EDITOR’S NOTE: Regular legal-contributor Raymundo Larraín Nesbitt summarises the tax obligations of non-resident landlords in Spain, including the rental reliefs, tax allowances and deductions they can benefit from.
By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of January 2017
In my experience non-resident landlords seem, at best, blissfully unaware of their taxation duties on renting out their properties in Spain; at worst, they are totally baffled by them. So I thought it would be a good idea to start off the year by adding to the mayhem writing up this little article!
For an abridged version of this article, please read my straight-to-the-point blog post without the esoterics.
I frequently get asked to cast some light on the matter, so this guide attempts to lay out all the different scenarios non-resident landlords may be faced with and what exactly are their tax duties as a result.
I take the liberty of introducing the article with the lenient tax allowances EU and EEA residents can now benefit from following recent jurisprudence from the European Court of Justice. British nationals, for the time being, may still benefit from these allowances on filing their Spanish tax returns until Prime Minister Theresa May triggers article 50 sometime in spring 2017.
This article is split into two sections:
- Allowances (state and regional) as well as deductions non-resident landlords can benefit from (as physical persons) to mitigate their rental tax bill in Spain.
- Tax returns to be filed (in Spain) depending on which case a landlord is classified in (short or long-term rental).
I. Landlord Rental Reliefs
Following up on my article from February 2015, regarding the ECJ’s landmark ruling of last 3rd of September 2014, which put an end to discrimination between residents and non-residents on taxation matters, these changes also affect rental laws.
Law 26/2014 of the 27th of November amends both the Personal Income Tax Act (I.R.P.F.) and the Non-Resident Income Tax Act (I.R.N.R.). These changes came into force on the 1st of January 2015. I had already referred to these changes in December’s and February’s articles: Taxes on Selling Spanish Property and Changes To Spain’s Inheritance And Gift Tax Law.
Law 26/2014 adapts and transposes the decision taken by the ECJ amending internal Spanish national laws. It brings to an end (fiscal) discrimination between residents and non-residents in a wide array of matters; for this article’s sake, specifically on rental matters. EU-residents are now treated on par with Spanish residents on taxation matters relating to allowances and deductions. This translates into paying fewer taxes (as non-residents now qualify for deductions and tax allowances which were previously barred to them as these were earmarked for Spanish residents alone).
For the purpose of this article, when I make reference to ‘non-tax residents’ I will always be referring to citizens which are either tax resident in another Member State of the European Union or else in the European Economic Area (E.E.A., which is compromised by Iceland, Liechtenstein and Norway). Just to clarify, the below-listed changes do not benefit tax residents outside of the EU or EEA.
I.e. a US national cannot benefit from the tax allowances listed below.
Additionally, it should be noted that non-EU and EEA nationals have a different tax scale levied on them on renting their properties.
As a brief recap:
I) Landlords resident in E.U. or E.E.A.
- Tax relief: Yes, physical persons may deduct, for example, home insurance, mortgage loan interest payments, property maintenance expenses etc. Legal persons may also deduct rental related expenses.
- Dates: collected annually or quarterly.
- Tax form: 210.
- Tax rate: 19% on rental income for 2016.
II) Landlords resident outside the E.U. or E.E.A.
- Tax relief: no.
- Dates: collected annually or quarterly.
- Tax form: 210.
- Tax rate: 24% on rental income for 2016.
Rental Allowances – Situation Prior to the ECJs’ Ruling
Non-resident rental allowances were virtually non-existent prior to this ruling for private individuals. There were few instances in which you could offset rental taxes as they required you employed someone full time and had a permanent establishment in Spain. Obviously of little practicality which was not an option for the vast majority of non-resident landlords.
Post-ECJs’ Ruling – Changes to Spain’s Rental Laws
The ECJ’s key ruling of 3rd of September 2014 marks the inflection point which puts an end to (fiscal) discrimination between residents and non-residents. It forces Spain to amend its internal laws and accommodate the European principles on which the EU is grounded on. The significance of the ECJ’s ruling is that it has opened up the opportunity for non-residents to apply as from the 1st of January 2015 to the below-listed state tax allowances and deductions which were previously reserved only to Spanish residents. In addition, non-residents may also benefit from those set by the Autonomous Communities where the property is located which have a penchant of being more generous than state law.
When taxpayers are resident in another European Union Member State, or in the E.E.A., the expenses described in the Law on Personal Income Tax (IRPF) can be deducted when calculating the taxable base, provided that proof is supplied that these expenses are directly related to income earned in Spain and have a direct economic connection that is inseparable from the activity carried out in Spain. When expenses are deducted, a certificate of tax residency in the corresponding State issued by the tax authorities of that State which must be filed along with your tax return.
So, for example, a British national must request from the HMRC a certificate of tax residency in the UK and submit this to the Spanish Tax Office. This allows to successfully offset the maintenance and running expenses of their Spanish property against their rental income yielding a higher net income. Needless to say, you need a lawyer to organize this on your behalf.
Landlord’s State Reliefs and Deductions for Private Home Rentals
Non-resident landlords can either rent out their properties on a short or long-term basis:
- Short-term lets are understood to be subject to private holiday rental laws which are covered in detail by my article Holiday Rental Laws in Spain. Moreover, this can be further compounded by whether a rented property is classified as either urban or rural which gives way to a different set of regulations and legal requirements.
