Using a Company Structure to Own Property in Spain

Luis Herredia / Medio y Heredia Abogados

Spain, costa del sol, marbella, property, law, company, guide, tax, investment

There are certain advantages to buying and owning a property through a company structure in Spain. This articles sets out some of the possible strategies that can be employed.

Using a Spanish Company to Buy Spanish Property

Introduction

A foreign investor may invest in Spanish property through a Spanish resident entity (Sociedad Anónima, (S.A.), or Sociedad de Responsabilidad Limitada (S.R.L.)), or even through a real estate investment fund Fondo de Inversión Inmobiliaria (F.I.I.)), or investment Company (Sociedad de Inversión Inmobiliaria (S.I.I.)).

Choosing a strategy where you buy as an individual or through a Company will depend mainly on the value of the investment. We suggest before going ahead with any property purchase that you read this basic guide. If you feel that your requirements fall within the criteria mentioned below then make an appointment to see us and speak with our fiscal advisor who will provide you with a study based on your itemized investment plan.

Why use a Spanish Company to own Spanish property

A common strategy of the past

Foreign investors used to frequently invest in Spanish property through a two-layer structure, in which a local Spanish Company owned the real estate and a foreign Company owned the shares in the local Spanish Company. Previous to recent legislation Spanish property could easily be bought and sold while avoiding many of the taxes or costs of transfer. The sale of the shares in the foreign holding Company frequently fell outside the scope of Spanish capital gains, transfer taxation and withholding at the source. However, this is a risky strategy nowadays and the Spanish tax authorities are looking into this form of avoidance.

Current advantages

The main advantage to owning a property through as company structure is that it could create opportunities to avoid or minimize taxes associated with buying, owning and selling Spanish property.

IVA or Value added tax (VAT) and Transfer Taxes when a Spanish Company buys a property

• 7% IVA on the purchase of new build property (only) is avoidable i.e. where a Spanish company buys a property off of another Spanish company.
• 16% IVA on the purchase of commercial property or land is avoidable  

Tax deductibles from income and corporate tax

The following costs are tax deductible through using a company

• All renovation, building and furnishing costs
• Utilities bills
• All other running and maintenance costs

Loss carry forward

Tax losses incurred may be carried forward fifteen years and may offset capital gains or ordinary income. For newly created companies incurring in losses, the fifteen-year period will start to compute once profits are achieved. Nevertheless, the Spanish corporate income tax law provides a limitation to the transfer of tax losses of an entity under certain circumstances.

Tax avoidance

The usual running taxes associated with owning property in Spain through a Spanish company structure are minimized particularly in terms of Income & Wealth Tax. The tax rate for Income (the tax is called Impuesto Sobre Ia Renta and is a form of income tax on all second home owners in Spain and non residents for the notional letting value of the property. If the property is not let, it is calculated on the notional rental value of the property. Notional rental value is calculated at 0.5% of the Valor Catastral) and Wealth Tax increases progressively according to the value of the assets acquired, therefore, its always worth using a  Spanish Company if the values of the property(s) are high ( i.e. + € 1.000.000).

Types of S.L.Company

For the purpose of this article we will discuss the most commonly used corporate vehicle for owning property, the Sociedad de Responsabilidad Limitada or S.L.

Setting up a Spanish Limited Company will imply costs, this is a minimum share capital of € 3,006.05 plus fees to be paid to an accountant or fiscal advisor to maintain the books of the Company typically around 1500€ to start the company and then 200€ per quarter to run the company.

There are two types of SL companies in Spain according to the tax Law:

• Companies with an economical activity
• Companies called “Patrimonial Companies”

Companies with economical activity:

1. Are included in the normal regime of the Spanish Company tax (corporate tax).  The taxable income is defined as the difference between the period revenues and period expenses. Business expenses are deductible if they are properly recorded and supported.
2. Many of expenses such us community fees, maintenance and expenses relate to building the house can be deducted.
3. The income tax rate is: 30% small companies and 35% for intermediate and big companies)

Patrimonial Companies:

Patrimonial companies can have an economical activity. In this case they are included in the specific regime but the tax must be calculated according with the rules of the Spanish Income Tax (IRPF) as an revenue paid to professional people.

They have the following requirements in their structuring:

1. There must be less than 10 partners.
2. At least 50% of the capital share belongs to a family.
3. At least 50% of the activity of the Company are properties.

