52ND UIA CONGRESS

Bucharest - Romania
October 29-November 2, 2008

 

 

TAX LAW

Friday, October 31, 2008

 

REAL ESTATE TAXATION

 

QUESTIONNAIRE

 

Ignacio Alonso
Advocatia - Abogados, Goya 99, Esc A 3o izda,
28009 Madrid, Spain
Tel +34 91 432 12 12 / Fax +34 91 577 34 84

ialonso@advocatia.net

 

© UIA 2008

 

1UIA Congress, October 2008, Bucharest (Romania)

Questionnaire

The upcoming UIA congress in Bucharest (Romania) in October 2008 will focus on the taxation of real estate. The purpose of the present questionnaire is to analyze, for each juriction represented at the Congress, the regimes of taxation of cross-border real estate ownership and transactions.

Name of Author(s)

Ignacio Alonso

Corresponding state

Spain

 

Introductory remarks:

The following situations have to be analyzed: The taxation of acquiring, holding and transferring real estate, whereas the person – whether an individual, a legal entity or a real estate fund, is domiciled in another state than the real estate property is located (cross-boarder situation).

Two possible scenarios have to be examined, i.e. scenario (i) where the real estate is located in your own jurisdiction and (ii) where the residence of the owner of the real estate is in your jurisdiction.

In addition, in case the real estate owner is an individual, the answer has to distinguish between a private asset and a business asset. Furthermore, the real estate may be a residential property or a business property. Finally, a distinction may be made between a structure where the property is owned directly or indirectly (through the ownership of the shares of a real estate company).

The questionnaire invites the participants to present in some brief answers the tax consequences in the different scenarios mentioned above.

The questionnaire is split into a section (I) dealing with the taxation of a transfer of real estate, into a section (ii) dealing with the taxation of ongoing ownership of real estate and into a section (iii) dealing with other objects of taxation. For all those situations, each type of tax shall be covered.

As an introduction, some basics of civil law topics are raised in order to summarize the underlying civil law system relevant for the taxation of real estate in the different jurisdictions. Additionally, general questions on some basics of tax law topics are addressed and a chapter regarding a general overview over some taxes is available.

 

Overview:

 

CIVIL LAW


TAX LAW

General Questions

Specific Questions

Civil Law

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Hereafter, some civil law questions are raised in respect of the state where the real estate is situated.

How is real estate property defined according to the law of the corresponding state?

According to article 348 of the Spanish Civil Code the property is the right to enjoy and to have at oneself disposal goods with no other limitations that those established by the laws. In this sense, article 333 of the Spanish Civil Code indicates that all goods that can be object of appropriation are immovable or movable. According to this, the Spanish law does not define the immovable goods, but it enumerates those that have this condition (article 334 of the Spanish Civil Code):

  1. Land, buildings, roads and any kind of construction stuck on the soil (Real estate).

 

  1. Trees and plants and their fruits, as long they are joined to the land or they are part of an immovable good.
  1. Everything that it is fixed permanently to an immovable good and cannot be removed without its destruction or its deterioration.

 

  1. The statues, reliefs, paintings and other objects of use or ornamentation placed in the building or in the land by the owner with the purpose to join them permanently.
  1. The machines and instruments assigned by the owner of the good to the industry or to the exploitation of the building or the land. Furthermore, they have to be used directly to cover the necessities of the exploitation.

 

  1. Animal’s breeding, dovecot, beehive, fishes’ bond and similar when they have been placed or kept by the owner of the land with the purpose to link them permanently to the land.
  1. The fertilizer assigned to the cultivation of the land if they are in the place where they are going to be used.

 

  1. Mines, quarries, slagheap and water (flown and stagnant).
  1. Dikes and constructions assigned to be in a fixed point in a river or lake or at the coast.

 

  1. Administrative concessions of public works and the easement rights and other real rights over immovable goods.

Is there a public register stating the ownership of a real estate property
(land register)?

Yes, the Land Register. According to article 605 of the Spanish Civil Code, the purpose of this register is the inscription or the annotation of the acts and contracts referring to the ownership and other real rights over immovable goods. The regulation applicable is out of the Spanish Civil Code: it appears in the Mortgage Act of February 8th 1946 and the Decree of December14th 1947.

If there is a land register, what is the nature of the register and what are the legal effects of a registration with the register?

According to article 606 of the Spanish Civil Code and to article 32 of the Mortgage Act, the ownership or the real right over immovable goods which are not duly registered or annotated, cannot be in detrimental to third parties. That means that third parties acquire according to the situation the register shows.  So, the Land Register gives publicity to all acts which are inscribed or annotated.

