Spain: Legal Highlights Of Doing Business In Spain By A Foreign Investor - UPDATE of Pa

Last Updated: 27 February 1996
4. INVESTMENT IN REAL ESTATE

4.1 Main types of investor

These may be: non-resident individuals, foreign companies and foreign governments or government-owned companies (subject to restrictions). Aliens with residence in Spain may freely invest in real estate, but this investment would not be a foreign investment.

4.2 Real Estate Investment System

4.2.1 General Rules
Provided, in general terms, that the investment is made in freely convertible currency foreign investment in real estate in Spain is free. The investor simply transfers the money, buys the property in question and subsequently should declare his investment to the Foreign Investments Register so that the rights attached to the foreign investment (mainly, transfer of rental and sale proceeds of the investment) may be given effect to. If the investment is in itself an entrepreneurial activity it is considered a direct investment and thus subject to the rules on direct investments (see 3.4.1).

4.2.2 Exceptions
Investments in real estate are not free and require the prior "verification" of the Spanish authorities in the following cases:
a) if the actual investment exceeds 500,000,000 pesetas;
b) if, irrespective of the actual amount, the investment comes from countries and territories which by regulation are deemed to be tax havens (see list in footnote 44).

For verification purposes the investment project must be submitted in advance to the Foreign Investment Authority. The comments made in paragraph 3.4.1 above apply.

4.2.3 Rights attached to foreign investments
These are:
a) Repatriation of the proceeds of the sale provided all legal and tax obligations and regulatory requirements have been duly met, and
b) Remittance of rents abroad: there is no limit subject to fulfilment of the relevant tax obligations.

The transfer of the proceeds of sale of real estate and of rental income is free and requires no prior verification.

4.2.4 Other highlights

a) Business activity (the so called entrepreneurial activity) in the real estate field is regarded and treated as a direct investment and thus subject to the requirements established for this type of investment.

b) Foreign investments in certain restricted areas (namely coastal areas) further require a military permit for national security reasons. This requirement does not apply to nationals (individuals) or companies of EC countries. In the case of companies, whether Spanish or foreign, a military permit will be required if more than 50% of the company's share capital belongs to non-EC nationals (whether individuals or companies) or if, being less, the non-EC partners exert a decisive influence in the company's management.

c) Domestic loans to non-residents for the purchase of property secured by mortgages on the acquired property are available and require no prior approval of the Foreign Investment Authority. Spanish banks have been authorised on a general basis to give loans under certain conditions. Repayment of such loans is to be made with foreign currency, though rental income deriving from the property may also be applied to repayment.

4.3 Taxation

4.3.1 Taxes on purchase

4.3.1.1 VAT or Capital Transfer Tax (CTT)

a) Plots of land: 6% CTT (between non businessmen); 16% VAT (otherwise); Rural non-buildable land is exempt from VAT but is liable to CTT (6%)

b) New property. housing : 7% VAT; business premises: 16% VAT; parking lots: 7% VAT if attached to a dwelling and sold together; 16% VAT in any other case. Under certain circumstances the transfer of shares of companies owning property may be subject to CTT at the rate of 6%.

c) Second hand property. plots of land (rural or non-buildable land) and buildings attached thereto: 6% CTT, since sales are exempt from VAT; empty plots of land: 16% VAT (if seller is an entrepreneur) 6% CTT (if between non-businessmen). Rural non-buildable land: 6% CTT; housing: 6% CTT; business premises: 6% CTT

In a), b) and c) the tax is borne by the buyer.

4.3.1.2 Impuesto sobre el Incremento de Valor de los Terrenos de Naturaleza Urbana (Urban Plots Capital Gains Tax).

This tax is in force since January 1st 1990 and replaces the so called Municipal Capital Gains Tax (Impuesto Municipal sobre el Incremento del Valor de los Terrenos, commonly known as Arbitrio de Plusvalia). It applies to both individuals and companies dealing in urban plots (excluding rural land).

The taxable base is a percentage of the official value (valor catastral) of the plot of land at the time of the sale. The percentage (i.e., the annual increase in value of the plot of land) is fixed for five year periods by the relevant city council within margins authorised by the law. The applicable percentage at the time the land is sold is multiplied by the number of years the property has been in the possession of seller. The resulting total percentage is applied to the official value of the plot of land. The resulting amount is taxed at rates varying between 16% and 30% depending on the population of the relevant city. Example: the plot of land is sold after 7 years, the percentage agreed by the city council for the second 5 year period is 2%, the land's official value is 100 million pesetas; hence the taxable base would be 14% of 100 million pesetas or 14 million pesetas and the tax payable somewhere between 2,240,000 pesetas and 4,200,000 pesetas. Individuals are allowed to deduct the 75% of the tax paid from their own personal income tax.

