Owning Spanish property through a company structure could be a tax timebomb waiting to explode, so get a tax compliance check-up as soon as possible.
Many company ownership structures used by wealthy owners of property in Spain are ticking time-bombs of tax problems. The best defence is to be prepared.
From the 1970s to the early 2000 many foreign investors buying upmarket homes in Spain in places like Marbella, Sotogrande, Mallorca, and Ibiza, were advised to use company structures to avoid or minimise tax, but those arrangements are now ticking time-bombs in many cases. Why? Because the Spanish tax authorities are now aggressively targeting properties owned through company structures, especially offshore vehicles.
Experts at cross-border tax specialists estimate that more than 5,000 private properties in Spain are owned using international company structures, with some owned by double or triple structures involving a Spanish company belonging to a foreign company and, in many cases, a Trust on top. Thousands of wealthy foreign owners are now thought to be in the sights of Spanish tax inspectors.
These companies can help you with a Spanish tax compliance check-up:
Owning Spanish property via a company structure for tax reasons
Company structures intended to avoid or minimise tax in Spain, and facilitate change of ownership / inheritance, were the standard recommendation of many leading international tax advisory firms to wealthy investors from the 70s to the 2000s. Needless to say, those same firms are far from eager to talk about the problem today.
A recent decision by the Spanish tax authorities to target aggressively these tax avoidance arrangements explains why many of these company structures are now a ticking time-bomb for their owners.
With public finances under pressure, Spain is looking hard at tax avoidance schemes just like other Western countries, but in Spain the tax authorities are notoriously hard to deal with. And foreign owners of valuable properties in Spain can be seen as soft targets for Spanish tax inspectors looking for wealthy individuals who will not put up much of a fight.
The bomb goes off when owners get hit with a tax inspection, or when the time comes for a change of ownership by sale or inheritance that attracts the attention of the tax authorities. Tax consultants have seen the following justifications used to impose heavy penalties on company ownership structures, or hold up a transfer of ownership:
- Not declaring an annual rental income, even if not rented out
- Not paying Spanish corporation tax and VAT
- Not complying with all tax and registration regulations, and even rental licences in some regions
- Not paying tax on disbursements to shareholders, even when paid internationally
- No complying with Spanish regulations on loans and share capital, in particular thin capitalisation rules
- Not documenting properly the shareholders’ loans or paying or accounting for interest on an “arm’s length’ basis
- Not accounting for capital allowances and depreciation permitted to reduced CGT
- Not including company shares in wealth tax returns
- Not including foreign company shares in the the worldwide assets declaration (Modelo 720) when owners are resident of Spain
- Not paying the ITP Transfer Tax when selling shares of the foreign company
- Not paying the non-resident tax when ownership is located in a jurisdiction without a double tax treaty or a tax haven
- Not paying the 3% tax based on the property’s value when ownership is located in a tax haven
- And finally, some non-resident shareholders have fallen foul of the clause in some of Spain’s double tax agreements with countries like the UK, Germany, and France, which allows Spain to tax shareholdings of foreign companies that mainly own Spanish real estate
Tax solutions for company ownership structures of property in Spain
If you own a property worth more than one million Euro in Spain through a company structure set up between the ’70s and the 2000s, especially if there is an offshore company involved, you should investigate your exposure and get prepared for the eventuality of a tax inspection. And if you have already attracted the attention of the Spanish tax authorities you need to get prepared urgently. A well-prepared response guided by experts will send a strong message to the tax authorities that you are not a soft target, which is half the battle. Get prepared now.