Antonio Flores’ Blog

Transfer Tax in Spain, and more specifically in Andalucia, has been consistently raised in the last years. Up until the 31^st of December 2011, Transfer Tax on resale property was capped at 7% (6% some years before) but, as if the worldwide housing slump had not reached this region, the Socialist Government chose to increase it to 8%, 9% and 10%, applied on purchase price segments of 0-€400k, €400k-€700k and €700k  and above, respectively.

Madrid, on the contrary, thought that it was wiser to bringing it down by 1%, from 7 to 6 (a little incentive to make up for lack of good weather it seems).

But going back to Andalucia, not all transactions are taxed at rates close to double digits: property professionals that buy resale property and sell it within 5 years can benefit from a reduced 2% rate. 

So what are the requirements that have to be met?

• That the property is for living accommodation purposes (commercial and land are excluded).
• That the unit(s) remain(s) registered in the same form (i.e. buying a plot with a derelict property to rebuild and divide up into several units will not qualify).
• That the property is sold within 5 years from purchase, and the sale is not VAT subject (selling with VAT will occur when a property professional rebuilds, adding value, and sells choosing to add VAT on).
• That the property professional is registered with the Tax Office with one of the following codes: 833, 833.2, 861 and 861.1.
• When completing the purchase transaction at the Notary, that the buyer officially confirms that he is a property professional and the asset will be categorized as a “current asset” (i.e. reasonably expected to sold, consumed or exhausted through the normal operations of business), that he wishes to avail of the tax reduction and that he intends to sell within 5 years.

Does this scheme make sense financially?

Three points to be considered when opting to go down this route:

1. The pretty stiff closing costs in Spain if you add buying and selling costs: these can reach 20% if one factors in Transfer Taxes, Legal Costs, Real Estate Agency Fees and Capital Gains Tax (full cycle). By taking up this option, anything between 6% and 8% can be saved.
2. The “running costs” of being a property professional: by registering with the Tax Office, and Social Security, one has fixed minimum costs of €280/ month plus €50/month in legal/accountancy fees -the lowest the market has to offer-, roughly €4,000 p.a. (if we times it by 5 years, that’s €20,000).
3. The “Five Year Rule for Buying a House”, if you believe what is said in this article.

And what happens if one “misses” the deadline?

According to this 2012 ruling, the unpaid Transfer Tax, plus annual interest on late payment (5% for 2014), will have to be paid to the Tax Office.

What about if buying with a mortgage loan?

All cases we have dealt with where cash buys but would be skeptical about getting banks to lend under this scheme, given the risks associated with the buyer not meeting the criteria.

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If there is a word that I am never comfortable with when advising clients, in law, is ‘watertight’. I often hear the adjective in front of `legal case´, `contract´, `lease agreement´, `terms´ or even, just recently, a firm called Watertight Legal. Let’s now focus on how non-watertight can certain contracts be, in particular Consumer contracts.

Spanish contract law operates the principle of “libertad de contratación”. This means that parties to contracts are allowed to agree on the terms of a contract so long as they do not violate public policy, ethics/morals or the consumers’ rights, and they conform to special legislation that may exist pertaining to the activity i.e. banking, insurance etc.

Surprisingly, employing the best lawyers to draw up contracts is sometimes a recipe for disaster: banks, insurance companies and other large operators have found out, to their horror, that contracts drawn up by the most expensive law firms their money can pay are riddled with (loop)holes like a Swiss cheese.

The examples below come to show what can happen with supposedly watertight contracts (and terms), when challenged in Court:

• Madrid Courts declare at least 45 clauses in banking contracts null and void as they breach Consumer protection regulations (6-9-2013).
• Supreme Court voids 8 clauses found in contracts with insurers Allianz, Caser and Mapfre (1-7-2010).
• Madrid Court rules that 8 clauses in Ryanair contracts must be removed because they are unfair, such as charging €40 for a boarding pass (23-10-2013).
• Costa Cruceros, the cruise liner operator (and owner of the infamous Costa Concordia sinking) agreed to remove 7 clauses off its contracts.

In my experience it is everyday practice, and not some lawyer’s intuition, excessive self-belief in his abilities or the firm he works for, what will help identify clauses (or even the contract) prone to be successfully challenged. That, and articles 82-90 of the Consumer Protection Act that has blacklisted no less than 30 unfair contract terms.

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