempting to mitigate or eliminate Inheritance Tax.
- Only certain costs and improvements on property can be deducted against the profit on selling, not annual running costs (unless one registers as a trader).
Buying Property in Spain: In the Name of a Company?
The pros and cons of incorporating a Spanish company to purchase a property are summarized below:
- No annual taxes on corporate tax after a recent tax law change. Company running cost will depend on the firm dealing with the bookkeeping, €120 per month being an acceptable fee.
- Ability to deduct property running costs from profits.
- Anonymity: A company will allow the shareholder and ultimate owner to limit the exposure to any third party ownership information request. For a full-proof anonymity situation, buying shares of an off-the shelf company and not being appointed as the director is essential (only a Judge, or the Tax Office, could request the shareholders books to be made visible).
- Improved ability to mitigate IHT, particularly where the shareholders are non-residents.
- Improved ability to register as an actively trading to request a full or partial VAT refund.
- Set up costs: Law firms will generally charge anything between €1,000 and €3,000.
- Maintenance costs, compared with paying personal non-residents income tax, where the property has a rateable value of €300,000 or less.
- Capital Gains Tax: Corporation tax is currently at 20% for net profits of less than €300,000 per annum, and 30% thereafter. A retention on dividends payment is thereafter applicable, at 15%. Non-payment of this tax goes largely undetected.
Generally, it is established that buying a property in a company name is recommendable, in our professional opinion, where:
- There is no financing requirement to acquire the property.
- There is a need or desire for anonymity.
- The property has a rateable value of €300,000 or more, as non-residents PIT will be approximately €1,500 per annum, as opposed to a company running cost of around the same value (irrespective of the value of the property).
- The purchase of the property attracts input VAT (new property sale), which is susceptible of being offset against output VAT, where the company embarks on a genuine activity, i.e. property is rented to another company (private individuals do not pay VAT on rental) or used for any other commercial activity, or in the event that the property is refurbished and then sold on.
And what about companies Gibraltar and other offshore jurisdictions?
I have already dealt with this on a previous post, from a rather negative point of view, even if it may have certain benefits.