On December 28, 2022, Law 38/2022 was approved, which modified Law 19/1991 on Wealth Tax, with the aim of making non-resident individuals in Spain who have ownership of real estate located in Spanish territory through non-resident entities pay Wealth Tax.
It is important to highlight that this new regulation will affect not only the years 2023 and the following ones, but also the year 2022.
Situation until the entry into force of the new standard
Until the entry into force of Law 38/2022, the situation was that non-residents in Spain who owned real estate located in Spain through non-resident companies were not subject to Wealth Tax, although such company only had an asset or various assets located in Spain.
This had been confirmed by the Courts of Justice and the General Directorate of Taxes on several occasions.
Measures introduced by Law 38/2022
The measures affect the taxation of non-resident individuals who own property in Spain through non-resident companies.
The approved regulation changes the current rules of Wealth Tax for non-resident individuals who own real estate in Spain indirectly, through one or more foreign companies.
According to the new regulation, non-resident individuals in Spain are subject to Wealth Tax for holding shares in any non-resident entity, provided that the entity’s assets consists of at least 50% of real estate located in Spanish territory, either directly or indirectly.
To determine the composition of the assets, the net book value of the company’s real estate must be replaced by the highest of the following three values:
- the cadastral value,
- the one determined or verified by the Administration,
- the price, compensation, or acquisition value.
The net book value of the rest of the non-real estate assets or rights must be replaced by their market value on the tax accrual date.
Currently, the Wealth Tax law, which is levied on non-resident individuals in Spain who have assets or rights located in Spain, provides for the possibility of applying the Tax regulations approved by the autonomous community where the greatest value of the assets and rights is located assets.
For this reason, it could be interpreted that non-resident natural persons, who have real estate through non-resident companies, can opt for the law of the autonomous community where the underlying real estate of the company in which they participate is located.
However, this new regulation does not mention this aspect, which will require the interpretation of the General Directorate of Taxes and, where appropriate, the Courts of Justice to clarify this issue.
Depending on whether the administration accepts this interpretation or not, the Wealth Tax will be applied to individuals who are indirect owners of real estate in autonomous communities such as the Community of Madrid or Andalusia, which have this tax subsidized by regional regulations.
Likewise, these people may be subject to the new Temporary Tax on Solidarity of Great Fortunes (ITSGF), also approved by the same Law 38/2022, which will be applicable when the direct or indirect value of the assets or rights located in Spain was more than three million euros.
For the purposes of their inclusion in the tax base of the Wealth Tax or the ITSGF, the interpretative doubt also arises as to what amount the shares in non-resident companies in Spain with majority investments in Spanish real estate should be valued, especially as to whether the part of the value of the shares that proportionally correspond to the assets of the entity that are not located in Spanish territory, should be excluded.
When will the first tax return be filed under this new regulation?
The payment of both taxes should be made during the month of June (Wealth Tax) and July (ITSGF) of the year following the accrual, which means that with the accrual on December 31, 2022, the people affected by this regulatory change should already submit declaration in the months of June and July of 2023.
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