The Land Register is a public register for those persons who have a recognized interest to find out the legal situation of the immovable goods o real rights which are inscribed or annotated. In fact, every person can obtain information from the Land Register.

Is the land register a national or a regional register? – Which authority is in charge of the land register, how is the register kept?

The Land Register is a local register. Almost all the cities have a Land Register. The register is kept by an officer called Land Registror.

Which form has to be observed when the ownership on land is transferred (e.g. public deed, notarization)?

Article 609 Spanish Civil Code establishes that the property can be acquired:

  • By occupancy.
  • By the Law
  • By donation
  • By intestate or testate succession
  • By contract with the “traditio
  • By prescription.

 

Spanish Law follows the theory “modus and title”.

In this sense, a private contract can transfer the property, but it does not have effect to third parties if it is not granted before a public notary: only public documents can be inscribed in the Land Register.

Who is entitled to acquire real estate property in the corresponding state? Are there any limitations applicable to persons without residence in the state of the real estate property?

Every person with legal capacity is entitled to acquire real estate. In this sense, the minors who are not emancipated cannot transfer, levy or dispose immovable goods until they are full of age or dully represented (article 323 Spanish Civil Code)

In the corresponding state, how is real estate preferably acquired / held / transferred? Directly (asset deal / asset property) or indirectly (share deal / asset property)? According to civil law, what are the reasons for such structuring? (cf. also hereafter, page XX question according to tax law)

A real estate is normally acquired directly.

 

Is there a statutory mortgage (legal lien) securing the tax liability, due on the transfer of the ownership of real estate?

Yes. According to article 43.1 d) of the General Tax Act 58/2003 of December 23rd, the acquirer of goods linked to tax obligation becomes subsidiary responsible of the tax debt. In this sense, the acquirer will not become subsidiary responsible, if he is protected by the publicity of the Land Register as a good will third party. (article 79 of the General Tax Act 58/2003 of December 23rd).

Article 5 of the Royal Legislative Decree 1/1993 of the Transfer of Ownership Tax establishes that the transferred goods and rights are linked to the liability to pay the taxes which levy the transfer, no matter who is the holder.

 

Tax Law

 

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General Questions

Acquisition of real estate

In the corresponding state, is real estate property preferably acquired directly (asset deal) or indirectly (share deal)?
From a tax point of view, what are the advantages / disadvantages of an acquisition of real estate by way of an asset deal or a share deal? Especially, are there any advantages of a share deal regarding inheritance and gift taxes, or with respect to real estate capital gains taxes etc.?

 

Normally, the real estate is acquired directly.

Concerning the advantages of a share deal, according to article 108.1 of the Act 24/1988 of the Stock Market, the transfer of shares is exempt of the Transfer of Ownership Tax and of the Spanish VAT.

Notwithstanding, this article establishes that in such cases, the transfer will have to pay by Transfer of Ownership Tax as transfer of immovable goods if the shares trade in the stock market or the transfer is the result of the exercise of a right of first refusal or the right of conversion obligation into shares, in the following cases:

    • When the capital share or the patrimony of the company is constituted at least in a 50% of immovable goods placed in Spain and the transfer of shares allows the acquirer to have the company control.

 

    • When the transferred shares have been received by the contributions of immovable goods as result of the company’s constitution or the capital increase.

So, the legal treatment to the share deal can be equal or not to the asset deal, depending on the proportion of the immovable goods placed in Spain with the company’s total patrimony.

Separation of operational business and real estate property

Provided that the real estate is held by a company domiciled in the state of location of the real estate, and provided that the company is performing operating activities/ conducting a business, how is the ownership of the assets of the company usually structured?
I.e., are real estate assets separated from the operating business (two separate companies under the same control)?
And, what are the drivers behind such structuring? Civil law (ring fencing) and/ or tax reasons, other reasons?

Normally the separation is more frequent when the companies or the groups of companies have an important patrimony. No separation in case of small companies.

What is the definition of a transfer of real estate?

Is there a taxation upon change of ownership in accordance with civil law(asset deal)?

According to the Spanish Law, the changing of the ownership of a real estate is levied:

  • By the Transfer of Ownership Tax or Spanish VAT, if it is as consequence of a purchase.

 

  • By the Inheritance and Gift Tax, in case of gift or inheritance.

