Continuing with our previous post on Real Estate Due Diligence and the legal aspects of real estate investment in the Balearic Islands , on how to invest in real estate in the Balearic Islands if you are a foreigner, below, we will expand the information on the tax obligations derived from the acquisition of a real estate property in the Balearic Islands.
As a reminder, before making the investment we must be clear about two important aspects, such as the real market value of the property for tax purposes and the state of spills and debts with the Community of owners. Likewise, as we have already explained, we must take into account that there are several types of contracts to be signed prior to the formalization in public deed of the sale of real estate.
Before signing, a decision must be made about the vehicle from which to make the investment, because depending on the use that is to be given to the property, between private use, annual or tourist lease or as an investment, with or without reform or construction, to its subsequent sale of the property, the tax impact may vary depending on whether the property is acquired personally or through a company, Spanish or foreign:
Municipal taxes and fees
Regardless of the use that is given to the property, as well as if it is acquired personally or through a company, there will be an obligation to pay the City Council annually the Tax on real estate, known as IBI and the garbage collection rate.
In addition, in the case of acquisition of land for subsequent construction, it will be necessary to pay the fees for obtaining the necessary licenses to build.
If the property is sold in the future, the municipal capital gains must be settled, also before the City Council, according to the calculation that each City Council applies to assess the increase in value of the land on which the property sits from the moment of acquisition until its sale.
If the home is purchased personally, there will be an obligation to submit an annual declaration, except if it is purchased personally and the use is as a habitual residence or primary residence.
If it is used as a second residence, in the event that the buyer is a natural person, there will be an obligation to allocate an annual rent, based on the cadastral value of the property. In the case of residents in Spain, it will be declared through IRPF form 100, while non-residents must do so through IRNR form 210.
If the home is rented, the annual income obtained must be declared, in IRPF or IRNR depending on the residence of the purchaser, and in the case of foreign residents, depending on whether they reside within the EU or outside, there may be great differences such as the possibility of deduct the expenses necessary to maintain the property in conditions to be rented, or not being able to deduct any expenses, having to pay taxes on the income obtained.
In the case of acquisition of land in order to build a house for its subsequent sale, although it would be advisable to undertake this investment through a company and not personally, an annual declaration should also be made, in addition to that relating to the capital gain obtained in the future sale.
In the case of acquisition of the property through a Spanish company, there would be an obligation to present the Corporation Tax declaration annually.
In that declaration, the income obtained in the event of renting the home, both to third parties and to parties related to the company, must be declared.
As with natural persons, in the event of the sale of the property, the profit obtained in the year in which it occurs must be declared.
The casuistry of VAT in the real estate business is extensive. Already at the time of purchase, depending on whether the buyer intends to carry out an economic activity or not, they have to decide whether they are going to pay Property Transfer Tax or if they are going to waive the VAT exemption, so that the purchase becomes be subject to VAT instead of ITP, taking advantage of the fact that VAT is 100% recoverable while ITP, like any expense, is only recoverable in the % of tax that we end up paying.
Then, depending on how we use it, we will also be affected by this tax. If we rent it to someone who will use it as a home, the rent would be exempt, but if we rent it to a company we could be forced to apply a 21% VAT on the rental price. If, in addition to offering the rental of the property, we are offering ancillary services to those of the hotel industry, such as cleaning, change of sheets and towels, preparation and service of meals, laundry, etc., we should apply the 10 VAT %.
As in the case of renting the house, if we acquire a plot of land for construction and future sale, there may be numerous possibilities of applying VAT, although the usual thing in the case of acting as a promoter of a house would be that the majority of expenses related to the construction work will not carry VAT, under the rule of the investment of the passive subject, and that the VAT will be paid either in the future sale of the property, or as income from the rental is obtained.
Another tax that can affect us when acquiring a property in Spain is the Wealth Tax.
If we acquire the property personally, whether we are residents or not, as long as its acquisition value exceeds €700,000 per buyer, we will be obliged to pay between 1.1% and 2% of the value of the property. If the use is going to be that of habitual residence, the limit amounts to one million euros. If the home is acquired by two people, there will be an obligation to present the declaration if the value of the property reaches one million four hundred thousand, or 2 million in the case of habitual residence.
Although the Wealth Tax is levied on individuals, the acquisition of a property through a Spanish company can also mean that its partners become obliged to file this tax annually, if the value of the property for purposes of the IP calculation exceeds the aforementioned limit of €700,000.
If the person who acquires the property is a foreign company, it will not have the obligation to file the Wealth Tax.
Property Transfer and Certified Legal Documents Tax
In addition to municipal and state taxes, when acquiring a property, we also have to render accounts with the Administration of the Balearic Islands, paying the ITP on the purchase of homes, except if they are first-build or if the purchaser decides to waive the exemption from VAT, as mentioned in the section corresponding to VAT.
When the owner of the property is a company, and what is sold are its shares and not the property directly, there is an obligation to pay ITP unless the property is used for an economic activity carried out by the company.
For homes with a tourist license and depending on the number of places, tourist taxes must be paid annually to the corresponding Insular Council.
There are so many taxes and obligations that may or may not affect, depending on the intended use of the property, as well as depending on the vehicle chosen to make the investment, that it is essential to be properly advised, both prior to the acquisition and while you are the owner and until the property is transferred.
That is why at addwill we have a multidisciplinary team, with lawyers specialized in the legal review of purchase and sale operations, who provide security to the transaction, specialists in taxation, who can offer the best advice according to the needs of each buyer to minimize the fiscal impact throughout the period from the acquisition to the sale of the property, as well as other lawyers, economists and other professionals specialized in the financial analysis of investments, the preparation of periodic reports or the control and administrative management related to the possession of the property. You can contact us by clicking here.