Capital gains obtained by non residents on the sale of urban property bought between May 12, 2012 and December 31, 2012 shall enjoy a tax exemption amounting 50 % of said capital gain. For this partial exemption to apply the purchaser must be unrelated to the seller. Note that the sale can be done after December 31, 2012. The relevant date for the exemption is the date of acquisition.
Once you have set up a company in Spain you have to keep the accounting records to comply with the legal accounting and tax reporting requirements established by the Law.
You can only do it in three ways:
The first two systems shall require a kind of bottom – up reporting, because all the accounting must be reported to the head office to allow it consolidate the Spanish Sub data into the global organization accounting system.
The third system is what I call a top – down reporting because at some point the Spanish accounting kept abroad must be adapted to allow the Spanish Sub comply with local accounting and tax requirements.
In my view, the only sensible way to deal with this matter is using the third system because is, by far, the most efficient, safe and cheap method, at least for small to medium size operations.
If you hire a Spanish tax accountant you will need a skilled one, with experience and knowledge of foreign accounting standards and also a good command of foreign languages. Besides, you will need some kind of external support for mildly complex tax and legal issues. You will also need to buy or rent accounting software, assuming the cost involved thereof. This is not cheap. Moreover, you need to incur in time and effort at home country level to review and consolidate the data of the Spanish Sub. Therefore this system is expensive, inefficient (basically you duplicate the work) and slow, because reporting is always done with some delay.
Hiring and external firm to handle the matter may allow you to overcome some of the drawbacks of an in house accountant, but still is not an efficient system. Clearly, relying in a firm rather than in one single person is safer – the accountant shall go to holidays from time to time, get ill, or leave the company- . Other advantage is that you do not need to buy or hire any accounting software. Still, it may be rather expensive because for cross border reporting you will need a top class firm. Although in Spain accounting firms are very cheap due to the fact that in practice it is an unregulated sector (i.e. anyone with a short course in accounting, but not qualified or supervised by any accounting body, can legally set up an accounting firm), most of those firms lack the necessary expertise and knowledge to deal with international reporting and accounting. More often than not they cannot even speak English for professional purposes. So your choices would be rather limited. Spanish top class accounting firms are very professional, but are not cheap at all. Basically, you will end up paying around 100 Euro per hour, and this can add up to an outstanding year end figure. On top of that, the delays in reporting are unavoidable.
Instead, the proposed accounting organization is astonishingly simple. All the accounting entries are done at the head office premises using the parent company software. All you need is a good scanner, because the original documents (invoices, bank statements…) should be kept at the Sub premises. That way the parent retains full control of the Sub accounts. The marginal cost is also very low, because you use the head office staff. There are not delays because the Sub records are automatically integrated into the global organization. So it is a perfect system: efficient, cheap and safe.
However, your local sub must comply with Spanish accounting and tax obligations, which are summarized below;
Once per year the company must legalize the journal (s) and the inventories and quarterly trial balance book before the Mercantile Registry. Very few people seem to know that Spanish Law does not require any predetermined layout for these books. A company can codify the accounts and use them in the way best suits its needs. The language of the books is also irrelevant. The general ledger not need to be legalized, but I think is good practice to do it as well.
Monthly or quarterly (for companies with a turnover below 6 Million Euro) the company must produce the sales registry, the purchases registry and the capital expenditure registry. These books are very simple. They are not more than a list of invoices issued or received ordered by date. Any accounting software can produce such reports, which are used for Value Added Tax self assessment. A spreadsheet would be fine for these purposes and in case of a tax audit, is normally requested by the tax inspector.
Once per year, the year- end compulsory Financial Statements (Balance Sheet, Income Statement, Explanatory Notes, Statement of changes in Equity and Cash Flow Statement) must be filed in the Mercantile Registry.
The year-end Financial Statements do have a predefined layout which must be compulsory followed. Not only the layout, but the accounting principles used to produce these statements, must be consistent with Spanish General Admitted Accounting Principles (“GAAP”). Spanish GAAP, closely follow the International Accounting Standards (“IAS”) and the International Financial Reporting Standards (“IFRS”) so little, if any, adjustments are to be expected to comply with Spanish GAAP’s . However, it is necessary to review the accounting policy of the parent company to make sure that is acceptable for Spanish reporting. The main difference is that Spanish GAAP do not allow the impairment of non current assets.
That’s it! With these records you can comply with all accounting and tax requirements (basically VAT and Corporation Tax).
