Many UK overseas property investors have sought to minimise tax liability by buying Spanish properties via a company buying vehicle. So far, so tax efficient. Owning properties this way used to be fine.
However, the new 2019 Annual Tax and Custom Plan showed that the Spanish tax authorities are now paying close attention to these international structures by conducting an unprecedented number of investigations on these properties.
Residential properties along the Costa del Sol are being targeted by the Spanish authorities at an alarming rate. With new tools at their disposal to help clamp down on these properties, it is only a matter of time before the taxman inspects them. This is particularly relevant for properties that were created pre-2018 and have not been assessed recently.
While advisers were highly recommending the corporate acquisition route, legislative compliance was not taken very seriously. As such, due diligence was often not carried out properly and the tax position not reviewed annually as required. This was in large part because the authorities had little interest in overseas property investors at the time.
Owning a property through a Spanish company or a company that has been established in a double treaty jurisdiction meant avoiding, not only the non-resident 3 per cent levy, but also wealth tax which is payable for those who own a property personally. Another major appeal was also avoiding charges concerned with the change of ownership, such as stamp duty, transfer and inheritance or gift tax.
However, the reality is that UK advisers rarely paid much attention to the tax or legal implications for their clients, as they assumed that the Spanish adviser was on top of these matters. This was not always the case.
Another issue relates to the use of trusts, a legal arrangement not actually being recognised in Spain – to the surprise of many UK tax advisers.
Legislation has now been tightened up.
In May 2018, EU Directive 2018/843 amended article 2.1 of Directive 2015/849 which meant that certain professional bodies were required by law to take responsibility for being fully compliant: ‘auditors, external accountants and tax advisors, and any other person that undertakes to provide, directly or by means of other persons to which that other person is related, material aid, assistance or advice on tax matters as principal business or professional activity’.
Furthermore, other measures were put in place by the Spanish tax authorities to clamp down on illicit financial gain through these properties include the following obligations for property owners:
Declaring any rent that is gained from a company-owned property, in case the authorities determine it at market value.
Directors of the companies need to submit proper accounts of the company in their annual Spanish tax returns (in compliance with company law).
Considering the tax on distributions to international shareholders.
Reviewing loans and capital structures and checking they comply with Spanish law.
Reviewing the position of trusts under Spanish and English law, as they are not recognized in Spain.
Checking whether VAT applies.
For any shares of the foreign company which are sold, ensuring payment of transfer tax.
If the property is being rented, checking that full compliance with new tourist accommodation rules is met.
Check that your Spanish property is tax legal. Talk to a qualified tax adviser.
Those individuals who are seen to be making an effort to comply with the new regulations will fare much better upon investigation. The authorities will be much harder on international investors who have neglected to seek any kind of advice to abide by the regulations and they will be considered an easy target for fines.