Is there a taxation upon indirect transfer of real estate, in particular in the event of a change of ownership in a real estate company (change of control, share deal)?

Yes. According to article 108 Act 24/1998 of the Stock Market, the transfer of shares is tax exempted of Spanish VAT and of the Transfer of Ownership Tax. Nevertheless, the transfer of shares will have to pay the Transfer of Ownership Tax as transfer of immovable goods if the shares trade in the stock market or the transfer is the result of the exercise of a right of first refusal or the right of conversion obligation into shares, in the following cases:

      • The capital share or the patrimony of the company is constituted at least in a 50% of immovable goods placed in Spain and the transfer of shares allows the acquirer to have the company control.

 

      • If the transferred shares have been received by the contributions of immovable goods as a result of the company’s constitution or a capital increase.

 

Does the law of the corresponding state provide for a deferral of, or exemption from, taxation in certain cases? In what situation (e.g. upon succession; upon donation to the spouse / descendant; upon disposal of the shares of a real estate company)?

Real estate capital gains tax

According to article 33.4b) of the Act 35/2006 of the Income Tax for Natural Persons, gains obtained as consequence of the transfer of the normal place of residence by a person older than 65 year old or by a person with severe dependence or great dependence are tax exempted.
 
Furthermore, there is a tax exemption of the Income Tax for Natural Persons for the real estate gains which arise as consequence of:

  • Donations made to the foundations and associations constituted according to the Act 49/2002, December 23rd of the Non Profit Entities (article 33.4.a Act 35/2006 of the Income Tax for Natural Persons).

 

  • The payment of tax debt as result of an auto-liquidation by the transfer of a property qualified as Spanish Historical Heritage (article 33.4.c Act 35/2006 of the Income Tax for Natural Persons).

Corporate income tax

According to article 21.2 of the RDLEG 4/2004 of March 5th of Corporate Income Tax, incomes obtained by a company with Spanish residence as a consequence of the transfer of shares of a non-resident legal entity is exempted if the Spanish company keep with the following requirements:

  • The percentage in the capital (direct or indirect) or in the stockholder equity was at least the 5% uninterrupted during the last year from the date of transfer.

 

  • The transfer was taxed in a similar way of the Spanish Corporate Income tax.
  • The non-resident legal entity had benefits by its commercial activities abroad in every year the Spanish company owned its shares,

 

  • In any case, the legal entity cannot have its residence in a tax haven.

When the non-resident legal entity (whose shares have been transferred by a company with tax resident in Spain) has shares, goods or assets placed in Spain or in other State it is exempted the proportional part of the gains obtained by the transfer of shares to those goods and assets. Nevertheless:

    • If the proportion is equal or smaller than the 15%, all the gains obtained are fully tax exempted.

 

    • If the proportion is higher than the 15%, the tax exemption is limited.

Real estate transfer taxes

The Transfer of Ownership Tax establishes some exemptions (subjective and objective) to the transfer of real estate property in some cases (article 45 RDLEG 1/1993 of the Transfer of Ownership Tax):

  • Exemptions in relation with the subject, as for example: the State, Administration, Social Security, foundations and associations (if the charge of their government body is free or in case the association has been declared of public interest).

 

  • Exemptions in relation with the object, as the following ones:
  • The rights and goods that a spouse gives to the marriage and the awarding of them in case of dissolution of the marriage.

 

  • The transfer of property in order to concentrate plots of land.
  • The transfer of land and the right of building in order to build officially protected houses.

 

Inheritance and gift tax

The regions (Autonomous Communities) are competent to regulate some aspects and collect the Inheritance and Gift Tax. Some of the regions have established fiscal bonuses to same transfers between closed relatives. As for example:

  • The Community of Madrid has established a bonus of the 99% upon the tax quote in case of donation from parents to sons.

 

  • Catalonia has established that the donations from parents to sons which purpose will be the acquisition of the first residence by the sons, have a reduction of the 95% of the value of the donation, with a limit of  60.000 €
  • Canary Islands Region establishes a bonus of the 100% upon the quote of this tax if the object of the donation was the normal place of residence of the transmitter and if the person who receives the donation is a descendant with a handicap of the 65%.

 

Other taxes

Article 105 of the Royal Legislative Decree 2/2004, March 5th of Local Taxes establishes exemptions to the Increase Value of the Urban Land. In this sense, the increase of value which rises as a result of the constitution or transfer of a easement right or the transfer of goods declared of cultural interest are exempted.

