Spanish Income Tax on rental income for non residents

Hi All.

I have a problem with my spanish income tax on rental income. Where an apartment is let in Spain, as a non resident, I am exposed to a flat rate of 24% on the gross rent, without any deductions for legitimate expenses such as repairs, service charges, depreciation of furniture etc. In essence, it is a tax on turnover as opposed to profit.

However, I understand that if I was Spanish resident I would be allowed such deductions in arriving at my taxable rental income.

In my case, given my legitimate expenses on my apartment, the 24% Spanish tax will exceed the rental profit I have made on this apartment.

Up to 2007 Spain charged non residents 35% Capital Gains Tax while residents were charged 15%. This was discriminatory to EU citizens and a case was taken to the European Court. The Authorities were forced to change. Both residents and non residents are now charged 18%.

Surely, a similar discrimination applies to the differinig rules for residents and non residents for Income Tax on rental income. I don't know of any juristiction that taxes rental turnover as opposed to profit. Both the UK and Ireland charge profit. Does anyone know if this situation is likely to change or if there is any case being taken to Europe on this issue.

I do appreciate that many non residents do not declare Spanish rental income, and given the flat 24% rate, suddenly I understand why but I wish to be fully compliant as I am a tax advisor myself.  From the discussions on your forum, nobody has discussed this point.  

Hi & welcome.

My Husband & I own a villa as non residents & we do NOT EVER rent our villa out NOR allow others to use it so we (each) fill in the simplified 214 form which covers renta tax (also wealth tax). We find it unjust that we are not earning profit yet are taxed as if we were.  

See http://www.heddon.co.uk/dhills/things/wealth.htm

It's 25% x 1.1% not 25% x 2%. Our fiscal rep works it out as this, as do others, including Dream Hills info.

" I do appreciate that many non residents do not declare Spanish rental income " (Think you might have your answer).

Sorry I cannot help you further.

HI,

I appreciate that you are annoyed to be inputed rental income when you don't actually rent your Villa, this is basically just an additional way for the Spanish Authorities to milk non residents who purchase property.

My problem is a little different.  I do not have a problem paying Income Tax on the profit I make if I rent but a charge of 24% on gross rental turnover amounts to more that the net profit I would make from the apartment. 

I do not believe it is legal under European Law for the Spanish Revenue to charge more on rental income for non resident EU citizens than Spanish residents.  They had to change the rules for Capital Gains Tax and I am hoping that they will have to change the rules for Income Tax on rental income for non residents.

Regards,   TaxLady

Maria, who is a member of EOS & a lawyer who helps us all here with many problems will advise you.

Dear Tax lady

Hi I'm new to the forum and haven't had time to have a good read of it all but I have exactly the same problem as you and feel the same as I am also involved in tax.

Did you resolve your question?

Would love to hear from you.

Fluf

I totally agree with the first poster, about paying tax on rental turnover rather than profit - this can't be legal under EU law, surely? But until such time as it is rectified, I would suggest calculating how much you would pay if you use form 214 to pay tax as if you did not rent out your property - 24% of 1.1% of valor catastral (or 2% if VC has not been revised since 1994), and if it works out less than if you declare the true income, go with that. The chances of anyone checking it are slim, and besides, this may not be strictly legal, but if you can't beat 'em, join 'em!

Don't forget, income earned abroad has to be declared to HMRC too. But.... Under the double taxation treaty, you can set aside tax paid in Spain against tax due in the UK AND there are allowances you can claim too!!! Wear and tear, maintenance, etc. I'm just filling mine in for the first year which shows a deficit, HMRC have said I should expect a refund!!

Mark

thanks Marksfish.  I am happy with the tax treatment in this country because I genuinely make a huge loss !! But of course that will not transfer to Spain when I have to do my return...  it really is bugging me.  anyway must pop out now but will keep an eye on the board later.

Hi Fluf

I totally agree with all your comments.  It doesn't seem an equitable way of treating non resident landlords and we, like you, need to do it correctly as we rent out properties on behalf of other landlords.  I have actually written to the EU on this subject and received a reply from their TAXUD department.

They are instigating an infringement procedure against the Spanish authorites, as they are contravening EU law by distinguishing between resident and non resident landlords.    I am afraid we must await the outcome, and in the meantime pay our taxes.

Keep your eye on the EC website for developments, I guess. 

