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How to Buy in Spain

Many questions can arise when it comes to obtaining ownership of a property located in Spain. Questions such as what, how and who can be raised and it is beneficial to have some prior knowledge, which we will address in this summary.

  • SELECTING THE PROPERTY:

When considering acquiring a property, it is highly recommended to consider the services of an Estate Agency with extensive experience in the sector. It will be the agency that will indicate the steps to follow and guide both the buyer and seller at all stages during the process, including consequences of value assessment, possible financing, guidance on possible renovations or restructuring works at the property and questions related to tax, amongst other topics, in addition to the signing of the purchase agreement. Furthermore, this service is available at no additional cost to the buyer.

  • OPTIONS FOR THE PURCHASE AGREEMENT:

Various options are available when it comes to buying a property. In Spain, a verbal agreement is valid (but infrequent and not advisable), however, it is recommended to have some kind of signed document so there are no errors in the purchase agreement. The most common types of contracts can be found below.

  • RESERVATION CONTRACT:

When the party interested in acquiring the property needs some more time or needs to have consultations before formalising the agreement, a reservation contract is normally used. This is a document that obliges the selling party to not sell the property to a third party who is not the interested signing party for a short period of time. It is common to make a small advance payment as a reservation deposit. This amount will be deducted from the total amount payable if the purchase is completed, or it will or will not be returned – depending on the agreement between the parties – in case the purchase is not carried out.

 Purchasing in Spain

  •  OPTION CONTRACT:

This type of contract is more binding than the previously mentioned contract, given that it commits both parties to buy and sell under the conditions outlined in the contract. Within it, fulfilment dates and the payment or payments to be completed for the purchase are detailed. Thanks to this document, the seller is obliged to sell the property, while the buyer is obliged to purchase the property or has the right to economic compensation. Normally, a premium of 10%, which will be deducted from the final price when the purchase takes place, is set. If the purchase is not fulfilled due to circumstances attributable to the buyer, this premium will not be returned. If the opposite occurs and the purchase cannot be completed due to circumstances attributable to the seller – usually because the property was sold to a third party or the seller changed his/her mind –, double the premium will be returned or the fulfilment of the option may be requested, if this scenario is established in the contract.

  •  PRIVATE PURCHASE CONTRACT:

This type of contract enables the purchase to be completed. A private purchase contract is drawn up when both parties decide to conclude the agreement. Only a judge will be able to determine a solution in case there is a conflict of interests when the time comes to formalise the process. This document has legal support and validity.

 

  • PUBLIC DEED OF SALE:

With the public deed of sale, the new owner is registered as the owner of the property with the Land Registry. This is a necessary step as the deed will contain a description of the property along with a statement regarding the encumbrances and easements that may exist, the price and the payment method. The notary, through formal procedures, verifies the identities of the buyer and seller, confirms registered information, controls the final Property Tax (‘Impuesto sobre Bienes Inmuebles’ – IBI) payment and confirms that, if the property is located in a homeowners’ community, that the owner is up-to-date with the payment of community fees by means of a verifiable declaration from the president. It is important to know that power of attorney can be granted to an individual or legal entity to successfully complete the public deed of sale in the event the buying party, selling party or both parties cannot be present when the process is formalised. 

  • LAND REGISTRY:

The notary informs the seller and buyer and, at the same time, implements registration with the Land Registry, meaning any other record for the specific property remains blocked. The time period for final registration with the Land Registry is extended by 60 working days. When the corresponding Property Transfer Tax (‘Impuesto sobre las Transmisiones Patrimoniales’) has been paid to the Tax Authorities, definitive registration with the Land Registry can be completed. In any case, a request can be made to the notary to carry out the filing entry by fax.

