Owning property with a company in Spain: a tax time-bomb. Owning Spanish property via an international company could be a tax time-bomb waiting to explode.
Spain has for decades been a destination for countless expats across the world; some areas along its beautiful coast resemble British colonies, due to the concentration of UK citizens living there! Shared membership of the European Union facilitated these relocations, particularly for pensioners, who sought to benefit from the milder winters and relatively cheaper costs of living of the Southern European country.
Of course, the key hurdle for this relocation has always been the home. Where to buy it, how much should it cost, what type of mortgage to get… These are questions all British and non-British expats have faced at certain points. Many of them have chosen conventional approaches to acquiring their properties, simply contracting mortgages with local banks and covering their loan over time. Of course, this has led to some issues with unfair terms on mortgage contracts, that are thankfully being claimed by homeowners.
Other expats, on the other hand, have chosen different routes to home ownership in Spain. One of them is the ownership of their property through a company. This method has certain tax advantages according to the owner’s asset distribution. At the same time, it has many complexities that require professional advice.
Currently, legislative changes are affecting certain firm structures, and could result in high fees and fines for owners. But before we examine those, we will explain the history of property ownership through companies in Spain.
A brief history of corporate-owned real estate regulations in Spain
Tax planning for real estate has always included the possibility of ownership through limited company and other firm structures. According to data, the practice has mostly attracted wealthier owners: on average, properties owned through companies are worth between £1m and £5m. This is because setting up these structures requires a substantial investment of time and money, so it is only justified if they are designed for high-value properties.
International tax advisors began assessing clients on these structures many decades ago. Unfortunately, many of these foreign-based advisors lacked sufficient knowledge of the Spanish context and the way the authorities dealt with tax fraud. Clients, as non-residents, sought to limit or avoid income tax; wealth tax; and property transfer taxes (stamp duty, VAT, inheritance, capital gains, municipal duties). The incentives were great, and both lawyers and clients benefitted from a relatively lax regulatory environment. In the 1970s, Spain was rapidly catching up in economic terms with the rest of Europe. However, one of the challenges was attracting foreign investment. At the same time, aspiring expats sought to bypass the, at the time, complicated and Spanish-language legislation. As a result, corporate acquisition seemed like a perfect solution.
At the time, advisors encouraged clients to design operations based on two or three layers of corporate control (private firm on the country of origin, shares owned offshore firm in a tax haven, discretionary trust). This was an opaque ownership structure that allowed, for instance, wealthy individuals to avoid inheritance taxes while keeping properties in the family.
But, since then, the context has changed. Spanish authorities are not as relaxed with foreign investors anymore. They also have improved their transnational exchange of information with other tax bodies. Soon, voices began to raise against British and other expats’ ability to avoid paying capital gains tax or covering their municipal duties. In 1991, the Spanish government published a list of tax havens for the first time, partly pointing at the structures employed to buy property through corporations. In 1998, non-resident income taxes were designed for those foreigners who owned property in Spain, with a particular focus on offshore firms.
In practice, this translated into a tax rate of 3% over the value of real estate assets. There were some exceptions, however. Properties belonging to firms listed in secondary security markets, firms operating in finance but not in real estate, and organisations like states, public bodies and international bodies; were exempt from this duty. As a result, advisors targeted their recommendations at high-value individuals for whom this 3% percentage equalled large sums. Additionally, this tax on corporations allowed them to save money on income and wealth taxes.
Relaxed tax advisors and their unpreparedness for regulatory change
The fact that Spain was an easy country to conduct these operations translated into a certain lack of care for many advisors. They did consider into Spanish legislation in detail, ignoring that its understanding of tax avoidance/evasion/fraud has through the years converged with the European Commission’s perspective on aggressive tax planning. The EU institution defines this tax planning as the one directed at making the most of the differences between tax systems, illegitimately claiming, for example, double deductions.
In the 1990s, tax authorities in Spain began targeting corporations conducting these real estate operations, as they realised they had provided an escape from taxation for wealthy expats. The tax agency realised that local legal, accounting and tax systems in Spain were not up to the task, and began taking action. For instance, many advisors disregarded the fact that trusts were not legally recognised in Spain. Others ignored the different regulations for benefit-in-kind remunerations in Spain, at least until parallel issues emerged in the UK in the early 2000s.
These gaps in preparation and knowledge by advisors generated several compliance problems for their clients:
- Failure to declare accurate annual incomes, including benefit-in-kind.
- Lack of payments for:
- Taxes like disbursements to shareholders, interests and absence of proper documentations on loans.
- 3% tax for properties managed by companies in offshore “tax havens”.
- Transfer taxes (ITP) for the sale of societal rights for an offshore company.
- Non-resident tax for corporations located in countries without double taxation treaties or which are deemed to be “tax havens”.
- Absence of VAT returns relevant to holiday rental licences.
- Failure to consider Spanish regulations regarding capital depreciation, allowances.
- Lack of awareness of certain clauses in double taxation treaties which allow Spanish authorities to tax foreign firms which mainly operate in the ownership of real estate.
According to the British Office of National Statistics, more than 1 million Britons have overseas properties. At least between one or two of every ten owners were advised to purchase their real estate through share-owning firms. In the case of Spain, studies estimate that a minimum of 5,000 homes are owned by foreign citizens, many of them from the UK. There are still many old structures of this type which are currently unfulfilling one or more of these conditions above. They have not been detected by tax authorities yet, but this does not mean that owners should feel relaxed. In the light of economic instability, the government will be more proactive in ensuring the application of its mechanisms against tax avoidance by foreign owners of Spanish property.
When a lot of these structures were created, tax advisors and the accountants and lawyers they enlisted to finalise agreements were not thorough enough with due diligence processes. They relied on Spanish professionals who were not familiarised with multinational taxation. Later, British advisors were surprised when client after client began being prosecuted by Spanish authorities.
From Andalusia to Madrid and the Balearic Islands, there are thousands of large properties currently owned through these double/triple layers of local and offshore firms. However, many of these complex networks were built before Spain began signing taxation agreements with territories that used to act as tax havens for these operations: Gibraltar, Delaware, Jersey… Increasingly, Spain is sharing information with these administrations, meaning that some of the owners could be investigated very soon, especially if they have not bothered to review their structures for years.
Thankfully, many clients are still in time to address the issues. This is one of our specialties at Del Canto Chambers, as we have carefully reviewed assets for many individuals across jurisdictions. We know that a good advisor should start by considering all relevant issues affecting the individual and his or her assets: tax residence, ultimate beneficial owner, the type of firm or firm structure established in the first place… This provides an accurate picture of the client’s situation and helps our team determine the best way forward. Sometimes, these are issues the client could not have possibly considered on their own. For instance, we know that many of these old corporate structures will for sure not be adapted to recent legislation regarding tourist accommodation in urban areas. We strongly encourage you to contact us so we can understand how we can help regularise your tax situation with Spanish authorities.
In the next post, we look at the specific regime regulating these structures today.
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