Rising real estate prices can lead to wealth taxation in Spain
The Spanish tax authorities are specifically examining the tax situation of non-residents
From Dr. Burckhardt Löber and Dr. Alexander Steinmetz
The Spanish treasury is always looking for new sources of income. Recently, due to increased real estate values, it has been increasingly examined whether and, if so, to what extent the wealth tax applies or whether its assessment basis has even increased, for example, due to the construction of a garage or a swimming pool. After all, fincas with values of five and more million Euros are no longer a rarity nowadays.
Clients of ours with real estate ownership in Spain reported corresponding requests from the Spanish hacienda to provide more details about the financial scale of their finca. Here, of course, liabilities at the time of purchase, such as mortgage charges, must be deducted but also proven to the tax authorities, because the net value is decisive. The Spanish tax authority responsible for non-residents, the AEAT (Agencia Española de Asuntos Tributarios), is known for its meticulous audits.
The Spanish Property Tax Law
The Spanish wealth tax is regulated by laws 19/1991 and 13/2011. Wealth tax only applies to natural persons. It is a direct and personal tax and starts from a net wealth of 700.000,- Euro. Net assets are considered to be the total of all economically significant goods and rights of which the taxpayer is the owner, minus debts and costs. If spouses own real estate or other assets jointly in equal shares, these are taxable from a total value of 1.4 million euros. However, the allowance for each of them increases by 300.000,- Euro if the property is permanent residence (vivienda habitual). However, this does not apply to so-called non-residents domiciled abroad. Whoever exceeds the tax exempt amount is liable to wealth tax. Wealth tax is progressive in its amount, ranging from 0.2% to 2.5% of net assets.
For residents in Spain, wealth tax applies to their world wealth. Non-residents are subject to Spanish wealth tax only on their assets located in Spain. 1 million in Spain as a non-resident. of assets, pays 732.87 euros in wealth tax. If the net asset value exceeds 10.695.996.06 euros, the tax rate increases from 0.2% to 2.5. The Spanish tax authorities use the highest of the following values as the tax base:
- Cadastral value
- Acquisition value
- Tax value that has been established for other tax purposes
Example 1: Otto Müller, who is subject to unlimited tax liability in Germany, uses his Spanish finca for vacation purposes. Furthermore he owns a rental house in Germany with a value of 2 Mio. Euro. The market value of the Spanish vacation property is €1 million. Taking into account an exemption amount of 700.000,- Euro, Mr. Peter Müller will be asked to pay an annual amount of 732,87 Euro in Spain from the point of view of wealth tax.
Example 2: But how is the wealth tax situation of Otto Müller to be assessed if he has "residencia fiscal" in Spain, i.e. is assessed in Spain for tax purposes without restrictions? For Spanish residents, the so-called world assets are decisive for the determination of the wealth tax, i.e. not only the Spanish domestic assets, but also the rental house in Germany with a value of ca. 2 million euros. Therefore, in the present case, the tax base for the Spanish wealth tax is the total amount, therefore 3 million. Euro. Taking into account an exemption amount of 1 million euros (700.000.- + 300.000,- Euro) in this case the Spanish wealth tax for the taxable assets of 2 million Euro is 17.142.37 euros per annum.
Principle of self-assessment
In Spain, the submission of the wealth tax return within the framework of the tax self-assessment and the payment of the tax is a debt to be discharged by the taxpayer. This means that without any special request from the Spanish tax authorities, the tax return is filed on the Modelo 714 tax form. The Spanish tax calendar can be found on the Internet, where the respective tax data can also be found.
Statute of limitations
Taxes expire in four years in Spain. This means that the tax authorities can claim back taxes for the current year and for the last four years when the tax return is submitted. But then the matter becomes quite uncomfortable.
Procedure and agent for service of process in matters of property taxation
An agent for service of process resident in Spain is required by law. This does not necessarily have to be a lawyer or a tax advisor. The designation of an authorized representative for service of process vis-à-vis the tax authorities can prevent serious damage, because deadlines set by the authorities in Spain are extraordinarily short and therefore, if the owner of a Spanish finca does not become aware of coercive tax measures, in the worst case scenario a compulsory auction of the finca may come into question. Also, in the case of tax evasion, which in Spain is called "tax fraud", penal steps that go beyond administrative offenses can follow. However, an evasion amount of 120.000,- Euro per tax year must be reached to get into the criminal area.
Double taxation agreement
The double taxation agreement between Germany and Spain also governs wealth tax and assigns the right of taxation to the taxpayer's country of residence, with the exception, however, of u.a. Real estate assets. Since Germany has abolished the wealth tax, it is only the Spanish Treasury that levies wealth tax on Spanish real estate in the German-Spanish relationship.
Balances held by non-residents in Spanish bank accounts are in principle subject to Spanish wealth taxation, but Spain is not bound by Art. 21 para. 5 DTA prevented from assertion, because the taxation of monetary claims is the sole responsibility of the state of residence (Germany). Since Germany has de facto abolished wealth taxation, Spanish wealth taxation for non-residents only applies to real estate located in Spain, but not to balances in Spanish banks. However, if the real estate assets are held by a company whose assets consist of at least 50% of real estate assets located in Spain, Spain is considered as a tax jurisdiction under Art. 21.In Spain, the Spanish tax authorities reserve the right under Art. 4 of the DTA to subject the corresponding company shares to wealth tax, but whether shares in companies are subject to wealth tax under Spanish regulations cannot be answered unequivocally due to the complex legal situation under Spanish law in this respect.
Special regulations for the Balearic Islands
The Balearic Islands, as well as other Autonomous Communities, have made use of the right to country-specific regulations in the context of the wealth tax. Basis is the law 6-2007 and the law decree, Nr. 1-2014. By law 12-2015, an increase of the wealth tax scale from 0.28 – 3.45, which is an upward deviation from the national regulation. In the example cases, the state wealth tax law was applied, as well as the rest of this presentation is based on the regulations of state central wealth tax law.
Arrangement options
In these cases, it is possible to consider u.a. anticipated succession is introduced with the aim of reducing the wealth tax burden by increasing the exemption amounts. However, the calculating pencil is particularly important when considering these cases because some of the wealth tax savings can be lost again through transfer taxes.
Quintessence
Who as a German only knows about the abolished wealth tax in Germany from discussions about its reintroduction and who is also not familiar with the Spanish tax practice of self-assessment without prior request by the tax office, should act before the Spanish tax authorities act, if the assets situation is appropriate. Because once the tax office audit process has begun, the matter can also become really expensive due to punitive sanctions. That's why you should take precautions in good time.