Furthermore, there is also a tax exemption when the taxpayer is the State, the Administration (central, regional or local), the Red Cross, the Social Security, charitable entities or associations and those established by Double Taxation Treaty  (herein called DTT).

 

Relevant time


What time or what civil act is relevant for the taxation of the acquisition of real estate (time of conclusion (signing), time of completion (closing) or time of registration?

It depends on the applicable tax:

  • Date of purchase for the Transfer of Ownership Tax.
  • Date of the dead of the deceased person for the Inheritance and Gift Tax.
  • Normally the date of the public deed.

Depreciation and amortization


Depreciation and amortization of real estate.

Referring to the amortization and to the real estates properties, the Corporate Income Tax establishes that it will be deductible the amount of the effective depreciation that they may have suffered for their use, enjoy or obsolescence (article 11 RDLEG 4/2004 of the Corporate Income Tax).

 

Tax Overview

Taxes relevant to real estate taxation in the corresponding state

Real estate capital gains tax

All the gains of a person are levied by its corresponding income tax: Income Tax for Natural Persons for natural persons and Corporate Income Tax for moral persons.

Furthermore, the persons (moral or natural) who have not their residence in Spain but they obtain gains in Spain from real estate are subject of the Income Tax for Natural Persons. In any case, this tax is applicable unless there is a Double Taxation Treaty with the State of residence.

Income tax (corporate and individual income taxes)

The most relevant income taxes are:

  • Income Tax for Natural Persons, regulated in the Act 35/2006 of November 28 th , expanded in the Royal Decree 439/2007, March 30th.

 

  • Corporate Income Tax, regulated in the Royal Decree Legislative 4/2004 of March 5th, expanded in the Royal Decree 1777/2004, July 30th.
  • Income Tax for Non Resident Persons, regulated in the Royal Decree Legislative 5/2004 of March 5th and expanded in the Royal Decree 1776/2004, July 30th.

 

Real estate transfer taxes

The Transfer of Ownership Tax, which is regulated in the Royal Legislative Decree 1/1993, levies in its articles 7-18 the acquisition of any kind of rights and goods  „inter vivos“.

This tax is expanded in the Royal Decree 828/1995, May 29th.

In any case, this latter tax is only applicable when the Spanish VAT is not pertinent. See below “Value added tax (VAT)”.

Inheritance and gift tax

The acquisition of real estate by inheritance or as consequence of a donation is levied by the Inheritance and Gift Tax.

In any case, such tax has been transferred to the regions (Autonomous Communities). As a consequence of this, it is possible to find different fiscal treatment, especially in the tax rate and reductions, between some regions and others.

The regulation of the Inheritance and Gift Tax is contained in the Royal Decree Legislative 1/1993, September 24th and expanded in the Royal Decree 828/1995, May 29th.

Net wealth tax

The Spanish Net Wealth Tax levies the personal assets of the natural persons, defined as all the goods and rights they have. In any case, this tax is also applicable to the non resident for their assets placed in Spain.

Its regulation can be found in the Act 19/1991, June 6th, expanded in the Royal Decree 1629/1991 November 8th. Although the main regulation of the tax is competence of the State, the regions (Autonomous Communities) can establish the minimum amount exemption, tax rate, tax benefits and tax deductions.

 

Special tax on immovable property

The Immovable Goods Tax taxes the value of the rights over immovable properties from its holder, such as property, usufruct, easements, etc. Its main regulation appears in the articles 60 to 77 of the Royal Decree Legislative 2/2004.

Value added tax (VAT)

The Spanish VAT is regulated in the Act 37/1992 December 28th and it is expanded in the Royal Decree 1624/1992, December 29th.

Concerning the transfer of the ownership of real estate property, article 20 Uno 20 of the Act 37/1992 of VAT establishes that the second and posteriors transfer of buildings are VAT exempted. This includes the surface they are built on, when the transfer occurs after its construction or once its rehabilitation is finished.

In this sense, the Act 37/1992 of VAT establishes as a general rule that first transfer is the one realized by the promoter of a building after the termination of its construction or rehabilitation.

Other taxes

Articles 104 to 110 of the Royal Legislative Decree 2/2004, March 5th Local Taxes regulate the Increase Value of the Urban Land. This tax levies the increase of value of urban land which arises as consequence of a transfer. In any case, the application of this tax depends on the regulation of the local administration (municipality) of the place the real estate is placed.

 

Double Taxation Treaties (DTT)

Under the double taxation treaties concluded by the relevant jurisdiction, which State is entitled to levy a tax on income derived from real estate?

The State where the real estate is placed.

Which State is entitled to levy a net wealth/ net equity tax on immovable property?

The State where the real estate is placed.

Which State is entitled to levy a tax on capital gains derived by the alienation of immovable property

The State where the real estate is placed.

Methods for the elimination of international double taxation under the treaties concluded by the relevant country (tax credit/ imputation or exemption method):

In case there is an income gains obtained abroad, Spain applies mostly in its DTT the deduction of the amounts paid in the foreign tax. In such cases, the deductible amount cannot be higher than the amount that would correspond calculating the Spanish income tax or the net wealth tax.

Specific Questions

Introduction/ Instructions:

Below you find 12 different cases. The criteria to distinguish the cases are the following:

  1. Owner of the properties: Individual ("I"), real estate company ("REC") or (other) legal entity ("LE")
  2. Type of property: Residential ("Res") or Business ("Bus")
  3. Type of deal: Asset deal ("AD") or Share deal ("SD")
  4. Type of wealth to which property or shares belong: Private ("Pr"), Business ("Bus") or Business of a legal entity ("BLE")

 

The following table gives an overview of the 12 cases:

Case No.

Owner

Type of property

Type of deal

Type of wealth to which properties/ shares belong

1

I

Res

AD

Pr

2

REC

Res

SD

Pr

3

I

Bus

AD

Pr

4

REC

Bus

SD

Pr

5

I

Res

AD

Bus

6

REC

Res

SD

Bus

7

I

Bus

AD

Bus

8

REC

Bus

SD

Bus

9

LE

Res

AD

BLE

10

REC

Res

SD

BLE

11

LE

Bus

AD

BLE

12

REC

Bus

SD

BLE

 

It must be noted that the above criteria have been elected from a Swiss legal and tax perspective. It may be possible that in your jurisdiction other criteria are more relevant. For this purpose, under all cases listed below, the specific situation of your jurisdiction can be described in the section "Comments".

The 12 cases have been put into the following three sub-sections:

  • Real estate is part of private wealth of an individual: Cases 1 –4.
  • Real estate is a business asset of an individual: Cases 5 – 8.
  • Real estate is an asset of a legal entity: Cases 9 – 10.

 

Each case contains a Part A asking for the tax treatment if your jurisdiction is the country where the real estate is located. Part B deals with the situation where your jurisdiction is the country of residence of the owner, or shareholder of the real estate company, as the case may be.

Within the questionnaire, the taxation upon transfer of the ownership of real estate (e.g. by way of a sale) will be covered as well as the ongoing taxation of real estate (i.e. recurring taxation such as income and wealth taxes).

I. Real estate is part of private wealth of an individual

 

 

Case 1

 

Part A (Your jurisdiction is the country where real estate is located)

 

Description

Country of taxation

Taxation in the state where the real estate is located

Type of asset

Residential property

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal

 

Taxation upon transfer of the ownership of real estate

 

Real estate capital gains tax

There is no special real estate capital gains tax in Spain. A person who transfers a residential property will have to tax for a patrimonial variation according to his applicable income tax.

 

Income tax

The transmitter will have to pay for the purchase’s gains in accordance to his applicable income tax:

  • Income Tax for Natural Persons, if he is a natural person who has his residence in Spain. According to article 35 of the Act 35/2006, the amount of the gains will be the difference between the transmission’s value and the acquisition’s value.

 

  • Income Tax for Non Resident Persons if the transmitter, moral or natural person, is not resident in Spain (article 13 4º I 3 of the RDLEG 5/2004).

 

Real estate transfer tax.

The transfer of a residential property placed in Spain is levied by the Spanish VAT or the Transfer of Ownership Tax, depending if the residence is:

a) First transfer. It will be applicable the Spanish VAT. The taxpayer is the acquirer and the rate will be of the 7 % of the price of the purchase.

b) Second or posterior transfers. In such case the transfer is VAT exempted (article 20 Uno 20 Act 12/1992 of VAT), but it is applicable the Transfer of Ownership Tax (articles 7.1 A and 7.5 RDLEG 1/1993 of the Transfer of Ownership Tax). The acquirer will be the taxpayer. As this tax has been transferred to the regions (Autonomous Communities), the rate will be 6 or 7%, depending where the real estate is placed.

Inheritance and gift tax

In case of inheritance, the acquirer is the taxpayer of the Inheritance and Gift Tax (art. 5 a) of the Act 29/1987) because the real estate is placed in Spain (art. 7 of Act 29/1987), independently if he has tax resident in Spain or not.

