What property taxes are
MUNICIPAL PROPERTY TAX.
IBI (Imbuesto Sobre Bienes Inmuebles)
We all know about the municipal property tax IBI (Imbuesto Sobre Bienes Inmuebles), which is paid by the owner as of January 1 of the reporting year. The amount of the tax is on average 0.4%-1.10% of the total cadastral value of the property, and there are no problems with its calculation. The tax receipt is mailed annually to the address of the purchased property, and the bank account is automatically debited.
In this article we describe two hidden taxes related to the acquisition and ownership of real estate in Spain, namely the additional tax on the transfer of ownership ITP (Impuesto de transmisiones Patrimoniales) and the national annual tax on imputed income on the fact of ownership of real estate, or, in other words, the income tax for non-residents IRNR (Impuesto sobre la Renta de no Residentes sin establecimiento permanente).
Why are these taxes called “hidden”? Because in the process of buying a property, and even after the purchase, no one will warn you about the obligation to pay these taxes, and the consequences of this can be very severe. The essence of these taxes is as follows….
ITP (Impuesto de transmisiones Patrimoniales).
ITP (Impuesto de transmisiones Patrimoniales)
In Spain, after signing the contract of sale of real estate (bill of sale) at the notary, non-residents are required to pay the transfer tax ITP (Impuesto de transmisiones Patrimoniales) at a rate of 6% to 10% of the market value of the purchased object, depending on the autonomous region where the property is located. It seems simple, but in practice the following unpleasant situation often arises.
You buy an apartment for sale for 100.000 €, and its market value is also 100.000 €, but for some reason the bill of sale shows a sale amount of 50.000 €. If the tax on this amount in your autonomous region is 10%, you will pay 5.000 € tax, which is incorrect from the point of view of Spanish tax law, since the tax must be paid on the market value of the property.
According to Article 134 of the “Basic Law on Taxation in Spain”, the tax authority has the right to inspect the contract of sale of real estate to verify the correct payment of tax on the transfer of ownership. If the value of the property stated in the contract of sale is clearly lower than its market value, a tax investigation may be ordered to verify the correct payment of this tax.
When additional tax is assessed, the regional tax office assesses the property sold by multiplying its cadastral value by a coefficient that is determined each year separately for each municipality. For example, in 2015 in Alicante the coefficient was 2.22. That is, if you bought a property in Alicante with a cadastral value of 100.000 € and would like to avoid additional taxation, then the declared sale price must be equal to or greater than 222.000 €. Now the sale price is calculated using special tables. In practice, there were many cases when the sale price did not exceed the cadastral value and we recommended buyers to inflate the declared value in the bill of sale, trying to get closer to the required value.
At the end of the investigation, the owner receives a notification letter stating the grounds and results of the inspection, as well as a demand to pay the specified amount of tax on the difference between the market value of the property and the value specified in the contract. The owner is given 1 month to consider this letter and must not miss this period, which is calculated from the date of official notification, i.e. receipt of the letter.
Consequences of non-payment of additional tax
If there is no reaction from the owner during this period, he misses the deadline for filing an appeal. The tax authority assumes that he accepts the additional amount and automatically withdraws the money from his bank account. If there is no money in the bank account, a record of the tax arrears is entered in the Spanish Property Register.
Where tax is not paid, the tax authority has the right to recover it in court.
According to Spanish law, when a non-resident of Spain buys real estate, a specially appointed tax representative must be present at the time of signing the bill of sale at the notary. The signing of the contract of sale by a notary without a tax representative is impossible. Such a representative can be a law firm, or its representative, which subsequently resolves possible issues with the tax authority on the additional charge of this tax. The tax administration does not send notification letters outside Spain, but uses the address of the tax representative.
If you receive a demand for payment of additional tax, there is no need to despair. In our practice, we have repeatedly challenged and obtained the annulment of such decisions.
We recommend that you decide on your tax representative before purchasing a property.
IRNR (Impuesto sobre la Renta de no Residentes sin establecimiento permanente)
IRNR (Impuesto sobre la Renta de no Residentes sin establecimiento permanente)
There is another “hidden tax” – The annual national tax on imputed income based on real estate ownership, the so-called “Income Tax for Non-Residents” IRNR (Impuesto sobre la Renta de no Residentes sin establecimiento permanente). Most non-residents do not pay this tax and this has very serious consequences.
The essence of this tax is that foreign citizens, non-residents of Spain, are attributed income from the ownership of real estate in Spain, even if the property is not rented out and the owner does not receive any real income from its ownership, but could potentially rent it out. The tax ranges from 0.264% to 0.48% of the cadastral value, depending on the year of revaluation.
The peculiarity of income tax for non-residents is that no one mentions it during the purchase of real estate and does not indicate the obligation to pay it. The tax authority or its subdivisions do not send a form for payment and do not notify the owner of the need to pay the required amount in the specified period. Non-residents are obliged to take care of filling in the tax return and submitting it to the fiscal authority. The form of this tax must be filled out independently on the website of the tax administration, and then printed and paid in the bank. The problem is that without an excellent knowledge of the language and taxation issues, it is almost impossible to do this.
Please note that according to the Law on Income Tax for Non-Residents (Royal Legislative Decree 5/2004), a non-resident is required to provide the details of his/her tax representative. This person (or organization) is entered in the database of the tax administration. All important correspondence will come to the specified address of the representative. Thus, no important document will be lost or overdue. For the absence of a tax representative, the law prescribes a fine from 2,000 to 6,000 €.
The consequences of not paying income tax
- In case of non-payment of income tax, the tax administration has the right to withdraw the amount owed from your Spanish bank account (if there is such an amount in the account)
- the bank account may also be seized, up to and including the suspension of the debit without acceptance
- If there are insufficient funds in the bank account, a record of debt to the tax administration is made in the property’s entry in the Real Estate Registry (Registro de Propiedad Inmobiliaria), which means that it is not possible to amend the bill of sale, inheritance, etc.
- the tax administration can collect this debt in court
- you may be subject to penalties
- you may be subject to one of the unscheduled tax audits
If the tax administration has questions about your income tax payment, you may be sent a warning letter to your Spanish real estate address. However, if you fail to receive it, it will be returned to the tax authorities. This warning letter will then be placed in the BOE (Boletín Official del Estado), the bulletin of official publications of the tax authorities, at which point it is considered that you have been officially notified. If you do not respond soon, your account may be seized.
December 31 is the last day to file income tax for non-residents with the tax authorities. This tax is a report for the previous year and includes imputed income. The tax authorities have recently increasingly used a method of matching information to identify rental properties, which involves tracking electricity use and comparing it to the declared use of the property.
How to avoid problems when paying real estate taxes
We strongly recommend that you appoint a tax representative in Spain who could:
- track the timely payment of taxes in Spain
- represent your interests before the Spanish tax authorities
- receive tax notices in your name
- to inform you of important innovations in tax legislation
If you have doubts about the correctness of payment of property taxes, you can immediately, with our help:
- receive oral or written advice on taxation issues
- conclude an annual agreement with a tax representative
- receive an income tax payment form (IRNR)
- check the payment status of all taxes and receive invoices for payment
- compile and file an annual income tax return and tax payment
- pay tax through a tax representative
- automate the debiting of tax payments from the bank account
This article does not contain exhaustive information on the payment of taxes by non-residents in Spain. It covers only general aspects of real estate taxation. For each case, taxation is completely individual and requires separate proceedings in a personal legal consultation.
A list of the tax services we can offer you can be found here.