As you see, the top- down reporting allows your business to comply with Spanish Law very easily and cost efficiently. The time and effort of the local firm hired to support your operations in Spain is dramatically reduced, so are the cost involved.
At Costa, Alvarez, Manglano & Asociados we work successfully with foreign companies following this method, so we encourage you to analyze its convenience for your business.
If you own a property in Spain, it can be either for your own use and pleasure or rented (or both).
Believe it or not, if you own a non rented property in Spain you have to pay each year the Income Tax on a sort of “notional income”. I prefer to call it phantom income, because nobody sees it but the tax man. This phantom income is a percentage of the cadastral value (usually 1.1 %). On that income you apply the tax rate of 24,5 %.
Example: if the cadastral value of the property is EUR 100.000 the annual payment would be: 100,000 * 1.1 % * 24,5 % = EUR 269,5.
You also have to pay a local tax called Property Tax (“Impuesto sobre Bienes Inmuebles”). The taxable base of this tax is the cadastral value and the tax rate varies depending on the place where the property is located, but cannot exceed 1.1 % for urban properties and 0.9 % for rural ones.
In case you rent your property you have to pay the Income Tax on the income you get from the rented property. If you are a European Union citizen you are entitled to deduct from the gross income all the expenses related to that income, including financial expenses derived from the acquisition of the property, depreciation (2 % on the value of the property excluding the value of the land), maintenance, professional fees and the like. The tax rate is also 24,5 %.
Tip: If you are not an European Union citizen the taxable base is the gross income, that is, you cannot deduct any expense. I call this discrimination.
Some history
The Spanish property law is inspired in the Roman’s Empire Law. More than that, in many cases the rules governing the transfer or property are actually the same, although more than twenty centuries have passed.
To transfer the ownership of a property the Romans required two acts. In first place a title apt to transfer the property was needed. These titles could be a sale agreement, a gift or donation, a will and the like. But to become the owner, the acquirer further needed to take actual possession of the property (“ traditio”). In those times the need to take possession was logical. Since there were not registries or files, an external act was needed to let the others know that the ownership or the property had passed to someone else. As time passed the need to take physical possession of the property was somehow tempered and substituted by some kind of symbolic act, such as de delivery of the keys of the property (“tradition ficta”).
In Spanish modern law, the tradition has become more of a legal fiction. By rule of Law, if someone acquires a property in a Public Deed entered before a Spanish notary, there is the legal fiction that he has taken possession of the property. But if you buy the property in private contract, remember that you still need to take possession of the property to become the owner of it.
In practice, since almost 100 % of people buy the real estate in a Public Deed there is no need to bother with the possession. Therefore, nowadays both acts (the title and the possession) are basically the same thing.
Other important rule inherited from the Roman Law is the principle by which if the seller is not actually the owner of the property, the buyer cannot become owner either (“nemo dat quod non habet”). It makes sense that none can transfer an interest or right that he himself does not own. For example, if you buy a stolen item, you will never become the owner of it.
The Land Registry (“Registro de la Propiedad”).
Until the setting up of the Land Registry in the Nineteenth Century the old rules were applied, although it was clear that these rules were no longer appropriate for the modern times. Specifically, the risk of buying land or other real estate from a non-owner or with hidden charges had practically collapsed the real estate market. The market was dead and nobody was willing to buy any property. Banks did not give any loans backed by real estate, because of the same risk. The economy stalled.
The Land Registry was set up with new rules that override in practice the all ones. The Land Registry operates under a few very clear and safe principles. The most important one is what I call WYSIWYG principle (What You See Is What You Get). According to this principle if you buy a property to whom appears in the Land Registry as owner (“The Official owner”), you become the owner of the Property, providing you are acting in good faith, which is always presumed. The same happens with any charge, lien or mortgage on the property. Only the charges expressly stated in the sheet of the Property can affect the buyer.
There is only one exception to the WYSIWYG principle. Taxes. The Local Property Tax (“Impuesto sobre Bienes Inmuebles”) is said to have a “phantom” mortgage on the property. So even if it is not stated in the sheet of the Property, as will normally be the case, it is a charge on it by rule of Law. Therefore, when buying a property one should always ask to the seller for the receipts probing the payment of this tax for the previous four years. The Tax levied on the acquisition of the property is also a phantom mortgage.