 

FEES AND TAXES DERIVED FROM THE PURCHASE OF A PROPERTY IN THE BALEARIC ISLANDS:

  • IF THE SELLER IS A PRIVATE INDIVIDUAL (not a company or business entity): 

The buyer must pay PROPERTY TRANSFER TAX (‘Impuesto sobre las Transmisiones Patrimoniales’ – ITP) to the Balear Tax Office (Hacienda Balear), at a scale of between 8% and 10% of the value of the property. For example:

 

Total value of property (€)

Total liability (€)

Remaining value up to (€)

Rate applicable (%)

0

0

400.000

8

400.000

32.000

200.000

9

600.000

50.000

400.000

10

1.000.000

90.000

and above

11

 Other fees inherent to the purchase of the property (notary, land registry, processing, lawyer if required, etc.) will need to be added to said amount. These fees can amount to between approximately 0.5% and 1.2% of the value of the property. Fees and taxes could be more if the purchase is being financed by a mortgage, reaching around 1.75% of the amount borrowed. 

  • IF THE SELLER IS A COMPANY OR BUSINESS ENTITY and a new building (one which has been constructed or renovated) or plot is the subject of sale: 

The buyer must pay VAT to the seller. A VAT rate of 10% will be applied if the property is a newly finished building.

A VAT rate of 21% will be applied if the property is a plot of land, industrial unit, establishment, office … 

The buyer must also pay DOCUMENTED LEGAL ACTS TAX (‘Actos Jurídicos Documentados’ – AJD) to the Balear Tax Office, at a rate of 1.2% of the value of the property. 

Between 0.5% and 1% approximately should be added to the amount for fees inherent to the purchase of the property (notary, registry, administration). It may be more if the purchase is financed by a mortgage, with the percentage depending on the amount borrowed. 

  • IF THE SELLER IS A COMPANY OR BUSINESS ENTITY and a second-hand building (home, establishment, hotel, etc.) is the subject of sale, initially they will not be subject to VAT + AJD. However, the payment of ITP (between 8% and 10%) will be required. In any case, if the buyer is also a business entity (for example, a Spanish entity) and the property is purchased with the aim of being used for economic activity (for example, an industrial unit or establishment to be rented, or a hotel to be run or rented), there is the possibility for the process to be subject to VAT, which is a tax that can then be deducted and recovered (unlike ITP and AJD). 
  • IF THE SELLER IS THE OWNER OF THE PROPERTY THROUGH A COMPANY, it is common to offer the buyer the chance to purchase the company and not the property directly.

Non-resident sellers can hope to obtain certain tax advantages (including not paying tax in Spain on earnings derived from the sale) and buyers can save on tax for the purchase as long as they fulfil certain requirements, in particular that there are various buyers and that nobody purchases more than 50% of the company. In any case, it is a process that has significant legal and tax risks for the buyer, therefore, it is highly recommended to complete a prior, in-depth study. 

  • TAXES DERIVED FROM CAPTITAL GAINS AND LOSSES IN THE SALE OF A PROPERTY by a non-resident (payable with the Income Tax IRPF): 

TAX DERIVED FROM THE SALE OF A PROPERTY

Capital gains and losses

-       Annual Income Tax (IRPF)

-       Annual Corporation Tax

-       Municipal Capital Gains Tax

Purchasing in Spain

 

  • INCOME TAX (IRPF)

The obtained capital gains from the sale of a property have to be declared in the Income Tax of the corresponding fiscal year and will be included in the Taxable Amount on Savings.

In order to calculate the capital gains the transfer value is deducted from the acquisition value.

The following rates of taxation will be applied on the obtained capital gains: 

Net capital gains

Rates of taxation

Up to 6,000 €

19%

Between 6,000 and 50,000 €

21%

Gains of more than 50,000 €

23%

 However, for properties purchased before the 31st of December of 1994, the calculation is as follows: 

  • For the days elapsed between the acquisition of the property until the 19th of January of 2006, a reduction coefficient according to the year of acquisition will be applied to the proportional part of the capital gains.
  • To the resulting sum, the capital gains corresponding to the elapsed days between the 20th of January of 2006 and the date of the sale are added.
  • The final amount obtained by adding up all of the assets, provided it does not exceed a maximum of 400,000 €, is subject to taxation applying the aforementioned rates. 

On account of this tax, the buyer is obliged to retain and pay in 3% of the agreed amount to the Tax Office (Hacienda). 

