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Bank of Spain Raises Real Estate Provisions Set Aside by Lenders

May 27th, 2010

It was highly anticipated since January this year that the Bank of Spain would raise –yet again– the provisions lenders have to set aside on real estate assets held in their portfolios as a result of NPL (http://belegal NULL.com/articles/showArticle/home-repossessions-in-spain-defaulting-on-mortgage)’s or on accepting daciones en pago (http://belegal NULL.com/articles/showArticle/spanish-mortgage-dacion-en-pago-handing-keys-bank) from ailing developers or struggling borrowers. The purpose of these provisions is to offset the likely capital depreciation.

Lenders are required to set aside 10% on adjudicating themselves these assets and deposit it before the BoS. If after 12 months the asset remains in their books they have to set aside an additional 10%. If a further 12 months go by a further 10%. So basically after 24 months they are unable to offload these real estate assets from their portfolio they must set aside provisions for 30%.

So the BoS not only has raised these provisions but additionally has also proposed to shorten the timeline to deposit them down from 24 months to 12 months. The outlined proposal will bring serious consequences on many fronts:

i) As a direct result lenders will suffer a further impact on their already deteriorating balance sheets as they will have to allocate additional funds to offset asset depreciation which sincerely couldn’t come at a worst time as credit is tight. Spanish savings banks will foreseeably suffer the greatest with this change to the point that some may even collapse (http://www NULL.cotizalia NULL.com/en-exclusiva/cajas-colapso-provisiones-banco-espana-20100527 NULL.html). The BoS itself estimates the huge impact of yesterday’s change in a reduction of 10%, on average, of Spanish banks’ pre-tax profit.

ii) Indirectly, as I had already anticipated in my article on “Advice to Struggling Mortgage Borrowers (http://www NULL.levantelifestyle NULL.com/index NULL.php?mod=art_det&art_id=707)”, this change in law would have as collateral victims those borrowers that seeked to hand the keys (http://belegal NULL.com/forums/showthread NULL.php?t=622) in lieu of being repossessed (AKA as Dación en Pago de Deuda (http://belegal NULL.com/articles/showArticle/spanish-mortgage-dacion-en-pago-handing-keys-bank)). Lenders were already increasingly reluctant on accepting them due to the BoS continued raises in these generic provisions in 2008, 2009 and now 2010. This is explained in detail in this post (http://belegal NULL.com/forums/showthread NULL.php?t=73&page=15#150).

What the above translates into, for practical purposes, is that when I wrote in my article on Dación en Pago on 2007 that as a rule-of-thumb 20% of positive equity was required (AKA no-negative equity rule) for a lender to accept a dación procedure the collar must now be raised to 30 or maybe even 40% following the changes in law over the last three years. If you compound this with a foreseeable hike of interest rates by the ECB by this year’s fall or early next year you have brewed a perfect storm for struggling Spanish mortgage borrowers who will no longer have this option available and will most likely be repossessed (http://belegal NULL.com/articles/showArticle/home-repossessions-in-spain-defaulting-on-mortgage) by their lenders on slipping into arrears.

And the reason is simple, property prices of new-build second homes on the Spanish coasts have fallen by an average of 40% from the appraisal value as the BoS itself acknowledges with the proposal of change in law. So it will be hard to find off-plan properties with 30 or 40% positive equity in them built over the last five years as borrowers typically took 80% or 100% LTV mortgage loans to acquire them. There simply isn’t enough equity left in such cases with such high LTV loans when you compound asset depreciation (- 40% on average). Which is why I think that properties built post 2005 are now probably in the red zone for the purposes of following a dación en pago procedure as owners will be unable to fulfill lenders’ new criteria to accept them.

The Dación en Pago was a solution of last resort to waive the dire consequences of a full-blown Spanish repossession procedure with everything that it entails (personal and unlimited liability with all your assets, both now and in the future); sadly, even this has probably now been removed as an option for all those who purchased with a mortgage loan post 2004 following the proposal announced yesterday by the BoS.