The consequences of this new approach (not so new, by the way, considering that it has more than two centuries) are enormous. Note that not always the official owner is the actual owner. I will give you a few examples. In some cases, the acquisition of the official owner could have been void (for instance, he bought from a minor or incapable). Or even if his acquisition was completely valid, he may no longer be the owner. For example if he has dead, the property would have passed to his heirs. The latter may not have registered the property in the Land Registry on his own name for some reason, for instance, to avoid paying the Inheritance Tax. Or the official owner may have sold the property to someone else who does not want to register the property on his own name, for example, to conceal it to his creditors – or spouse. In all these cases the official owner would not be the actual legal owner of the property.
Although the registration of the acquisition in the Land Registry is not compulsory and has nothing to do with the transfer of ownership, it should be clearly understood that failing to register the property possess an enormous risk for the buyer due, precisely, to the WYSIWYG principle. If the official owner sells the property again to a good faith buyer, the latter could become the new owner, as explained below.
In effect, although the so called “double sale” is a rare event, it do happen. It can be caused by a criminal act or not. A seller willingly selling the same property twice, commits a criminal fraud that can be prosecuted by a criminal Court. However, the buyer (s) should be focused in recovering the ownership of the property or, at least, the price paid for it. In most cases, however, a double sale event occurs by chance, without any criminal intention. I will put you two examples:
a) Imaging an old English gentleman, who owns a property in Spain, decides to sell it. He hires a Spanish Lawyer to handle the sale and grants him a Power of Attorney to close the deal. The UK owner then finds a neighbor interested in the property and sells it to him without informing his attorney in Spain. The latter, ignoring that the property had already been sold and before the new British owner registers the Property, sell it again in Spain. Voila! A double sale has taken place.
b) A company, ran by two managing directors who can act severally (i.e. each one is entitled to dispose of the assets of the company by his own), owns a property in Spain. Then each one, ignoring that the other has already sold the property, sells it again.
When a double sale takes place, the Law must decide who is the new owner, as clearly both buyers can not own the same property. Before the Land Registry existed the conflict was decided by the possession. The first buyer taking possession of the property became the owner and the second one had only a claim against the seller to get the refund of the price paid and any damage suffered.
But the advent of the Land Registry changed the rules. Now a new principle, known as the TPT rule applies (“Prior in Tempore, Potior in Iure”). Under the TPT rule, the first buyer registering the sale in the Land Registry becomes the owner. It does not matter the date of the Deed or the possession. The other buyer has only a claim against the seller for the price paid and any damage suffered before a criminal court, if is the case, or before a civil court. Whatever is the case, a long path of pain before the Spanish Courts is to be expected. And the final outcome may be rather disappointing if, after getting a favorable judgment, it cannot be enforced because the seller has disappeared or become insolvent (actually or apparently).
Therefore, and to put an end to this article, I would recommend two things:
a) After signing the Public Deed of sale, don’t walk, RUN to register your contract in the Land Registry
b) When checking the sheet of the Property in the Land Registry, make sure that you are looking to the right page!
c) Do not take the road to ruin, hire a Lawyer!
The seller of a property must deal with two taxes: Non residents income tax ” Impuesto sobre la Renta de los no Residentes” equivalent to the UK Capital Gains Tax and a local tax with an ominous name “Impuesto sobre el incremento de valor de terrenos de naturaleza urbana”; to make it short, we will call it the Local Urban Land Gains Tax. In Spain it is commonly referred as “plusvalia municipal”. By far, the first one is the most relevant.
It is important to point out that the seller must pay these taxes according to the law, i.e., the law considers him the tax payer. It does not mean that both parties of the sale purchase agreement can agree otherwise. But this agreement only is binding between the parties.
1.- Capital Gains Tax.-
Capital gains obtained as a result of selling a property are subject to tax. This income shall be deemed to be accrued when the property is transferred.
In general, net gains shall be calculated based on the difference between the cost price and transmission value of the property.
The cost price consists of the real amount for which the asset being sold was acquired, plus the sum of the costs and taxes inherent in the acquisition, excluding interest, paid by the transferor. This value will be corrected, according to the year in which the property was acquired, by applying updating coefficients that are established annually in the General State Budget Act.
The application of a coefficient requires the investment to have been made at least one year in advance of the date of transfer of the real estate asset, as is the case
If the building being transferred had been rented, the value determined should be reduced by the amount of the depreciation corresponding to the rental period. This depreciation will also be updated in accordance with the year to which it corresponds. It does not seem to be the case.
The transfer value is the real amount for which the disposal was made, reduced by the amount of any costs or taxes related to the transfer paid by the seller.
As a result, the capital gain on which taxation will be paid consists of the difference between the transfer value and the cost price, determined as described above.
