When considering purchasing a property in Spain, there are several different approaches you can take depending on your property priorities. To be sure that you’re approaching property purchase in a way that backs up your interests, it’s a good idea to know the nuances of how the process differs between a company and an individual buyer. In order to make understanding the difference easier, we’ve outlined the potential benefits, restrictions, and reasons for using a company to purchase property in Spain so that you can walk into your purchasing process armed with as much information as possible.
Why Use A Company To Purchase Property In Spain
Using a company to make a property purchase in Spain is standard practice for plenty of reasons. These might include anonymity, corporate management, or the application of British Law in the case of Gibraltarian offshores. However, in the past, the main reason for ownership of a real estate property through a company was typically tax avoidance. Tax avoidance was possible through company purchasing due to the following rules:
- Individuals are taxed on imputed income just for ownership, while companies are not.
- When companies purchase second-hand property, the purchase of shares is only subject to transfer tax in certain cases.
- The change of ownership of a property is registered at the Land Registry for individual buyers. But, when a company purchases a property, it’s listed as a sale of shares and doesn’t go in the Land Registry, making it less likely the authorities will find the land transaction.
- The sale of a property is subject to “plusvalía municipal”, a tax on the increase of the value of urban land payable to the Town Hall. The sale of the shares is not, as the ownership of the property remains in the company.
- An individual property seller always has to pay capital gains tax in Spain, but the seller of shares will pay capital gains tax in the country defined in the applicable Double Tax Treaty.
- The sale of a property by individuals who are non-residents of Spain will be subject to a 3% retention on account of capital gains tax. Meanwhile, the sale of shares is not.
However, in recent years, many of these reasons are no longer applicable. After many years of people using companies to purchase property to exploit these advantages, there have been some rule changes that de-incentivize the use of a company for purchasing property in Spain. These adjustments include:
- Companies are not taxed on imputed income, true, but according to Spain’s domestic legislation, the owners and their relatives can’t use the property they purchase for free. Instead, they must pay at the rate of market rental income. A long-term rental tenant is typically responsible for utilities for the home as well, which means that those using the property will pay utilities that are seen as a profit to the company- meaning they are subject to taxation.
- While companies aren’t subject to wealth tax, the people who own the company might be. Most of the new Double Tax Treaties specify that taxation of Spanish property is acceptable if that property represents more than 50% of the total assets.
- Anti-abuse clauses are now included in the purchasing of property. They stipulate that if a property makes up 50% of its assets, the sale of shares of the company, the only shares that aren’t subject to transfer tax are the business premises.
- Today, the lack of registration of a sale in the Land Registry doesn’t do enough to hide the transaction. Spanish companies have other people and places they must report the sale to.
In addition to the above points, people who own an old property through a company that has been sold several times might now find themselves faced with an unrealized capital gains tax if they don’t find a buyer interested in the company. The book value of the company asset remains unaltered in those transactions, which means it’s only the company shares that retain their value. So if the home originally sold for 300,000 euros but the company shares are worth 2 million euros, you will be responsible for convincing someone to purchase the shares rather than the property.
Is It Worth Buying Villas In Marbella Using A Company Today?
Real estate professionals, lawyers, and accountants all used to stipulate that each case should be reviewed on an individual basis to be sure that the best approach is taken. While many of the benefits of purchasing a property as a company have been removed, there are still some situations that might make that approach advisable. There are several points you’ll want to consider if you’re considering that route.
The purpose of your investment plays a role in your approach, naturally. If your intention is to buy a property to rent it out, you have the right to offset most of the costs related to the rental and pay a 19% income tax rate on the net profit if you are an EU resident. However, non-EU residents can’t offset any costs and have to pay a 24% income tax rate on the gross income from the rental. This non-EU resident status includes UK residents since 2021 as well. This distinction means that a non-EU citizen who has a substantial amount of rental expenses such as interest on a mortgage loan, a company setup might be a more beneficial setup. The company would pay a 25% corporate income tax, but on the real profit after costs are deducted, rather than on the costs as well.
The value of the investment makes a difference as well. Some tax treaties forbid Spain from taxing the value of shares of a company, even if the only asset in that company’s name is a Spanish property. Some of these countries include Sweden, Holland, or Russia. In those situations, it might be worth the additional cost of having a corporation in place to own the property.
The location of the funds can play into the best approach. Transferring funds to an individual isn’t always a low-cost process, particularly if there’s already a corporate structure in place such as a trust. In those situations, withdrawals might be taxed as income rather than a simple reallocation of funds. Depending on how the funds are set up, an existing company under a corporate structure could have fewer administrative costs than transferring funds to an individual for the purchase. This solution can also work if an investor is providing funds from within the existing corporate structure. Again, the administrative fees could be less substantial in an existing setup. Finally, management can be easier to set up and execute through a corporate structure. It can make the management of the investment more efficient, particularly during investment, refinancing, and restructuring. In every case, the size and value of the property will determine whether or not the corporate approach is worth using, and qualified legal professionals should be consulted about the situation.
The only other real reason to consider purchasing a property in Spain using a corporation is secrecy. For some wealthy investors, privacy can be relevant for family, business, or safety reasons in situations involving oppressive countries. For those who require higher levels of discretion, corporate structures might be worth the value.
Purchasing property in Spain can be a complicated process but with the help of professionals, you can find the best possible approach that will give you the best return on your investment over the years. With the support of experienced agents, you will be put in a position to find the right property for your needs and move forward with the purchasing process in a manner that ensures the best results for your situation. For professional input and insider knowledge on the Spanish real estate market, you can contact our real estate agents here.