In case of a gift, the person receiving the goods will pay the Inheritance and Gift Tax (art. 5 b of the Act 29/1987of the Inheritance and Gift Tax), no matter if he has Spanish tax resident or not (article 6 and 7 of the Act 29/1987of the Inheritance and Gift Tax).

 

Other taxes (VAT, etc.)

The acquirer of a real state property (independently if he has tax residence in Spain or not) has to pay for the Increase Value of the Urban Land Tax, no matter his tax residence (article 106 RDLEG 2/200 of Local Taxes), if:

  • He has acquired the real estate property as a consequence of a purchase (Art. 106.1 b) RDLEG 2/2004 of Local Taxes) or by inheritance (Art. 106.1 RDLEG 2/2004 and art. 39 General Tax Act 58/2003), he will be a taxable person.

 

  • He has acquired the real estate as a consequence of a donation, (Art. 106.1 RDLEG 2/200 of Local Taxes) the chargeable person will be the transmitter and not the acquirer.

In any case, the application of this tax depends on the regulation of the local administration (municipality) of the place the real estate is placed.

 

Ongoing taxation of real estate

Net wealth tax

The natural person who is holder of goods or rights placed or enforceable in Spain is subject to the Spanish Net Wealth Tax, even if he is not resident in Spain.

Income taxes: Taxation of rental income, imputed rental value, deductibility of interest

According to article 13.1 h) of the RDLEG 5/2004 of the Income Tax for Non Resident Persons, the owner of the real estate property placed in Spain whom residence is abroad is subject to the Income Tax for Non Resident Persons. He will have to pay the 2% of the land value of the property as “imputed revenues”.

In case the owner has Spanish tax residence, he will have also to pay according to the article 85 of the Act 35/2006 of the Income Tax for Natural Persons for the 2% of the land value of the property as “imputed revenues”

Other taxes

The possession of a residential property is taxed by the Immovable Goods Tax, even if the owner is not resident in Spain.

 

Comments

Concerning the Income Tax for Natural Persons, article 33.4b) of the Act 35/2006 of the Income Tax for Natural Persons establishes  that the gains obtained as consequence of the transfer of the normal place of residence by a person older than 65 year old or by a person with severe dependence or great dependence are tax exempted.

 

Part B

 

Description

Country of taxation

Taxation in the state of residence of the owner of the real estate

Type of asset

Residential property

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal

 

Taxation upon transfer of the ownership of real estate

Real estate capital gains tax (RECGT)

There is no special real estate capital gains tax in Spain. A person who transfers a residential property and has tax residence in Spain, will have to tax for a patrimonial variation according to the corresponding Personal Income Tax.

 

Income tax

If the transmitter has his residence in Spain, the gains he obtains as a consequence of the transfer of the real state property will be taxed according to the Income Tax for Natural Persons. (Article 6 and 8.1 Act 35/2006 of the Income Tax for Natural Persons)

Real estate transfer taxes (RETT)

If the residential property is not placed in Spain, the Transfer of Ownership Tax is not applicable.

If not, the individual will have to pay this tax according to article 6 of the RDLEG 1/1993 of the Transfer of Ownership Tax. Take note, that if the transfer is qualified as first transfer, the tax applicable is the VAT.

Inheritance taxes

According to article 5 a) and 6 of the Act 29/1987 of Inheritance and Gift Tax, the person who has his residence in Spain and acquires a good „mortis causa“, will be taxpayer of this tax independently where the good is placed.

Gift taxes

According to article 5 b) and 6 of the  Act 29/1987 of Inheritance and Gift Tax, people who have their residence in Spain and they acquire „inter vivos “, will be taxpayer of this tax independently where the good is placed.

Other taxes (VAT, etc.)

If the property is not placed in Spain, no Increase Value of Urban Land Tax is applicable.

 

Other taxation (other than upon holding or upon disposal)


According to the article 85 of the Act 35/2006 of the Income Tax for Natural Persons, to hold an immovable urban good is taxed as „imputed revenues”, expect if this good is assigned to be the principal residence of the taxpayer or the good is a business asset of the tax payer.

 

Comments

 

 

Case 2

 

Part A

 

Description

Country of taxation

Taxation in the state where the real estate property is located

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by a real estate company. The company is domiciled in the state where the real estate is located. Its shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company
Share deal

 

Taxation upon transfer of the ownership of real estate

 

Real estate capital gains tax: Is there a real estate capital gains tax on the sale of shares of a real estate company?