Nevertheless, if the property is transferred by an individual who purchased it prior to 31 December 1994, net gains will be subject to a transitory scheme and the previously calculated figure will be reduced.
If the transferor acquired the property on two separate dates or the property has been renovated, calculations must be made as if there were two net gains. Therefore, we have calculated two separate capital gains, one for the land and one for the building.
The tax rate is 21%, as from January 1st, 2012.
The person, who acquires the building, whether resident or non-resident, is obliged to withhold and deposit with the Public Treasury 3% of the selling price. For the seller this amount constitutes a payment on account for the tax on the income arising from the transfer. Therefore, the purchaser will give a copy of form 211, used to deposit the withholding, to the non-resident seller, so that the seller can deduct this withholding from the tax to be paid as a result of the tax return including the capital gain. Should the amount retained be greater than the tax liability, it is possible to obtain a refund of the difference.
In the event that the withholding is not deposited, the building will remain liable to payment of the lower of the amount of the withholding or payment on account and the corresponding tax.
The tax return must be filed within four months from the sale of the property.
2.- Local Urban Land Gains Tax
This is a local tax, so every town has his own rules. Some towns may not have it at all. The taxable base is a percentage of the cadastral value. This perecentage is variable depending on the years of ownership; the longer the ownership the higher the percentage and, therefore, the taxable base. The maximun percentage allowed by the Law is 60 % (for ownership of 20 years or more). The maximum tax rate is 30 %, but usually is much lower.- As a rule of thumb, the tax is normally about 2.000 – 3.000 Eur, although in some cases can be significantly higher.
When you buy a property you must pay one of the following two indirect taxes:
In case the transaction is subject to VAT, the taxable base is the price paid for the property and the tax rate is currently 8 %. Stamp Duty varies from one region to another, but the most commonly rate is 1 %.
When Transfer Tax applies, the tax rate is normally 7 %, although it may vary depending on the Region where the property is located.
The main problem with transfer tax is the taxable base, which is the fair market value of the property when the transaction took place. Note that this concept may be different from the price paid. So it happens quite often that you declare as taxable base the price paid to see that a few months later you receive a tax assessment from the regional tax office increasing the taxable base on the grounds that the fair market value is supposed to be higher than the price paid. Then you have to pay 7 % on that difference. Of course you can object and start a legal procedure to defend the value declared. As a barrister, I love this happening, but to be completely honest in most cases it is not worth doing so. At the end of the day you end up paying in professional fees (real estate experts, lawyers…) any hypothetical saving you may get from the legal procedure.
I have always thought that in sales between non related parties there is not such thing as a market value different from the selling price. Precisely the price represents the consensus between an informed buyer and an informed seller on the value of a property at any given time. Therefore, in my view, it is an absolutely a non sense the possibility of a market value different from the selling price, at least, in transactions between unrelated parties.
To overcome this legal uncertainty many regions follow in practice safe harbor rules. Thus, if the taxable base declared is higher than a certain value, your tax return is deemed to be correct. Basically the method is to multiply the cadastral value by a number which varies depending on the location of the property. Usually, the multipliers range from 1,5 to 3,5. Some regions, for example Valencia, provide an on line tool to help tax payers find the appropriate value for the property.
You can find the cadastral value of the property in the Property Tax notice (“Impuesto sobre bienes inmuebles”) or in the web site of the catastro.
One final word. Hiring a Spanish real estate solicitor may be expensive, but be sure that failing to do so can be the fastest way to ruin. Avoid hiring foreing practitioners, accountants, real estate brokers etc. They may be very skilled proffesionals but they are not legal experts. Spanish real estate legislation is very complex and probably beyond the knowledge of most proffesionals without a legal background.
1.- Company’s overview
The SOCIEDAD DE RESPONSABILIDAD LIMITADA (SL) is a Private Limited Company that can engage, broadly speaking, in any kind of commercial or industrial business. However, it needs previous Administrative approval for certain activities such as, brokerage, investment management, banking, insurance and other financial related services.
Benefits of a Spanish SL include:
2.- Key data
a) Total assets on or above EUR 2 Millions
b) Turnover on or above EUR 5,7 Millions
c) Average employees of more than 50
3.- Formation process
The formation of a Spanish SL requires the following actions:Request of the “Certificación Negativa del Nombre” - a Certificate stating that the company name you intend to use is not already taken. This Certificate takes a few days, so it is always a good idea to request the name “asap”.
All of the above can be done on behalf of the foreign investor by any person duly authorized by a valid Power of Attorney.
The main features of companies taxation in Spain for 2012 are the following: