Tax catch-22

To kick off this section, a catch-22 tax situation that appears to be affecting buyers in some areas.

As you may know, the property market in Marbella has been in the doldrums for a number of years. As a result market prices are back where they were 3 or more years ago, even if official figures suggest that prices have been steadily rising, albeit at a lower rate than before. Official figures are notoriously unreliable, and everyone knows that they overstate prices. The scandal is that tax officials in Marbella appear to have started fining buyers for under-declaring (paying part of the price under the table in cash) even if they haven’t. If the tax office thinks that the declared price is too low, they fine the buyer. So if you do everything by the book, declare the full price, and pay all your taxes, you might still be fined. All that matters is the price the tax authorities believe you should have paid, which might well be above the price you actually pay. A classic catch-22: whatever you do, you can’t win. Heaven help you if you find a real bargain.

I’m sure I don’t have to stress how utterly absurd this is. Under-declaring is rife in Spain, and has probably been going on as far back as the reconquista. It is encouraged by high taxes on property transactions. Now they say they want to clamp down on real estate tax evasion, but rather than address the root cause, say by lowering taxes and reducing the incentive to under-declare, they start by fining law abiding buyers who are doing them a favour by buying in a difficult market (and adding to the long term tax base). Buyers have to prove they haven’t under-declared, which is impossible, and the tax authorities don’t have to prove anything. The lack of transparency in the market means they can get away with it.

By fining people who pay the true market price, they run the risk of underminging the market. If this problem grows, and large numbers of potential buyers become aware of it, then demand could fall, as who will buy if they get fined for doing so? If demand falls so will prices, meaning even bigger fines for buyers….

If the Spanish property market tanks the Spanish economy will be in real trouble. You would expect the authorities to do everything in their power to build confidence in the market. Instead they come up with this little scheme to drive buyers away. Madness.

Comments

comments

3 thoughts on “Tax catch-22”

  1. Inez

    It is madness. When this first happened to me on a sale 3 years ago we had the devils own job to convince the notary this was real. All monies had to be paid as cheques which were copied and attached to the notary file. The buyers were told there may be a time when Hacienda come back wanting more money for it but the still decided to buy. They have since sold on the property with no penalty.

    A second case I had was so ridiculous that the sellers had to transfer nearly 10,000 euros to allow the deal to go through. Anyone else would have defaulted but they owned another proeprty in Spain and couldnt do that. They wished to clear their debt and leave themselves ok for the future. Again the notary could not believe it and extra money had to be paid at notary to cover the tax issue – its was around 700 euros and should mean that there is no comeback.

    Lawyers have looked into this and said it is possible to undersell without penalty providing it is notified in Hacienda before the deal is concluded and then there is clarity for any possible comebacks.

    The Spanish do not understand the concept of pricing to sell and do not understand people making a loss – I think maybe in the next couple of years they may start to get their head around it.

  2. Gerard

    “The Spanish do not understand the concept of pricing to sell and do not understand people making a loss – I think maybe in the next couple of years they may start to get their head around it.” I don’t know why, but I am struck by this observation from the comment made by Inez. This characterization of the Spanish market deserves much closer examination and discussion.

  3. Inez

    Hi Gerard, sorry if my observation seemed a bit vague – after a long day my fingers were hurting!

    It is borne from many years (totalling 23) in the property business both UK and now Spain for the last 13. The spanish are traditionally a saver nation, the older ones anyway, not so much the youngsters. In the Franco regime, no one was allowed to have much and taxes were high, and so the money under the mattress syndrome was and still is rife. The Spanish will buy something and then as far as they are concerned, they put a price on it to resell. It is irrelevant to the what a bank valuation is, or what others will pay for it, but what they want for it. And this gets increased yearly, despite the item not selling!

    As an example, last year I went to a developer who was complaining about not selling the last units they had. After explaining how we worked, I showed them what the reserve price should be in accordance with a bank valuation.

    Despite wanting badly to sell, they would not accept it, stating the bank valuation was irrelevant to them as the price was what they wanted, and yet they had to sell!!!

    The notaries cannot understand a seller letting their property go for less than the price declared on the escritura – I have had problems with this and in one case he demanded just over 700 euros in tax to ensure there would be no comeback by hacienda! Since them we have spoken to several notaries who also do not understand selling something for less than paid for it and so my statement as above.

    Once the Spanish in general realize they will have to sell at below the price they paid for property assuming they really do NEED to sell, then the market prices will drop and the market itself start to recover!

    Hope that clarifies things

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