If you are a resident, you are subject to personal income tax (including capital gains tax) and property tax (IBI). If you are non-resident, you are subject to personal income tax (including capital gains tax), property tax, plus an additional non-resident property tax. Personal income tax for non-residents only represents income from the property; income from salary is declared where you are a resident. If the property is for your own use, you must pay a certain percentage of your property; if the property is rented, you declare the amount you have received in rent.
This tax is based on the “valor catastral” and can vary widely from town to town for the same type of property because it is a municipal tax. This real estate tax is called the IBI, the “Impuesto sobre Bienes Inmuebles”. The tax is increased every year in line with inflation. For a non-resident, the best solution is to have the tax paid by standing order from a bank account. The bank will provide a form which authorises them to pay the tax, and a copy of the form is deposited with the local council. This ensures that taxes are paid when they are due, just as with the other utility bills of your property. In addition to the assessed value of your property (“valor catastral”), the IBI also lists your referencia catastral number, which will identify your property at the “catastro” office together with its officially documented size. This can be important in buying and selling property because sometimes the physical description does not agree with the description given in the property title. These three taxes cannot be avoided as the Spanish tax agency, “Hacienda”, will audit the books at the time of the property sale. They will be holding your deposit of 3% of your total sale price, which is a guarantee against your imputed income tax and wealth tax obligations for the previous four years, as well as against your capital gains tax liability. You will also be required to present the current real estate tax receipt, the IBI, when you sign the sale contract.
The wealth tax will now only affect properties with a property purchase price higher than 700,000 euros.
Spanish property owner’s imputed income tax is not charged on a resident owner’s principle residence; however, a second home would be taxed. In the case of a non-resident, since this property will not be considered to be the principle residence, the tax must be paid on a yearly basis. The tax payable is 2% of the rateable value of the property attributed to the property owner as a fictitious income on rental. This is reduced to 1.1% if the rateable value has been raised since 1994 – and many of the values have been raised. Residents pay tax on this notional income by having it added to their other income as if it were more earnings. Lower incomes pay 15% tax and higher incomes 30% or even 40%. A non-resident is always taxed at the flat rate of 24% on any income arising in Spain. This tax of 24% on income must not be confused with the capital gains tax of 21% which applies to profits from the sale of assets, such as a house or shares in a company.
There are thousands of offshore tax havens used for the sole purpose of owning a property in Spain. Tax exempt companies formed in Gibraltar to own Spanish property are no longer recognised since the end of 2010. The strict controls on tax havens and money laundering have made these changes necessary. There is a new form of non-resident company that offers many of the same advantages. The special tax on properties owned by offshore companies is 3% of the “valor catastral”. For companies registered in Gibraltar or other tax havens there are no exemptions.
It is legal and acceptable for you, as either a resident or non-resident property owner in Spain, to rent out your property. However you must remember that you must declare your rental income to the tax authorities. You are actually required to declare the income within 30 days of receiving it, but can instead apply to make quarterly tax declarations in order to save paperwork. It is true that almost all owners who let their properties do not declare this income to the Spanish tax authorities and the chances of getting caught are slim. Nonetheless, Spanish income tax is due on any profits arising in Spain. If you are non-resident, you are liable to pay 24,75% from the very first euro of rental income. You cannot take advantage of the reduction of 50% for resident landlords. If you are a resident, you should include your rental income with your other income when you make your annual Spanish income tax declaration. If you register your property as a tourist letting operation, you can charge the maintenance expenses of your property as a business expense and offset it against tax.
If you are a non-resident, but own and operate a business in Spain, such as a restaurant, or a bar etc., you are also liable for Spanish tax on your profits.
The non-resident property owner of only one property is no longer required by Spanish law to appoint a fiscal representative who is resident in Spain. Owners of two or more properties, however, must do so – under penalty of fines that can go as high as 5,000 euros in the event of noncompliance. The fiscal representative guarantees to the Spanish tax authorities that they have a reliable contact inside Spain for the non-resident tax payer. Most non-residents appoint their tax consultant or legal representative as their fiscal representative.
If you are a non-resident property owner, you must pay the above-mentioned taxes and may have to name a fiscal representative. In order to pay these taxes, you must apply for a NIE (Numero de Identificacion de Extranjero), which is your Spanish tax identification number. Non-Spanish residents of all nationalities also have such a number. You should apply for this number when you purchase your property. The number identifies you to the Spanish authorities and is required when you pay taxes or have any dealings with “Hacienda”. To obtain it, you need to make an application at the nearest police station, or “comisaria”, which has a foreigner’s department and to submit a photocopy of the relevant pages of your passport. If you are an EU citizen coming to live in Spain, you will be assigned your NIE number when you obtain your new certificate of registration which has replaced the residence card. Alternatively, you can appoint a legal representative to apply for it on your behalf by means of a power of attorney.
Since February 2013, all residents in Spain must declare their overseas assets worth more than 50,000 euros. Severe fines will be awarded for failure to comply with the new law. Tax residents have until 30 April to present their declaration for 2013 and 30th of March of the following years. The new legislation regarding the disclosure of overseas assets by all fiscal residents and businesses in Spain has now fully come into force (since 1st of February) and declarations, made by filling out Model 720.
P.S. Please note, however, that this overview is no substitute for legal or fiscal advice from a qualified professional. When buying property in Spain you should always use an independent lawyer.