Antonio Flores’ Blog

A recent report by the Association of Tax Inspectors in respect of rental income highlighted what we all knew: that very few landlords do actually declare any rental income. According to the inspectors, the biggest tax evaders are in Andalucía, where it is believed that only 26% of property owners declare this income to the Spanish Inland Revenue (of which, ostensibly, foreigners amount to…0 percent!). In total, €2,450 million of lost tax revenue.

It is not clear however how have they reached these conclusions but one thing is clear to me: I don’t know of anyone on the Costa del Sol (mostly foreigners) who has ever asked where should they pay their taxes.

The reasons, below:

1. Unwillingness to pay taxes (obvious).
2. Untraceability of the transaction as most of the deals are done in cash or are paid into non-resident bank accounts, of little interest to the Spanish Inland Revenue. Also, the sums are small and periodical so banks are not obliged to report back to the Central Bank of Spain.
3. Tenants are not obliged to withhold the tax and lodge with the Spanish Inland Revenue if the tenancy agreement is not of a commercial nature (Conversely, where a real estate agency is involved in the payments they will have to deduct the 24%).
4. Ignorance as to how to about paying the tax in the case of a non-resident.
5. In the event of willingness to pay, many non-resident owners are put off by the tax (24%), with no possibility to deduct costs (maintenance, etc.)
6. Lack of fear of the Spanish Inland Revenue.

But this blissful scenario is likely to change because the Spanish Inland Revenue is on a mission to trap tax dues with a clever and original proposal. They will force utility companies (water, electricity, gas) to supply details of consumption to identify the properties which are apparently empty but house a tenant in them.

This seems once again a futile attempt to convince owners that they need to pay taxes and judging by how it is released it looks more of a newsletter or circular carrying a declaration of intention, no more.

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Living in Spain as a resident has become a rarity among Spanish elite sports professionals. This includes Fernando Alonso, Sergio Garcia and Jorge Lorenzo, among others, who have their residence in tax havens such as Switzerland. Rafa Nadal and Alberto Contador (2-time Tour the France winner) on the contrary feel that paying taxes in Spain is a moral obligation.

The Spanish Inland Revenue and a couple of smaller political parties want to stop them from representing Spain internationally.They had already tried to implement this law some month ago but was it thrown out.

“Social scourge”, “tax cheaters”, “lacking in solidarity”, “miserable compatriots” are just some of the adjectives used to define these sports stars who could, if a law proposal succeeds, stop performing for Spain in future. But when is a person considered to be a resident in Spain for tax purpose and how can the tax office invoke residency of a certain individual in Spain so that he is forced to pay taxes on world-wide income? As with many other countries, any person staying in Spain for more than 183 days in a fiscal year (ending 31st Dec.) will be deemed a resident for tax purposes and is obliged to submit a tax return on world wide income. Unlike the UK, the 90-day rule does not apply in Spain but on the contrary other points of connection with the latter country do apply. To make it simple, the criteria used is one the following:

1. Spending more than 183 days per tax year.
2. Having the main center of its activities or economical interests, directly or indirectly, in Spain.
3. For companies, having most of the assets, directly or indirectly, in Spain or when the primary activity is carried out, as well as having the management centers, in Spain.

Nowadays it is extremely complex for the Spanish Inland Revenue (and presumably for other Tax Offices in the EU) to determine when is a person resident in Spain for the simple reason that passports don’t get stamped any longer. But if someone gets a letter from the Inland Revenue saying that they have detected that he/she is a resident for tax purposes and request payment of taxes on worldwide income the onus of proof falls on the tax subject. Showing water and electricity bills of a property in a third country is no longer a valid excuse for the Spanish Inland Revenue which has now increased the proof of residency by demanding a Certificate of Residency issued by the tax authorities of the third country, provided this country is not classed as a tax haven and that it has some form of tax information exchange agreement.

Where this third country is a tax haven the Spanish Inland Revenue will only let the tax suspect off the hook if he/she can prove that they are effectively spending more than 183 days per year in this country. The reason is that foreign taxpayers are being issued with what they consider as a “passive residents card” which does not oblige them to declare any income nor, ultimately, pay any taxes (normally only a small investment easy to comply with, such as lodging a few tens of thousands of Euros in a bank account or buying an apartment).

If the Spanish Inland Revenue and the Catalan Party CIU (Convergencia I Unio) can convince the Spanish parliament that fellow compatriots dodging taxes is immoral and that consequently they are to be stripped of the Spanish flag on their endorsements we may soon see Fernando Alonso and Sergio Garcia racing and hitting balls, respectively, for Switzerland, Lorenzo riding for Andorra or Pedrosa also riding but for England, leaving the poor(er) Nadal and Contador the burden of…building roads and council tennis courts for their beloved fellow compatriots.

Antonio Flores Taxes Spanish Inland Revenue, Spanish Residency, Spanish Tax Office, Spanish Taxman, Taxes in Spain

Contrary to what has been divulged by some, Property Income Tax (PIT) for 2008 will not have to be paid in June but prior to the 31st of December, as has been the case in previous years. Property Wealth Tax (PWT) has now been abolished and will not have to be paid alongside PIT.

PIT will also be calculated in the same manner as before, that is, by applying 2% to ratable value (or 1.1% if it this value has been revised after 1994) and applying a 24% on the resulting amount. Form 214 is no longer used, and instead Property Income Tax will have to be filed using Modelo 210.

If the property is being let (and the income declared to the authorities!), Property Income Tax is not applicable and if it is only let for part of the year, the tax is only applicable for the part of the year that the property is vacant from tenants. In this case the income is taxed at a flat rate of 24%, without possible deductions.

The elimination of PWT by the Spanish Government was a consequence of the economical crisis and seen as a measure to boost foreign investment. The reality is that very few investors get to know that this tax ever exist prior to deciding to purchase a property and even if they had known it was still applicable it is doubtful that it would have had any influence on the decision to purchase property. In any event the elimination of PWT has been welcomed by owners.

Property owners who have bought a property through a foreign company will need to provide a certificate from the Tax Office in the country of domicile proving fiscal residency of the company and shareholders in a country with a Double Taxation Agreement (all UE countries are), in order to avoid the Special Tax on Foreign Companies, currently at 3% of the ratable value. We will provide assistance in this matter. Property owners who have bought through a Spanish company are exempt from payment of taxes for owning property.

As in previous years, from Lawyers of Spain we will be offering the Fiscal Representation Service to all our clients as from September. The service includes not only the calculation of the taxes and filing of the forms and payment of tax due but also acting a fiscal representative for the duration of the fiscal year (calendar year), notification of any communication from the Spanish Tax Office in relation to the tax and free consultations in respect of any tax matter.

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Spanish tax law is slow to keep up with the new times and so when buying (and selling) at discounted prices, a common occurrence these days, it may well happen that in 6 months from completion we receive a letter from the tax office asking us to pay more tax.

This is exactly what happened to a client who approached us after purchasing a property in Benahavis for €250,000, when he was sent the letter asking him to pay an extra €3,850, on account of Transfer Tax (7%) on €305,000 which is the value property should have, according to the tax office.

Why does this happen? Well, the regional Tax Offices in charge of transfer taxes uses a calculator which tells us what the minimum value each property should be sold at and therefore, if any property is sold under this value they will recalculate our tax declaration and will request that we pay the balance, using the property which has been bought as a guarantee of payment (a charge is immediately placed in the land registry).

Possible scenarios and options:

• What can be done before you buy? If you are buying a property at a discounted price we suggest that the minimum value is known prior to entering into negotiations with a seller and if there is a likelihood that the tax will be more then use when negotiating a price, to your advantage. So if you want to know what is the assessed value for tax purposes of a property in Andalusia, according to the Tax Office, you can do so by using this calculator (note that although an accurate calculation it is not legally binding).
• And if you have already bought and receive the letter…? If it was already known and made part of the deal then it gets paid, but if we receive the letter “out of the blue” (because we never suspected it could happen) then it can either be paid or appealed, a process likely to run into a 2 year period (but nowadays they can be won as judges consider that a calculator is no substitute to a proper valuation to be carried out in situ).
• And what if we are selling? This is a more complex case as the tax office in charge of capital gains tax (CGT) is the national AEAT, which does not use the above calculator but does actually send over property valuers. If this is the case, of which our firm has had very few in the last seven years, we will analyze the facts and merits of the case and advise on what the best course of action is. In one case we had our client had sold cheap (€350,000) because he had personal financial matters to resolve and soon after selling he left the country with the proceeds (very small, incidentally), so we have not heard more from the AEAT Tax Office who reported the real value to be of €450,000. Again, an appeal here is also an option.

If you want to avoid surprises it is possible to apply for a legally binding value report, whether you are buying or selling, which your lawyer can apply and obtain for you.

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Some of you may have been advised by your bank that you need to provide them with a non-resident certificate or have the account frozen. The measure is still confusing as different lenders are applying existing legislation (a mixture of 1991, 1997 and 2007 sets of regulations) differently and whilst some are requesting the certificate electronically, from the appropriate government offices (at a charge of around 15 to 20 Euros), every year, others have requested that the bank account holder provides a hard copy obtained at the Police Station within 15 days from being notified failing which their bank account will be frozen. In these cases the certificate is valid for 2 years after which date the bank will request it electronically.

It does seem however that with the inevitable tightening of money laundering controls all banks and savings banks will eventually request it and therefore it may be wise to apply for a hard copy and send it to the bank.

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This is one of the measures implemented by the Spanish government to improve the economic situation. It also affects non-residents, to whom a special mention is made, and it will be immediately applicable (1st January 2008). This means that if you have purchased your property this year you will only have to pay Property Income Tax (PIT) next year, and if you purchased prior to 2008 this will be the last year in which you have to pay both taxes, paying only PIT next year.

On a 250,000 € property owned by two persons with a 100,000 € mortgage the measure will save them 300 € approximately, and on a 500,000 € property with no mortgage owned by one person the saving is of 2,000 €. I tend to subscribe to the notion that ‘every little bit counts’ and so we can only welcome the measure. Properties owned by Spanish or foreign companies are unaffected by the measure.

As December is quickly approaching, we recommend that you get in touch with your Spanish solicitors as soon as possible in order for them to start arranging the payment.

If you don’t have a solicitor and would like to be assigned one who can offer you this service, please visit the Fiscal Representation page on this site.

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