If the property (or properties) has been purchased between 12th of May and 31st of December of 2012, income gained when it is sold will be exempt up to 50%. 

  • CORPORATION TAX (when selling the property):

If the property of a Spanish company with shares held by a non-resident is sold, in principle said company will be required to pay 25-28% in Income Tax. Then, if the non-resident decides to dissolve and liquidate the company in order to take the money out of Spain, this could result in further earnings, meaning another Income Tax declaration will be required. If the non-resident resides in Germany, he/she would be required to pay Income Tax in Germany due to the current Agreement, and not in Spain. However, with the new Agreement which could come into effect, he/she will be required to declare tax in Spain. 

If a company has purchased property between 12th of May and 31st of December of 2012, the income earned when it is sold will remain exempt up to 50%. 

  • MUNICIPAL CAPITAL GAINS TAX:

When any urban property is sold, the seller must pay this tax to the Local Government. It is calculated in relation to the plot’s rateable land value and the number of years the individual has been the owner. The greater the rateable land value and number of years of ownership, the higher the amount payable for this tax will be. It is applicable to sales, inheritances, donations and contribution of capital to companies. 

  • SALE OF A COMPANY WITH PROPERTY

If, instead of selling the property, a company (Spanish or otherwise) – which is directly or indirectly the owner of the property – is sold, in principle the Income Tax will be payable in Spain, as established in Spanish law. However, Double Tax Avoidance Agreements prevail over Spanish law, so for example, if the seller resides in Germany, he/she will be required to pay tax in Germany and not Spain, due to the current Agreement. With the new Agreement which could come into effect, tax must be paid in Spain.

TAXES DERIVED FROM TENANCY AND/OR USE OF A PROPERTY IN THE BALEARIC ISLANDS by a non-resident:

-       Property Tax (IBI)

-       Wealth Tax (Impuesto sobre el patrimonio anual)

-       Income Tax

-       Corporation Tax

-       Special encumbrance 3%

-       Inheritance and gift tax 

  • PROPERTY TAX (IBI), which is a tax payable each year to the Local Government (Ayuntamiento) of between 0.4% and 1.1%, approximately, on the LAND VALUE of the property (this value should in principle be half the market value of the property, as a maximum). 
  • WEALTH TAX (‘Impuesto sobre el Patrimonio’), which is a tax that was removed by Spain in 2008 and then was re-established. 

Each autonomous region applies its own regulations. 

Non-resident individuals must pay this tax (applying a scale of between 0.2% and 2.5%) on the property and rights located in Spain, with an exemption minimum of 700,000 € and in consideration of the corresponding Double Tax Avoidance Agreement. 

Therefore, for example, with the current Spain-Germany Double Tax Avoidance Agreement, individuals who are residents in Germany and who have property in Spain with a value superior to 700,000 € would be required to pay this tax (mortgage debts that have been invested during purchase can be deducted). However, they will not be required to pay this tax if they own the property or properties through a Spanish or German corporation. With the new Spain-Germany Double Tax Avoidance Agreement, which probably comes into effect, residents in Germany who have property or properties in Spain through societies will also be required to pay this tax, if Spain decides to continue applying the Wealth Tax. 

  • INCOME TAXATION (IRPF) FOR NON-RESIDENTS (Annually):

If the property has been purchased directly by a non-resident individual, he/she will be required to pay this tax each year. If the property is for private use, a hypothetical rent amount of 1.1% of the land value will be calculated and 24.75% of this rent will be payable. If the property is rented, 24.75% of the rent charged will be payable, although residents of the European Union may deduct necessary fees and pay 24.75% on the net profit from rent. 

If the property has been purchased by a non-resident entity, the payment of this tax of 24.75% will also be necessary if it is rented and it will also be payable on the market rent price if the property is granted to associated individuals (partners, administrators, etc.). 

  • CORPORATION TAX:

If the property is purchased through a Spanish company, it will remain subject to Spanish Company Tax (‘Impuesto sobre Sociedades’), in principle at 25/28% on income gained due to the leasing or use of the property – minus costs –, or on the market value for rent if the property is granted to associated individuals, or on the sale of the property. 