Generally, the tax payer is the seller. In practice the former tax -the Municipal Capital Gains Tax- was often paid by the buyer as a result of agreement between the parties. In addition the tax was in fact secured by the property with the tax authorities having a charge over such. It was thus advisable to find out in advance the tax liability before committing to buy for it could be a significant sum. The property is no longer charged and the only tax payer vis-a-vis the city council is the seller. However, in practice the tax is still frequently borne by the buyer.

4.3.2 Taxes on ownership
Basically there are two:

4.3.2.1 Immovable Property Tax (Impuesto sobre Bienes Inmuebles). This tax is also in force since January 1st 1990 and replaces the so called Contribucion Territorial Urbana (Urban Property Tax), the Contribucion Territorial Roestica y Pecuaria (Rural Property Tax) and the Impuesto Municipal sobre Solares (Plots of Land Municipal Tax). The ownership of immovable property (generally land and buildings) gives rise to this tax.

The tax is assessed on the official value (valor catastral) of property which cannot exceed market value. For the fiscal year 1995, the official value of urban and rural land fixed for the fiscal year 1994 has been increased by 3.5%. The tax is payable annually. The tax rate is 0.3% in the case of rural property and 0.4% in the case of urban property although the relevant city council may vary these rates within certain limits. Individuals are allowed to fully deduct the tax paid from their own personal income tax.

4.3.2.2 Wealth tax
Applied each year according to an increasing scale on all types of property (including, therefore, real estate). Non-residents pay on property located in Spain only. Residents pay wealth tax on their property located in Spain and elsewhere. Companies are not liable to wealth tax for any property they may have.

For fiscal 1996 the following rules(48) should be considered:

(i) Residents must only have to file the relevant return if the taxable base under Wealth Tax is more than 17,000,000 pesetas. The first 17,000,000 pesetas are exempt. These rules do not apply to non-residents who must file the return and pay the tax irrespective of the actual values of the properties. However, securities generating income which is not deemed to be Spanish source income will be exempt from Wealth Tax.

(ii) The brackets, expressed in pesetas, are:
0 to 26,780,000: 0.20%
26,780,000 to 53,560,000: 0.30%
53,560,000 to 107,120,000: 0.50%
107,120,000 to 214,240,000: 0.90%
214,240,000 to 428,480,000: 1.30%
428,480,000 to 856,960,000: 1.70%
856,960,000 to 1,713,920,000: 2.10%
More than 1,713,920,000: 2.50%

(iii) Non-residents are also required to appoint representatives for Wealth Tax purposes in Spain(49). The appointment must be notified to the Tax Department within two months following the date of the appointment. Non-compliance with these obligations may result in fines being imposed ranging from 25,000 to 2,000,000 pesetas.

4.3.3 Taxes on rental income

4.3.3.1 Indirect taxation on rental income
Business premises: 16% VAT
Housing: CTT (stamp tax) which is paid via the officially approved lease contract form.

4.3.3.2 Direct taxation on rental income

a) Non resident companies : a flat 25% withholding tax on gross rent (no reduced treaty rate to avoid double taxation available).
b) Non resident individuals : a flat 25% withholding tax on gross rent (no reduced treaty rate to avoid double taxation available).

4.3.4 Capital gains tax
a) Non-resident individuals: As from the fiscal year 1988 it is a flat 35% withholding tax on the difference between the acquisition cost (made up of the price, expenses and taxes paid at purchase and the market value (as assessed by the Revenue Service or the sale price if it equals or exceeds the market value). The capital gain is reduced according to the time that the property was held by the seller (for details see Section 5.2.2.1 below).

b) Non-resident companies: 35% withholding tax on the difference between the acquisition cost (as determined pursuant to current regulations) and the market value (the sale price stated in the conveyance deed will be accepted if it equals or exceeds the market value).

4.3.5 Special corporate tax
There is a special corporate tax on non-resident entities owning, or holding real rights over, immovable property in Spain(50). The rate has been fixed at 5% to be levied annually on the "valor catastral" (official value of property), but as of 1st January 1996 it amounts to 3% (pursuant to the provisions set forth in Law 43/1995). The tax will be due at December 31st of each year and payable within the following month of January. The 3% tax will be an expense deductible when determining the taxable base for corporate income tax purposes. As the Law came into force on January 1st. 1992, the tax was payable for the first time on January 1993.

(48) Law 19/1991 of June 6th, published on June 7th 1991, and Law 41/1994, of December 30.
(49) Non-residents having interests in Spain at the time were given until December 31st. 1991 to make such appointments (First Transitory Provision of Law 19/1991).
(50) The tax was approved by Law 18/1991 of 6 June, published on 7 June 1991.


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstance.

For further information contact Mr. Jorge Angell, L. C. Rodrigo Abogados, Madrid (Spain) Fax:010 341 576 6716, or enter text search 'L.C. Rodrigo Abogados' and 'Business Monitor'.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions