Antonio Flores’ Blog

Taxes are a funny thing. One day you get a registered letter, sent via the post office, with a on the spot demand for €2 surcharge, and another day Mr. Roca, the brains behind the biggest corruption ring ever to hit the headlines, faces an €800 million fine for, among other counts, Tax Fraud.

Whatever your problems with the Tax Office are, small or big, I find a very worrying pattern among some professionals in the real estate business: they are still providing tax advice to people buying real estate in Spain and the VAT refund they are supposedly entitled to if they buy through a company.This Costa del Sol legal/tax-gossip is all the more dangerous as it openly despises the complexities and sophistications of VAT tax provisions.

I am talking about advice relating to VAT refund when buying plots of land or property, and is no small talk if one considers that it accounts for 8% (or 18% on plots of land), but also if we think that it can make the difference between buying or walking out of the real estate’s office.

This inexpert advice is presumably given out innocently, but the excitement it creates is not nearly as exciting as the tax officers’ desire to quash the application and return a letter with a fine equating to 50% of the VAT amount trying to be recovered!

This “Sonderbehandlung”, or Special Treatment, is reserved by the VAT officials to those they deem are trying to cheat the Tax Office and so the matter demands some adjustment in perspective. But this is only one side of the (horror) story, because we could also find that having paid VAT, and having been entitled to a refund, the seller of the plot or property who charged us the tax is not a trader and therefore not only will we struggle to obtain a VAT refund but also we will have to pay Transfer tax on top of the VAT!

So as to not bore readers, I will succinctly explain 3 real life case scenarios:

1. A property holding company buys a plot at La Mairena, Ojen, from a legitimate land trader with a view to develop it and sell the finalized property. The buyer claims a VAT refund and receives, by way of return letter, a rejection to the application and a fine of 50% of the VAT that the unsuspecting applicant was after, because the Tax Office, in a display of extreme distrust, considers that the company was never intended to be used to carry out a commercial activity, but rather only as a means to apply and obtain the VAT refund, since the property, they contend, was to be used as living accommodation for the owner of the company. The Tax Office concludes that the property holding company has no other property, no prior experience in construction, no offices (either owned or rented), no employees, is not registered with the Tax Office with a specific “epigrafe” (which is a communication made with respect to the activity the company intends to do) and is not proven that the property was intended to be sold through real estate agents (this particular requirement was used, by a client of our firm, to demonstrate in extremis the genuineness of the claim).
2. An individual buys plot of land at La Quinta, Marbella, and pays VAT for it (16%, now 18%). Some weeks later the Regional Tax Office sends a tax demand for Transfer Tax for an additional 8%, as it is determined that the seller should have not sold with VAT because he is not a property or land developing professional, in fact has, objectively, no business organization as such, and, consequently, the deal is subject to Transfer Tax and not VAT. Connected to the above is the situation whereby the buyer is a proper trader, buys with VAT and intends to claim it back. His surprise is massive when he is told he does not have an entitlement to a VAT refund but he stills has to pay Transfer Tax.
3. An import-export company based in Torremolinos buys a new flat and tries to shave off the VAT paid, alleging that the apartment is being used by the company to carry out its activity. Input VAT is deducted, but 1 year later a letter arrives indicating that application for a VAT refund was made irregularly and it has to be repaid. Applying the Lennartz UE doctrine, the applicant manages to keep 50% of the tax arguing that 50% of the apartment is used for business office purposes and the other 50% for private living purposes.

VAT is a complex tax and is the most visible example of the permanent war between the Spanish Inland Revenue and tax payers that merits an abrupt treatment, inspired by distrust, of the former on the latter. But also, VAT is the Inland Revenue’s obsession so careful when dealing with it.

Antonio Flores Taxes Spain Tax Office, Spain VAT, Spanish Inland Revenue, Transfer Tax

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.

Antonio Flores Property, Taxes rental income in Spain, Spanish Inland Revenue, spanish property taxes, Spanish Tax Office, Spanish Taxman

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