Using a Company to Buy Property in Spain

We suggest that you make an appointment to speak with a fiscal advisor who will provide you with a study based on your personal requirements.

How companies were used in the past to avoid Spanish tax

Until recently buying property using a company used to be an effective way of avoiding tax. In the recent past it was acceptable practice to buy a property using a local Spanish company that was owned by a foreign company. The Spanish property and the foreign holding company could then be bought and sold while avoiding many of the taxes or costs of transfer, as the sale of the shares in the foreign company frequently fell outside the scope of Spanish tax.

Another common method was to own the property using a Spanish company and to sell the shares, which avoided capital gains and transfer taxes as there is no taxation on the transfer of shares under Spanish law. This was a complicated procedure and required careful structuring in order to achieve a successful outcome.

These are risky strategies nowadays, as tax authorities throughout the European Union have cracked down on tax avoidance. Spain has toughened up its legislation in line with EU regulation by introducing a special annual tax now on real estate owned by non resident companies (not used for business purposes) set at 3% of the valor catastral. Furthermore, indirect sales using the transfer of shares in a foreign holding company that directly control a Spanish company owning a Spanish property(s) are liable for tax and in the event of non payment the property bears the charge.

Off shore or non-residents companies are also currently taxed in the same manner as non resident individuals and face a capital gains tax rate of 35% on the profit of the sale of the property principally paid with the 5% with holding tax of the registered sales price. What types of company can own property in Spain? You can buy property using the following Spanish company structures: a Sociedad Anónima (S.A.), a Sociedad de Responsabilidad Limitada (S.L.), a real estate investment fund (Fondo de Inversión Inmobiliaria - F.I.I.), or an investment company (Sociedad de Inversión Inmobiliaria - S.I.I.). Or as a foreign investor you can buy property in Spain using an off-shore company, or a company that is registered in a country outside of Spain (however no longer a viable option for most investors due to the extra running costs from the new tax mentioned above).

Why use a Spanish Company to own Spanish property

Provided that you structure the company in the correct manner (see below), and that you can show that buying and owning property is part of the company statutes (the title deed for the company that declares what types of business the company has been set up to do), there are still some opportunities to avoid or minimize the taxes associated with buying and owning Spanish property. Here are some of the benefits:

Tax avoidance

Income and Wealth taxes

Income & Wealth taxes associated with owning property can be reduced if the value of the property(s) is high. The tax rates for these taxes increase progressively related to the value of the assets. It may be worth using a Spanish company if the values of the property(s) are over € 1.000.000.

Tax deductions

The following costs are tax-deductible:

1. Renovation, building and furnishing costs

2. Utility bills

3. All other running and maintenance costs, including the mortgage payments.

4. Loss carry forward

Under the guidelines set by corporate tax law in Spain it may be possible to carry forward tax losses for up to fifteen years and also offset these losses against capital gains or ordinary income under certain circumstances.

A typical scenario for buying and holding property

The most common way to own property in Spain is to set up a Sociedad de Responsabilidad Limitada or S.L. Setting up an S.L. will imply the following costs:

minimum share capital of € 3,006.05 in the company bank account,

one time start up fee to start up the company and have it properly registered (around 1500€),

accounts and book keeping (200€ per quarter),

taxes on declared profits

There are two types of SL companies in Spain.

1. Companies with an economic activity.

2. Patrimonial Companies.

Companies with economic activity

On the sale of the property profit is taxed according to the normal corporate tax regime in Spain. The profit from the sale is defined as the difference between the period revenues and period expenses and the corporate tax rate starts at 30%. Business expenses are deductible if they are properly recorded and supported with invoices such as running costs, expenses related to building a property, etc.

Patrimonial Companies

Companies that are specifically formed to hold assets; they can have an economic activity and benefit from the same deductions as above. However taxes are calculated according to the rules of the Spanish Income Tax (IRPF) as for Spanish residents:

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

profits generated over one year of activity, the tax rate can be as low as 15%

Patrimonial companies must be structured as follows:

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 is related to property.

What you have to show the tax authorities

Spanish companies whose only activities are renting, buying or selling property are considered as having the same requirements under Spanish company trading standards:

1. An office.

2. At least one employee with a legal employment contract.

3. The account and the tax returns must be completed annually.

Spanish Tax Law Updates

There are some important updates to Spanish corporate tax that are currently being discussed in the Spanish parliament. If this new legislature is implemented the new laws will take effect from the 1st of January 2007. The most important changes that are currently being discussed are as follows:

Patrimonial companies

Will eventually be phased out and existing companies will be taxed according to the general rates of corporate tax, however there may be certain tax breaks for holding the property with a yearly deduction for up to five years. It would be highly advisable to seek advice on possible strategies to avoid taxation if this new legislation comes in to force.

Non resident companies

Capital gains tax would be reduced to 18%.

With holding tax would be reduced to 3%

Rental and dividend income will be taxed at a slightly reduced rate of 24%.

In view of the importance of the proposed changes and in an effort to keep you up to date we will update this chapter with the approved final draft legislation.

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