- Long term lets are subject to Spain´s Urban Rental Law better known by its acronym LAU. These long-term lets are covered by my article Urban Rental Laws in Spain.
The main difference between both is that the former is ruled by each of Spain´s 17 Autonomous Regions whereas long-term lets are ruled by a national legal framework which acts nationwide. The significance of this from a practical point of view, is that landlords who rent on a short-term basis using, for example, Airbnb or other similar rental portals should check the minutiae of the regional laws where their properties are located. Some of these laws are fairly restrictive and in fact may even require a landlord to attain a rental licence of sorts or else to register themselves prior to renting out their accommodations. Non-compliance may attract humongous fines in the thousands of pounds.
The following state deductions and allowances can be offset or deducted mitigating a landlord´s tax bill without prejudice of additional compatible allowances set out by the Autonomous Community contingent on where the property is located. Please take legal advice on the latter for your case as for economy of space I will not be listing them below.
The above translates into significantly higher returns for landlords on taking smart advantage of these lenient allowances. Meaning non-resident landlords stand to profit from higher net yields on letting in Spain as from 2015 onwards.
Article 24.6 of the Non-Resident Income Tax Act (I.R.N.R.) makes a direct renvoi on these to art. 23 of the Personal Income Tax Act (I.R.P.F.).
Please take note I will only list in this article allowances which properties are owned by physical persons, not by legal persons. More on ownership of Spanish properties through corporate structures in my article Buying and Owning Spanish Property through Companies: Pros and Cons.
Landlord Rental Tax Relief: Allowances & Deductions (as Physical Person)
- Rental Tax Relief / Deductible Expenses (Art. 23 I.R.P.F.)
Proof must be supplied that the following expenses are directly related to income earned in Spain and have a direct economic connection that is inseparable from the activity carried out in Spain.
• Interests arising from a loan to buy the property (i.e. mortgage).
• Local taxes and administrative charges and surcharges that impact on the rental income or else on the property itself (i.e. IBI tax, SUMA tax, rubbish collection tax).
• Expenses arising from formalising rental contracts such as lets or sublets (i.e. Notary and/or Land Registry fees); legal defence (i.e. hiring a lawyer for tenant eviction purposes).
• Maintenance costs may be offset; refurbishment expenses are excluded.
Examples of maintenance costs (deductible): repainting over flaky paint, plumbing, debugging, tennis court green mold cleaning, swimming pool pump replacement, annual lift maintenance, leaking faucet.
Examples of refurbishment expenses (non-deductible): glass curtains, double-glazed windows, parquet, marble floor, extension to property (outbuilding), tennis court, swimming pool, private lift.
Notwithstanding the above, refurbishment expenses may be claimed on selling the property by offsetting them against your Capital Gains Tax liability. Please read my article: Taxes on Selling Spanish Property.
• Home insurance premiums (theft, fire, civil liability etc.). Please read my articles Home Insurance in Spain, Community of Owners’ Insurance Policies and How to Cancel your Home Insurance Policy in Spain. However claims arising from events that diminish the value of a dwelling are non-deductible i.e. fire.
• Utility invoices (electricity, water, gas and landline).
• Concierge, gardening & security services (i.e. gated communities).
• Rental publicity expenses.
• Home depreciation and amortization. The calculation is 3% on the highest value of the following two: home buying costs or cadastral value; the value of the land is excluded.
- The 100% tax allowance on letting to under thirty-year-olds is supressed as from the 1st of January 2015. The allowance is now 60% on the net income regardless of a tenant’s age.
II. Tax Returns to be Filed
Depending on which classification a landlord falls in, different tax models need to be filed. This section is already covered in detail by my article Non-Resident Taxation in Spain. Notwithstanding, I will do a brief summary for completion’s sake.
- Not renting out property.
Regardless you must file and pay an annual tax return called Non-resident Imputed Income Tax. This is tax model 210. It must be filed and paid before the 31st of December of each year. The details are already covered by my above-mentioned article.
- Renting out property in Spain
- Short-term (Private Holiday Lets)
Besides complying with the above annual requirement, you must file a quarterly tax return for model 210. This has associated higher professional fees from lawyers or economists as it is admin intensive. A tax model must be filed for each tenant. Additionally, a tax model must be filed for each joint owner of the property (think joint property ownership as in couples).
Landlords should note that this option is borderline to running an accommodation business that is advertised in specialized rental property portals over the net.
- Long-term Rentals
It suffices to file an annual tax return; again, tax model 210.
- Professional Rental Business
Professional rental businesses require VAT is filed on a quarterly and annual basis (tax models 303 and 390.). The business is equated to running a hotel accommodation.
As can be clearly surmised from the above, the taxation on private rentals may be somewhat labyrinthian given the fact that 17 different Autonomous Regions in Spain hold competence over it and rule accordingly. This requires the input of seasoned professionals to wade through the pitfalls and come out successfully.
Which is where we lawyers step in; hand-holding landlords and guiding them through the taxation ordeal to come up on top of it working the system.
“The minute you read something that you can’t understand, you can almost be sure that it was drawn up by a lawyer.” – Will Rogers.
William Penn Adair “Will” Rogers was a Cherokee-American cowboy, comedian, humourist, social commentator, vaudeville performer and actor. He was also the father of a well-known U.S. politician; nobody´s perfect.
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