This type of Company has a specific regime in the Corporate Tax:

·        General base: profits generated in less than 1 year of activity, the tax rate is 40%

·        Special base: profits generated over one year of activity, the tax rate is: 15%

What you have to show the tax man

A company who’s only activities are renting, buying or selling will be considered as having the same requirements under rules that govern Company trading standards:

• An office.
• One employee with a legal labour contract 
• The account and the tax returns must be done yearly with the obvious legal and financial implications involved.

Special tax on real estate owned by non Spanish resident entities

Offshore or companies registered outside of Spain that directly own Spanish properties not used for business purposes are subject to a special annual tax equal to 3% of the official value of the property. However, this tax can be avoided provided that the company and its share holders reside in a country that has a double taxation treaty with Spain.

Comparing the Costs

The section shows what an individual and companies must pay to buy, own and sell property in Spain and is designed to give an overview to make easy comparisons

Impuesto sobre Transmisiones Patrimoniales (ITP) / Transfer Tax  on the sale of a resale property.

Resident and Non resident

New House 1% of value on purchase deeds, resale 7% of value on Purchase deeds.

Company

Same tax rates as residents and non residents.

Value Added Tax (IVA) on the sale of a new build property

Resident and Non resident

New house 7% of value on purchase deeds.

Company

Not applicable if and S.A. or S.L. Spanish Company sells the property to another S.L. or S.A. Spanish Company ie. When a Company owned by the purchaser buys a property form a developer.

Annual Real Estate Tax (IBI)

Resident and Non resident

Paid by new house/resale owners yearly, depends on value on the purchase deeds.

Company

Same levy is charged as a resident and non resident.

Real estate tax is levied on an annual basis and the tax rates will range from 0.4% to 1.10%, applicable to the cadastral value of urban properties, and 0.3% to 0.9%, applicable to the cadastral value of non-urban properties. Such rate is increased or decreased by the local authorities depending on the specific location of the property. The taxpayer is the owner of the real estate. Real estate tax is deductible for corporate tax purposes.

Wealth Tax on owning property

Resident and Non resident

Paid by new house/resale owners, the amount depends on value on the purchase deeds or the higher value out of Valor Catastral, Valor comprobado por Administración o valor en escritura. Form 214.

Resident individuals pay Wealth tax on their worldwide assets at December 31^st. of each year, valued in accordance with tax rules.

Non-residents are taxable on property situated, or rights exercisable, in Spain.

Company

Not applicable as the property appears as an asset in the Company records.

Non resident special information: Non residents who own shares of a Patrimonial Spanish Company, must pay Wealth Tax for the shares of the Company. If the only asset of the Company is a property that’s worth 1 million euro and it doesn’t have an office and an employee with a labour contract the Wealth Tax must be calculated on 1 million

Impuestos Sobre la Renta de las Personas Fisicas - Income Tax

Resident and Non resident

This tax is paid by non residents and residents who own a second or third property in Spain on the imputed rentals gain on the property regardless of whether the property is rented or not.

Company

Not applicable. Rental income is taxed according to Corporate Tax: Any business developed in Spain is subject to business tax levied on a yearly basis. Its cost will depend on the specific activity carried out by taxpayers.

Capital Gains Tax:

Resident

Pay 15% capital gains tax on the profit

Non Residents

Pay 35% but initially pay a 5% retention on the sales prices retained by the purchaser’s lawyer on account of the capital gains tax liability.  

Company

Companies pay tax on the profits of a real estate transaction as part of their yearly corporate tax declarations. Corporate tax starts at 35% but can drop to 15% in certain circumstances.

The Corporate Tax is due on the last day of the fiscal period. According to the provisions of the Spanish law, the fiscal period cannot exceed 12 months. As mentioned before the taxable income is defined as the difference between the period revenues and period expenses.

All business expenses are deductible if they are properly recorded and supported.

Municipal Add Tax Value (Plusvalía)

Resident and Non resident

Paid to the Town-Hall in case of sale of property.

Company

Not applicable.

Inheritance Tax (ISD)

Resident and Non resident

Please refer to the inheritance tax article

Company

As the property is owned by a Company which in turn is made up of shares, these can be transferred prior to death to avoid the tax.

November 14, 2005 | Category: Buying Property