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SPAIN: A SOLIDARITY TAX ON REAL ESTATE HELD BY FOREIGNERS

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The recent proposal of the Chamber of Deputies (Congreso de los Diputados) is likely to be a hard blow to foreigners who hold real estate in Spain through one or more non-resident entities.

In addition to the net wealth tax (NWT), the proposal also provides for a “Solidarity wealth tax” for individuals with high income (above 3 millions euros of assets).

Spain already has a wealth tax, but its effect has been greatly diluted because autonomous regional governments have the power to vary the rates, intervening on reductions and allowances. In some places, including Madrid, this has resulted in wealth tax being reduced to zero, and similar decisions have been taken by Andalusia, Galicia and Murcia.

In contrast, the new solidarity tax will be a national tax, directly under the authority of the central government. It will therefore apply at the same rate throughout whole Spain and the autonomous regions will not be able to modify it in any way.

The two taxes should complement each other.  According to the proposal, the NWT will affect individuals not resident in Spain if they hold shares in an unlisted entity in which “at least 50 per cent of its assets consist – directly or indirectly – of real estate located in Spain”. 

This is a substantial innovation, which overturns not only the current national regulations but also the most recent decisions of the Spanish tax authorities and Iberian courts. Until now, non-residents were required to pay the NWT only if they owned real estate directly; a tendency reiterated by the very recent ruling no. V1947-22, issued on 13 September by the General Directorate of Taxes (DGT).

The second innovation is that alongside the NWT comes to light also the so-called “Solidarity tax” (Impuesto Temporal de Solidaridad de las Grandes Fortunas). Non-resident individuals with a net wealth in Spain of at least 3 millions euros will be subject to this duty.

According to first assumptions, this tax should be complementary: people could deduct what has already been paid with the NWT from the total amount due.

The new Spanish Solidarity tax, announced last September, has now been definitively introduced in Parliament as an amendment to the “Non-Governmental Bill on Temporary Taxes for the Energy and Finance Sectors”.

When will the new measures come into force? The government has sufficient parliamentary support to have them approved by the end of 2022, and they will be executive the day after publication in the Spanish Official Gazette (Boletín Oficial del Estado).

With a possible debut before the end of the year, both the NWT and the solidarity tax would then apply to indirect holdings of Spanish real estate held on 31 December 2022, to be paid in June or July 2023.

If there will be a postponement to 2023, it would affect tax years ending 31 December 2023 and 2024. This is because the tax has been publicised as a temporary measure that will only apply for a two-year period. However, the temporary nature of the tax is not guaranteed. In fact, the current legislation provides a clause that allows the situation to be assessed at the end of the two years and either maintained or abolished.

The basic principles of the tax will follow those of the wealth tax, e.g. with regard to taxable persons, applicable exemptions and how to establish the taxable value of an asset.

Referring to the details of the proposal, there are 4 bands with respective rates:

1) Exemption up to EUR 3 million;

2) 1.7 per cent taxation for assets between EUR 3 and 5.34 million;

3) 2.1% for assets between 5.34 and 10.69 million;

4) 3.5% for assets over EUR 10.69 million.

Exemptions (EUR 700,000 plus EUR 300,000 for the value of the main residence) are expected just for Spanish residents.

The combined total of an individual’s income tax, wealth tax and solidarity tax liabilities cannot exceed 60% the individual’s taxable income, subject to paying a minimum 20% of the solidarity tax.

Deductions, if any, will be allowed for wealth taxes paid abroad on the same assets subject to the provisions of international treaties or conventions on double taxation.

Finally, individuals subject to the NWT or Solidarity Tax who are neither resident in Spain nor in an EU country will be obliged to appoint a legal representative in Spain to handle their files with the Spanish tax authorities.

SOURCE: Spanish Parliament