Source: Cotizalia (http://www NULL.cotizalia NULL.com/noticias/exprime-banca-provisiones-tocado-beneficio-20100526 NULL.html) and Expansión (http://www NULL.expansion NULL.com/2010/05/26/economia-politica/1274892946 NULL.html)

 

Related articles:

  • Buying Property In Spain Tips Part II. Off-Plan Property (http://belegal NULL.com/articles/showArticle/buying-off-plan-property-in-spain) – 18th April 2010
  • Advice to Struggling Mortgage Borrowers (http://www NULL.levantelifestyle NULL.com/index NULL.php?mod=art_det&art_id=707) -13th April 2010
  • 10 Common Abusive Clauses in Spanish Mortgage Loans (http://belegal NULL.com/articles/showArticle/10-common-abusive-clauses-in-spanish-mortgage-loans) – 4th June 2009
  • The Dación en Pago Explained (http://belegal NULL.com/articles/showArticle/spanish-mortgage-dacion-en-pago-handing-keys-bank) – 28th March 2009
  • The Dación en Pago Procedure – 21st November 2008
  • Bank Repossessions in Spain: A Legal Perspective (http://belegal NULL.com/articles/showArticle/home-repossessions-in-spain-defaulting-on-mortgage) – 25th June 2008

Property, Taxes , , , , , , ,

Spain’s Wealth Tax Reloaded

May 20th, 2010

So much for “green shoots”. Spain’s Government is mulling over resurrecting Wealth tax which was suppressed, albeit not abolished, as of the 1st January 2008.

In a new attempt to prop up its dwindling coffers the Government is now seriously considering bringing back to life this tax as reported this morning by the Spanish press at large. To sweeten up the deal it will be presumably modeled after France’s, which applies a sliding scale on estates north of €790,000. So basically this “new” Wealth tax would tax, presumably, only those who are deemed “affluent”.

This is a political concession from Zapatero to the left-wing establishment on the wake of last week’s hugely unpopular financial reforms, which were essential and maybe even fell short. His announcement on Wednesday the 12th of May before the Congress on adopting unprecedented harsh financial measures to keep the Budget Deficit at bay created a shockwave of social upheaval which ripples are still being felt a week later with syndicate announcements of strikes. His announcement came after he was phoned on the eve before by no less than US President Obama (http://news NULL.bbc NULL.co NULL.uk/2/hi/8679222 NULL.stm)himself and China’s PM Hu Jintao amid concerns on Spain’s spiralling debt; not to mention Merkel’s public announcements of early last week on taking control if necessary. You really couldn’t make it up, could you?

These measures (http://www NULL.elpais NULL.com/articulo/espana/nuevas/medidas/Gobierno/quiere/ahorrar/15000/millones/elpepuesp/20100512elpepunac_5/Tes) (i.e. reducing by 5% public servants’ salaries, freezing public pensions, supressing baby checks) caused great anger as it afflicted the weaker core of society. In an effort to counteract the heavy criticisms the Government is now preparing a new batch of tax novelties targeting the “rich”. A Government’s spokeswoman understanded by rich as those having more than €45,000 stashed in a bank. To affirm these financial measures seem somewhat, erm, improvised would be an understatement. 

Honestly, whatever next?

Source: El Mundo (http://www NULL.elmundo NULL.es/mundodinero/2010/05/19/economia/1274280458 NULL.html)

 

EDIT: 15:30PM

Spain’s Government has just officially announced the creation of a “new” Wealth tax on estates valued in excess of one million euros.

Source: El Economista (http://www NULL.eleconomista NULL.es/economia/noticias/2161797/05/10/El-Gobierno-aprobara-un-nuevo-impuesto-para-las-rentas-superiores-a-un-millon-de-euros NULL.html)

 

(http://www NULL.elmundo NULL.es/mundodinero/2010/05/19/economia/1274280458 NULL.html)

Related articles:

Taxes , , ,

EU Pulls the Stops and Vows to Put and End to Inheritance Taxation Discrimination on Non-Resident Beneficiaries Inheriting in Spain

May 20th, 2010

Here we go again. As explained in my article on “Spanish Inheritance Tax: Advantages of Making a Will in Spain (http://belegal NULL.com/articles/showArticle/spanish-inheritance-tax-spain-iht)” the matter of Inheritance taxation is a fairly complex and technical one compounded by the fact that the 17 autonomous regions of which Spain is made can rule on this matter besides the State.

Spurred by protests of non-residents inheriting in Spain (are you to blame Arthur?), Brussels has taken a closer look at this matter and has informed Spain that it gives it a 2 month’s deadline to set the record straight or else it will send the matter off to the European Court of Justice to rule on this issue. In any case don’t hold your breath, it will take some time to sort out.