If so, is the buyer of the shares entitled to claim a step-up in tax basis for a later asset and/ or share deal?

 

There is no specific tax which levies the real estate capital gains. In any case, such gains are levied by the pertinent personal income tax.

In case of sale of shares of a real estate company, the seller will have to tax for the benefits of the transfer of shares, according to:

  • Corporate Income Tax, if the seller is moral person with residence in Spain. In this case, as we have mentioned above in “Tax Law – General Questions”, gains of the transfer of shares can be tax exempted in some cases. See below in “Corporate income tax”.

 

  • Income Tax for Non Resident Persons if the seller (moral person) is non resident and the shares are from a Spanish company, except if there is a DTT applicable.

Corporate income tax

According to article 21.2 of the RDLEG 4/2004 of March 5th of Corporate Income Tax, incomes obtained by a company with Spanish tax residence as a consequence of the transfer of shares of a non-resident legal entity is exempted if the Spanish company keep the following requirements:

  • The percentage in the capital (direct or indirect) or in the stockholder equity was at least the 5% uninterrupted during the last year from the date of transfer.

 

  • The transfer was taxed in a similar way of the Spanish Corporate Income tax.
  • The non-resident legal entity had benefits by its commercial activities abroad in every year the Spanish company owned its shares.

 

  • In any case, the legal entity can not have its residence in a tax haven.

When the non resident legal entity (whose shares have been transferred by a company tax resident in Spain) has shares, goods or assets placed in Spain or in other State, it is exempted the part of the gains obtained by the transfer of shares proportional to those goods and assets. Nevertheless:

      • If the proportion is equal or smaller than the 15%, all the gains obtained are fully tax exempted.

 

 

      • If the proportion is higher than the 15%, the tax exemption is limited

 

In such cases, the transfer of shares is taxed by the Transfer of Ownership Tax (article 17.1 of the  RD 828/1995, May 29th and article 108.2 Act 24/1998 of the Stock Market)

Real estate transfer taxes

According to article 108.1 of the Act 24/1988 of the Stock Market, transfer of shares is exempted of the Spanish VAT and of the Transfer of Ownership Tax.

Notwithstanding, article 108.1 of the Act 24/1988 of the Stock Market establishes that the transfer will have to tax by Transfer of Ownership Tax as transfer of immovable goods if the shares trades in the stock market or the transfer is the result of the exercise of a right of first refusal or the right of conversion obligation into shares, in the following cases:

    • When the capital share or the patrimony of the company is constituted at least in a 50% of immovable goods placed in Spain and the transfer of shares allows the acquirer to have the company control.

 

    • When the transferred shares have been received by the contributions of immovable goods as result of the company’s constitution or the capital increase.

In such cases, transfer of shares is taxed by the Transfer of Ownership Tax (article 17.1 of the  RD 828/1995, May 29th Regulation of the Transfer of Ownership Tax and article 108.2 Act 24/1998 of the Stock Market)

Inheritance and gift tax

The inheritance or donation of the shares of a Spanish real company is taxed by the Inheritance and Gift Tax:

  • In case of inheritance, the natural person is the taxpayer of the Inheritance and Gift Tax(art. 5 a) of the Act 29/1987 of the Inheritance and Gift Tax) because the rights of the shares are enforceable in Spain (art. 7 of Act 29/1987 of the Inheritance and Gift Tax).

 

  • In case of a gift, the person receiving the goods will pay the Inheritance and Gift Tax (art. 5 b of the Act 29/1987of the Inheritance and Gift Tax), no matter if he has Spanish tax resident or not (article 6 and 7 f the Act 29/1987of the Inheritance and Gift Tax).

Other taxes (VAT, etc)

In cases there is an acquisition of real estate property there is a further tax to be paid: the Increase Value of the Urban Land:

  • If the acquisition is a consequence of a purchase (article 106.1 b) RDLEG 2/2004 of Local Taxes) or by inheritance (article 106.1 RDLEG 2/2004 of Local Taxes and article 39 General Tax Act 58/2003), the person acquiring the real estate will be taxable person.

 

  • If the acquisition is a consequence of a donation (article 106.1 RDLEG 2/2004 of Local Taxes), the taxable person will be the transmitter and not the acquirer.

