If you are a EU resident with a property in Spain that you rent out you will be aware that a 19% tax is applicable to your gross rental income, all according to the Spanish Non-Resident Tax Law.
You may not know that a Spanish resident renting a property in identical circumstances gets a very generous reduction of 60% on the gross income, provided that the tenant uses the property as his or her permanent residence. This reduction, which is found in Article 23 of the Spanish Personal Income Tax Act, is not applicable to EU residents outside of Spain. But this situation could change soon.
On 7 March, the European Commission initiated legal actions, an infringement procedure, against Spain due to the discrimination of its Non Resident Tax Law against EU citizens’ rental income. The legislation is contrary to EU Law and Spain now has a period of 2 months to give a detailed answer to justify its “unjustifiable” position. If it does not convince the European Commission, Spain will be forced to modify the rules in 2 months. Otherwise, the case will be heard at the Court of Justice of the EU.
If this discriminatory treatment is ruled out by the Commission or the Court, European residents may request the rectification of their declarations submitted in the last four years, as per Spanish statute of limitation’s rules.
This is not the first time that Spain might be forced to change its tax criteria due to discrimination against European citizens. On 3 September 2014, a ruling of the Court of Justice of the European Union declared that European residents were discriminated against by Spanish Inheritance Tax rules. The issue was related to similar discriminatory treatment as Spain was applying regional reductions to Spanish residents and non residents were excluded. Recently the Spanish Supreme Court has declared that discrimination against non-EU foreigners also violates EU law. This has been stated in the recent rulings of 19 February 2018 (with a Canadian resident), 21 March 2018 (Costa Rica) and 22 March 2018 (Switzerland).
We are ready to help anyone sort out their tax, wealth, and residency affairs in Spain. Please get in touch.
Claudio Rodríguez Vera
For Del Canto Chambers