In Spain there’s an ongoing trend to abolish Inheritance tax, especially in regions under the political control of the conservative party. This has created a three-tier system, speaking broadly, where you have on the one hand an increasing minority of regions which have gone as far as almost suppressing this tax whereas on the other hand you have a majority that apply generous tax allowances without actually suppressing it (i.e. Andalucía). Regional tax allowances are applied only to resident beneficiaries on one of the said regions.

On a third level you have the State regulation which has the least generous tax allowances and is applied to non-residents inheriting in Spain. Beneficiaries of an inheritance resident in one of these regions can take advantage of these generous regional tax allowances which in many cases almost suppress the Inheritance taxable base.

However non-resident beneficiaries inheriting in one of Spain’s regions may be faced with a hefty taxation bill (specially on large estates or when the named beneficiaries are non-family members) as it’s only the State law that is applied in their case in lieu of the more lenient regional laws. This amounts to a formal discrimination between residents and non-residents. These provisions are deemed to be incompatible with the free movement of workers and capital which the founding EEC Treaty of Rome enshrines. Brussels wants for non-resident beneficiaries to have application of State law waived and instead apply regional laws which are more tax-friendly. The problem will be deciding on the “connecting factor”. You can read in English the European Commission’s press release on following this link. (http://ec NULL.europa NULL.eu/taxation_customs/resources/documents/common/infringements/factsheet/2010/05/2010-05-513-es-tax-personal_en NULL.pdf)

Following what’s happened in similar cases, we can safely assume that non-resident beneficiaries will be able to benefit in the future from the generous regional tax allowances that are now reserved exclusively to those holding resident status in one of Spain’s 17 different regions. Again, this new regulation will greatly reduce lawyer’s headaches. One just cannot stop himself from having warm feelings towards Brussel’s legislators that keep making our life’s easier.

Related articles:

  • New EU Regulation to be Passed on Succession and Wills -18th May 2010
  • Spanish Inheritance Tax: Advantages of Making a Will in Spain (http://belegal NULL.com/articles/showArticle/spanish-inheritance-tax-spain-iht) – 3rd September 2009
  • Free Testamentary Disposition for UK Citizens: Only if You Own Property in the UK (http://belegal NULL.com/blog-by-antonio-flores/free-testamentary-disposition-for-uk-citizens/) – 22nd October 2008
  • Spanish Inheritance Tax Abolished? I’m Afraid Not! 19th September 2008
  • Ways on How to Avoid Inheritance Tax on Spanish Property (http://www NULL.marbella-lawyers NULL.com/articles/showArticle/how-to-avoid-spanish-inheritance-tax-on-spanish-property) – 22nd June 2005
  • Applicable Inheritance Law to Estate Located in Spain (http://www NULL.marbella-lawyers NULL.com/articles/showArticle/spanish-estate-inheritance) – 16th April 2004
  • Spanish Inheritance Tax: How much is it? (http://belegal NULL.com/articles/showArticle/spain-inheritance-tax) – 1st February 2000

Inheritance, Taxes , , , , ,

Spanish Capital Gains Tax Raise to 19% Goes Unnoticed

March 22nd, 2010

Spain’s Government has raised Capital Gains Tax (CGT) for both residents and non-residents to 19% as from the 1st of January 2010, which effectively means any property sold on as from the said date will attract CGT at 19%. This tax change seems to have gone blissfully unnoticed by the majority of people, or this is what you realise when you read what the so-called experts write on the many different expat forums available.

After a protracted process grounded on discrimination, the European Commission forced Spain to equate the Capital Gains Tax for both residents and non-residents alike leaving it at 18% as from the 1st of January 2007. Previously it stood at 35% for non-residents and 15% for residents.

This new tweak is related to Spain’s widespread efforts to prop up its dwindling coffers in view of its beleaguered Economy. This policy of increasing taxes in the aftermath of a property bubble has come under heavy criticism by reputed financial experts and may even hamper an early recovery as well as possibly incentivizing under declaring.

The following table sums up CGT amendments over the last years:

  Until the 31-12-2006 2007-2009 As from 01-01-2010
Tax rate 35% 18% 19%

For those who are still sceptical, and doubt wether this is true or not, I refer you to the official Modelo 212 instructions (http://www NULL.agenciatributaria NULL.es/AEAT/Contenidos_Comunes/La_Agencia_Tributaria/Modelos_y_formularios/Declaraciones/Modelos_200_al_299/212/Instrucciones/instr_mod212 NULL.pdf) (PDF – Spanish) for further confirmation.