Best wishes

Nikki Seal

Playa Golf Resorts

Well done to you Nikkiseal well that's encouraging .. I wouldn't mind batting on a fair playing field !  However they will never allow us the same treatment as their resident landlords, don't they all get huge reduction percentages they will end up owing us all money !!

Well thanks for the post anyway it's a step in the right direction, you've brightened up my New year...

Best regards

Fluf

Hi Fluf

Glad to cheer you up! - thank you.

There is a link which you can go to where you can subscribe to all the newsflashes which come down from the EU with regard to their actions on policies

http://ec.europa.eu/taxation_customs/common/newsflash/index_en.htm

it might be worth subscribing, to keep abreast of developments.

I also have a copy of their press release regarding their action, if you're interested

Let's hope they win through beore we have to file our next tax return!

All best wishes

Nikki

www.playagolfresorts.co.uk

Hello Members,

I have just read this post after logging in to the forum and checking my last Post which is below this one headed How To Safeguard Against Spanish Inheritance Tax. After reading all your comments and thoughts about None Domiciled Spanish Property Owners paying Taxes in Spain, my solution I was advised with removes taxes in Spain so will help you all out too.

I have purchased on Finca Parc near Murcia and was advised by my Agent as how to combat Spanish Inheritance Tax. They informed me that if I buy the property in a UK Limited Company and not my own name, I could leave the shares of the Company, which I own instead of the property to my Heirs & Beneficiaries.

I followed their advice and have now also produced a UK will, which instructs to leave my shares of the Company to members of my family. This means that when I pass away NO Spanish Inheritance tax will have to be paid by them, as they will inherit a UK Limited Company that owns the property, and not the property its self. Therefore Spanish Inheritance Tax is irrelevant and completely removed,

Also if I wish to sell the property, I will not have to pay any 3% Witholding Tax which none Spanish Domiciled People have to pay when they sell the property on, Secondly anyone who wishes to purchase the property from me do not have to pay the 7% Transfer Tax. This is because when I sell, I will not be selling a property, but will sell the UK Limited Company which owns the property, so no Taxes are payable to the Spanish Government.

As far as Income Tax and annual Tax returns are concerned I do not have to put these in because under EU Law a UK Limited Company which owns a property in Spain is Taxed in the UK and not Spain. This means as the Land Registry in Spain has the property registered to the UK Company and not me personally I do not need to put in a annual Tax Return to the Spanish Government. Also If I collect rental income which I would have to normally pay 25% of in Spain, I will now collect it by the Company which is Taxed in the UK and not Spain, I also get Tax Relief from Flights, Accommodation, Car Hire, Mortgage Interest, E.T.C, against the income where you cannot individually in Spain as the Owner of the Property. The UK Limited Company route is great as it keeps you in complete control as you own the Company but removes Taxation in Spain so all the worries of being charged for Owning are not there.

My Agent who is also a Corporate Property Ownership Consultant can assist anyone who wishes to purchase in a UK Limited Company appose to their own name, or move the Ownership from individuals to a UK Limited Company with legally saving the 7% Transfer Tax.

If anyone would like the contact details of my Consultant who have offices in the UK & Spain then please drop me a line.

 Kind Regards,      Westholme Corporate Developments Limited
 

Hi,

I have been wondering for a while if it would make sense to put our own property into a UK company but wasn't sure if it could be done.  What you suggest sounds almost too good to be true (forgive me for being sceptical but buying a place in Spain tends to result in this), but I would be interested in having the contact details of your consultant. 

Thanks in advance

Hi Janejohn

I do agree with you that once you have bought a property in spain, you very quickly learn that life is far more complicated than you could have imagined and you have to do your own due diligence at every turn and advice is always conflicting.

I have investigated, at length, the possibilities of putting your property into a company as the previous poster suggests - and my conclusion (and this is only MY opinion and I still continue to explore many options and I still maintain an open mind regarding the subject), but based on my research so far

it would seem that, to transfer a property into a company, there needs to be an actual trade - ie. it needs to be a property management company with ongoing property management performed by yourself.  Putting one property into a company which you let out, and pay someone else to manage it for you, doesn't SEEM to qualify you to label your company as a property management company - it is more a property investment, which doesn't SEEM to qualify.  Thus, the tax authorities wouldn't allow the tax allowances.

With regards to inheritance tax, yes, if you should pass on to the next world, the spanish authorities are not kind and they will take a large chunk of your property - but only of the EQUITY - so if you are heavily mortgaged, then there isn't any equity, so 15% of zero is not very much! - you will still be liable to their fixed charge which is about 5000 euros, but you could presumably take out insurance cover to cover this bill, if it should be needed, or put money aside somewhere to cover it if required, then spend it if you don't need it!