  • SPECIAL ENCUMBRANCE REGARDING PROPERTY OF NON-RESIDENT ENTITIES (Annually 3%):

If the property has been purchased by a non-resident entity, it will remain subject to this tax and it should be declared each year. The entity will be exempt from paying this tax if, with the yearly declaration, an accrediting document which confirms the entity resides in a State that has a Double Tax Avoidance Agreement with Spain in exchange for information (which Germany does, for example) is provided, as will individuals who are considered owners of the corporation and who reside in a State that has a Double Tax Avoidance Agreement with Spain. Otherwise, a tax of 3% on the land value of the property will be payable each year. 

  • INHERITANCE AND GIFT TAX:

As a result of the recent European Court of Justice Ruling of 3rd of September of 2014, regarding the discrimination suffered by non-resident taxpayers and testators through Spanish inheritance tax in comparison to residents in Spain, it has been ruled that non-residents may apply the local autonomous community legislation, which is usually much more favourable. 

In order for non-residents to be treated as residents, as decided by the ruling, the legislation (which is in process) deals with three aspects: 

Firstly, it includes residents of the European Economic Area in its application (the 28 states of the European Union and Iceland, Liechtenstein and Norway). 

Furthermore, it establishes the option of non-residents applying State law or the autonomous region’s regulations when considered favourable. 

In the event of inheritance: 

When the testator was not a resident in Spain, regulations of the autonomous region where the highest value of the property and rights of the decedent’s estate is situated in Spain may be applied. 

When the testator was a resident in Spain, regulations of the autonomous region where he/she was a resident may be applied. 

OTHER IMPORTANT CONSIDERATIONS

It is extremely important to bear in mind a series of details when formalising a transaction of this nature.

  • Tax Identification Number (‘Número de Identificación Fiscal’ – NIF):

In Spain, each person (resident or non-resident) has, or should have by law, an assigned tax identification number which is used in tax declarations and any form of communication directed to the Tax Authorities. This also applies to any type of corporation. The NIF usually coincides with the individual’s National Identity Document (‘Documento Nacional de Identidad’ – DNI). For individuals of foreign nationality, the NIF is a Foreigners’ Identification Number (‘Número de Identificación de Extranjeros’ – NIE). Nowadays, the process to obtain a NIE is long and tiresome (it takes 3 to 4 weeks). It is recommended that once the purchase agreement or option agreement is signed, the notary takes an obligatory photocopy of the passport of the buyer or buyers, as this is an essential requisite to then requesting the corresponding NIE.

 Usual residence in Spain:

An individual is legally considered a usual resident in Spain when he/she spends more than 183 days a year in the country, or when he/she has the principle residence located in Spain, or when he/she has his/her main direct or indirect economic activities or interests in Spain. 

  • Will:

It is highly recommended that a non-resident who has acquired a property in Spain provides a will and testament before a notary regarding his/her property or properties located in the Kingdom of Spain. This is a fairly simple and recommended process as it settles many problems, especially bureaucratic issues that may arise in the event of the death of the owner or owners.

Nova Real Estate Mallorca

Office

Passeig de Mallorca 14 a
Palma de Mallorca - Mallorca
Illes Balears , 07012 , Spain

Work: +34.971.717.920
Fax: +34.971.725.901
E-mail:

Nova Real Estate Mallorca

Office

Carretera de Palma-Andratx 2
Cas Català - Calvià - Mallorca
Illes Balears , 07181 , Spain

Work: +34.971.405.984
Fax: +34.971.405.124
E-mail:

Nova Real Estate Mallorca

Office

C/Benito Feijoo 13, Local 9
Puerto Portals - Calvià - Mallorca
Illes Balears , 07181 , Spain

Work: +34.971.679.022
Fax: +34.971.679.128
E-mail:

Nova Real Estate Mallorca

Office

Avenida Mateo Bosch 2
Puerto Andratx - Andratx - Mallorca
Illes Balears , 07157 , Spain

Work: +34.971.102.626
Fax: +34.971.102.624
E-mail:

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