Related article: Taxes when Selling Spanish Property (http://www NULL.marbella-lawyers NULL.com/articles/showArticle/taxes-when-selling-spanish-property) – 2nd May 2002

Property, Taxes , , , , ,

Smoking Ban: Government Reports That Smoking Will be Banned as From Next Year in Enclosed Premises

November 6th, 2009

Just when bar and restaurant owners thought things couldn’t get any worse, given the grim financial downturn, you can always rely on the Government to prove them wrong. Mrs Trinidad Jimenez, Spain’s Health Minister, announced yesterday that smoking will be banned in all closed public venues as from the 1st January 2010.

Bar, restaurant, hotel and discotheque owners have only just finished paying off the mandatory expensive reforms to their business premises so as to segregate designated smoking and non-smoking areas in compliance with the newly passed Smoking law (law 28/2005 which came into force on the 1st January 2006). Scarcely three years ahead the Government plans to scrape it off amending this law and banning smoking all together in closed public premises. So basically these refurbishments will now become useless.

On a side note, Spain’s football league are now threatening to go on strike if the tax reform announced by the Government this week is enforced whereby top-football-earners will now be taxed at the highest tax band of 43% instead of a flat income tax rate of 24%. This had garnered Spain widespread criticism throughout Europe on grounds of unfair competition.  Hopefully this will not be the case.

I think some people may be in for a hard time next year if they like watching football or smoking or both.

56 days to go…

Taxes, Uncategorized , ,

Spanish Government to Raise Taxes

September 28th, 2009

Contrary to what would seem like reasonable Fiscal Policy in the midst of a deep recession, Spain’s Government has decided it will raise its Indirect tax, Value Added Tax or VAT.

It doesn’t take a degree in Economics to realise just how, errm to put it mildly, counterproductive this is to the broad Economy, more so in Spain’s case. With Consumer Confidence plummeting in Spain it would seem the Government should strive to incentivize spending, rather than curtailing it at every opportunity. Oddly enough and contrary to popular wisdom, that is exactly what it has announced last Saturday the 26th of September.-a tax raise leaving the door ajar to future tax raises…

With Spain’s Property Industry, which has long been Spain’s driving force along with Tourism, in the doldrums, with 5 million unemployed and reportedly steadily rising to unprecedented levels unseen since the days of the II Republic (1931), with a reported stock of between 1.6 to 3 million unsold houses (http://fistfulofeuros NULL.net/afoe/economics-country-briefings/three-million-unsold-properties-in-spain/) (both resales and new builds), with a Public Deficit spinning out of control adding 80 million Euros of debt everyday and with Consumer Spending spiralling downwards hitting fresh lows every month our Government decides that what is best needed by our countries’ ailing Economy is to …raise taxes; contradicting its much vaunted electoral promise of “lowering taxes”.

On Saturday the 26th of September it has been decided that as from next year 2010:

  1. The extended VAT of 16% is to be raised to 18%.
  2. The reduced VAT of 7% is to be raised to 8%. This is the tax that is levied on new builds (off-plans). The tax on resales remains unchanged. This is not welcome news by a struggling sector vying to unload a huge stock of unsold new build properties
  3. The super reduced VAT of 4% will remain unchanged.

One can only pray our Government will not raise even further our tax burden in such dire times. Lowering taxes is always the right path on the road to economic recovery which incentivates citizens saving and helps to attract Foreign Investments; both of which will be invested reactivating Consumer Spending which will ultimately lead to creation of new jobs, not to their destruction and the reckless public subsidizing of lost causes.

Property, Taxes ,

Spanish Mortgages: No Tax on Term Extension or Switching to Interest-only

June 26th, 2009

stamp-duty-spanish-mortgageSpain’s Tax office has replied within the last month two binding legal queries which shed some light onto the taxation of the amendment of mortgage terms.

On the first reply of 25th of May, the Dirección General de Tributos (DGT) clarified that switching  to interest-only will no longer attract Stamp Duty. On the second reply of 10th of June, the DGT has stated that changing the mortgage’s reassessment date will no longer pay Stamp Duty either. It would be regarded as exempt following art 9 of Law 2/94. E.g. a borrower changes the mortgage resetting from once a year to a quarterly basis.

Regardless if the borrower chooses one or both options they will not attract tax. Also, a lender cannot lawfully charge more than 0,1% to extend mortgage repayments

This is welcome news indeed for struggling mortgage borrowers that will now have more options available to them without being taxed on choosing them. Reducing citizen’s tax burden is always the right path on the road to financial recovery.