As I have said, this is only my opinion, if you go to my website, i have a blog where i talk about these issues and you can purchase books on the subject which may help you to research the idea yourself and form your own opinion - sorry if this seems like a plug but it is intended to be genuinely helpful - you can pm me and i would be happy to discuss my findings with you - as i say, i continue to research the subject and i have a phone call booked on monday with a spanish business lawyer whom i will be discussing the options even further - if i learn anything different, i will post it here

http://www.playaresortsvideo.co.uk/nikki/#home

all best wishes

Nikki Seal

Playa Golf Resorts

Hello Janejohn,

When I was thinking of purchasing in Spain I looked at many possibilities of not having to pay IHT and Taxes in Spain, as I have friends who have been caught out before after purchasing in Spain themselves, and the advice I was given by Spanish Lawyers & Accountants only dealt with the issues but did not remove the Taxes. I found my Consultant on the internet so am happy to pass their details on to you, so that I do not break any rules on the Forum I will send them to you via a Private Message unless the Administrator of the Forum authorises me differently. Also if you research moving the Ownership from your name to a UK Limited Company beware that most professionals will say there is a 7% Transfer Tax, My Consultant has knowledge of UK, Spanish & EU Taxation so can do it without legally paying the 7% for you.

As far as Nikki's comments above your Post.

1: The Company that I had setup for the Ownership is a UK Private Limited Trading Company and not an Off Shore or Investment Company, so it qualifies at Zero rate for Inheritance Tax purposes in the UK. I can collect rent from my Tenant in Spain which goes in to the Company bank account, this can be collected in a UK or Spanish Business Bank Account and then I can offset any expenditure against it to receive the Tax relief. I have a UK Accountant that deals with this for me.

2: If you do have a mortgage outstanding then yes your Beneficiaries will not be charged IHT in Spain on the outstanding amount, but as I am sure you are I have no intention of leaving my Family a debt which they cannot afford to pay and have the property repossessed. With the property in Spain now being owned by my UK Company no IHT will have to be paid in Spain so insurance is not required. 

3: Maybe Nikki needs to talk with my Consultant appose to his Spanish Lawyer as I found Spanish Lawyers only understood the Spanish Tax system. My Consultant knows all 3 jurisdictions so has an advanced understanding of the issues.

Kind Regards,    Westholme Corporate Developments Limited

This message was last edited by Property On Finca Parcs on 1/25/2009.

This message was last edited by Property On Finca Parcs on 1/25/2009.

Hi,

Have sent you both PM

Dear Property on Finca Parcs

Hi, I haven't looked in on this thread for ages obviously and was just banging my head about spanish taxes again when I saw your answer.  It looks great.  I would love to get the details of your advisor from you if you wouldn't mind.  It fits perfectly with how I conduct and want to conduct my business. 

I hope you are still on this forum, for my sake !

Many thanks ! 

Hello Fluf,

Thank you for your reply and I hope the method I bought my property in Spain by using a UK Limited Company appose to my own name sorts your Spanish Tax problems. I will send you a Private Message as requested with my Consultants contact details so you can give them a call or read their website. When I contacted them I spoke to their UK office but I know they also have offices in Spain as well. 

Property On Finca Parcs, I would be interested in that contact too. Thanks.

Creating an S.L. (or Ltd company in the UK) company to shelter spanish tax in all it's various forms sounded fine until I was quoted GPB 7000.00 for setting up such a company.

I only have one spanish property (which I am unable to sell) and currently rent out for a paltry sum (which hopefully will be just enough to cover my overheads)

I hav'nt done the sums, but this does sound excessive, and smacks of rippng off british investors with a second home in Spain which they are unable to sell and who are stuck with paying all sorts of taxes (or paying someone to sort out the tax Spanish tax jungle for you) just to keep the bailiffs and the hacienda from the door.

Owning a second home in Spain (for me anyway) has turned into a financial nightmare - paying a huge amount for the deeds through a 'Notary' (what exactly is his function?) was bad enough and now to be quoted such an enormous sum to 'legally' scam/shelter spanish taxes is appalling - and all this on top of the weak pound, Ryanair treating you like a non-person, car hire rates on the increase and a never ending list of taxes to pay (never mind the systemic town hall corruption) - Arrrrrgh........