Property, Spanish Mortgages, Taxes

Spanish Inheritance Tax Abolished? I’m Afraid Not!

September 19th, 2008

Some of you have probably recently read in the press (http://www NULL.citywire NULL.co NULL.uk/personal/-/news/money-property-and-tax/content NULL.aspx?ID=313872)that Spanish Inheritance Tax has been abolished, and have received the news with excitement! Well, I don’t believe that anyone is in a hurry to pass away to benefit from this supposed tax exemption, but it would indeed mean a relief for all of those concerned about the Inheritance Tax burden for our heirs when the time comes!

As our colleague Fernando Del Canto rightly points out in his excellent blog, the news is incorrect. Apparently, Spain’s Government has published in the English version of their site a press release (http://www NULL.la-moncloa NULL.es/idiomas/9/actualidadhome/14082008_24reformas NULL.htm) in which they mistakenly claim that the abolishment of Inheritance Tax is to be approved.

The text, lost in translation, is as follows:

The Government approves the abolition of Inheritance Tax and 24 reforms aimed at economic recovery

Thursday, 14 August 2008

The president of the Government appeared after today’s extraordinary Cabinet Meeting to explain the economic reform programme that is focussed on six strategic sectors: finance for small and medium sized enterprises, housing, transport, energy, climatic change, telecommunications and the information society, and services. These reforms will take place during 2008 and 2009 with the aim of helping families and businesses, and preparing for economic recovery.
[…]
Adopted measures

The head of the Government announced that the Bill for abolishing inheritance tax, to come into effect from 1 January 2008, has been referred to Parliament. This represents a fiscal improvement of 1,800 million euros for approximately one million taxpayers.
[…]

We would like to confirm that, unfortunately, this is just an error due to a poor technical translation into English. What the Government meant to inform was that Property Wealth Tax (http://www NULL.marbella-lawyers NULL.com/blog-by-antonio-flores/property-wealth-tax-at-last-suppressed/), as already reported at large by the media, was to be abolished as from the 1st of January 2008.

Inheritance, Taxes , ,

Up to 300% Increase in Property Taxes in Malaga in 2009

September 12th, 2008

Thirteen local councils in Málaga province will revise and update the cadastral values (valor catastral) of properties within their limits, translating into increases which range from 80% to 300%. It is expected that the increase for residential properties will be no more than an average of 150%.

The increase in cadastral value is quite significant (http://www NULL.surinenglish NULL.com/20080830/news/costasol-malaga/catastral-revaluations-threaten-send-200808301344 NULL.html), as this figure is a benchmark which is used in calculating various taxes in Spain, such as IBI Tax, IIVT (or Plusvalía Municipal Tax), Wealth and Income Tax and the dreaded Inheritance Tax.  The cadastral value, which is generally well below the true market value of real estate, is regularly updated every decade or so, as not to significantly detach the taxable values from those of the market. The single most important factor that raises or lowers the cadastral value is the appreciation or depreciation in value of the land.

In the Málaga province these updates were carried in general in the 80s and mid 90s. The municipalities of Alfarnate, Arenas, Atajate, Benamargosa, Benaoján, Cútar, El Burgo, Cuevas de San Marcos, Gaucín, Jubrique, Málaga (city) Totalán and Abdalajís Valley will all be updating the cadastral value of real estate in their territory.  In some of these towns the cadastral value hasn’t been updated since 1989 such as in El Burgo or Gaucín. IBI tax may well even triple in these municipalities as from next year.

Important cities in Málaga province such as Estepona or Vélez Málaga (http://www NULL.surinenglish NULL.com/20080830/news/costasol-malaga/increases-anger-residents-velez-200808301347 NULL.html) already updated their cadastral values last year. However many other towns will also have to update them soon, such as Marbella (unrevised since 1988), Alhaurín de la Torre (1996), Benahavís (1996), Campillos (1996), Cártama (2000), Manilva (1997), Rincón de la Victoria (1999), Ronda (1998) or Torrox (2000).

Most owners have IBI tax set as a standing order against their Spanish bank accounts. Make sure that you have enough funds in your bank account before this tax is due (normally between June and September). Regarding Property Income tax (Property Wealth Tax is due to disappear next year), your solicitor will let you know how much this figure is.

Property, Taxes , ,