 

 

 

 

Ongoing taxation of real estate

Net wealth tax, net equity taxes

A person non-resident for tax purposes in Spain who is owner of the shares of a Spanish real state company will have to pay according to the Spanish Net Wealth Tax in a similar way as a tax resident person does.

This tax is not applicable to the moral persons.

Corporate income taxes.

The dividends obtained by the shareholder are taxable according to the applicable income tax:

  • Corporate Income Tax, if the shareholder is moral person with residence in Spain.

 

In such case, it is possible to apply an exemption if the requirements of article 21.1 of the RDLEG 4/2004 of the Corporate Income Tax if some requirements are reached:

  • The percentage in the capital (direct or indirect) or in the stockholder equity in the foreign company was at least of 5% uninterrupted during the last year from the date of transfer.

 

  • The transfer was taxed in a similar way of the Spanish Corporate Income tax.
  • The non resident legal entity had benefits by its commercial activities abroad in every year the Spanish company owned its shares.

 

  • In any case, the legal entity can not have its residence in a tax haven.
  1. Income Tax for Non-Resident Persons (or the DTT applicable) in case of non-resident persons (natural or moral) and the shares are from a Spanish real estate company. In this sense, it is applicable to the natural persons the exemption for the dividends up to 1.500 €.

 

Other taxes

The possession of a residential property is levied by the immovable Goods Tax, even if the owner is not resident in Spain.

 

Other taxation (except upon holding or upon disposal)

 

Comments

 

 

Part B

 

Description

Country of taxation

Taxation in the state of residence of the (indirect) owner of the real estate property.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by real estate company. The shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company.
Share deal.

Comments

According to the Spanish law, the incomes and benefits obtained by a real estate company with Spanish tax residence, are taxable in Spain (articles 4 and 7 of the RDLEG 4/2004 of March 5th of Corporate Income Tax).

 

Case 3

 

Part A

 

Description

Country of Taxation

Taxation in the state where the real estate property is located.

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal

Comments

Same tax treatment as for Case 1, because in Spain there is not a distinction between business and residential property. In any case, see comments in Case 1 for the tax exempted in case transfer by people older than 65 years old or with severe dependence or great dependence.

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

See above as to Case 1.

 

Case 4

 

Description

Country of taxation

Taxation in the state where the real estate property is located.

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company.
Share deal

Comments

A company with non Spanish tax residence will have to tax in Spain for the benefits obtained for the transfer of shares of a Spanish real estate company according to the Income Tax for Non Resident, except if there is a DTT applicable.

Furthermore, as we explained in Case 2, according to the Spanish Law non resident persons have to tax in Spain for the dividends they obtain as a consequence of the holding of shares of a Spanish company, except if there is an applicable DTT.

In case the company has Spanish tax residence, it will have to tax according to the Corporate Income Tax.

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

According to the Spanish law, all the incomes and benefits obtained by a natural person who has his tax residence in Spain, are taxable in Spain (articles 2 and 8.1 a) of the Act 35/2006 of the Income Tax for Natural Persons.).

 

II. Real estate is a business asset of an individual

 

Case 5

 

Description

Country of Taxation

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The property is part of the business asset of an individual.

Property / Deal

Single property
Asset deal

Comments

The different tax treatment to what has been explained in the Case 1 are the following ones:

1. If the person is taxpayer of the Income Tax for Natural Persons or the Income Tax for Non-Resident Persons:

  1. It is not necessary to tax for the “imputed revenues” because the property is a business asset (Articles 85 of the Act 35/2006 of Income Tax for Natural Persons)

 

  1. Furthermore, there is a different treatment in order to calculate the gains obtained for the transfer of the property. (e.g.: the basis to calculate these gains will be the book value, article 37.1 n) of the Act 35/2006 of Income Tax for Natural Persons)

2. According to article 11 of Act 19/1991, June 6th of the Net Wealth Tax, for the law purposes the value of the properties which are business assets will be the one which appears in the account books, except if they are part of the current assets of a company which the only activity is the construction or the real estate. In these latter two cases, it will be applicable the rules of valuation which appears in the Act 19/1991, June 6th of the Spanish Net Wealth Tax.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

See above as to Case 1

Case 6

 

Description

Country of taxation

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares of the real estate company are part of the business assets of an individual. The company is domiciled in the state where the real estate is located.

Property / Deal

Shares in a real estate company
Share deal

Comments

The properties linked to the activities of the company receive a special treatment in the Corporate Income Tax. Example of this, it is the possibility to apply a deduction for reinvestment or the amortization of  fixed goods elements linked to the activities, in case of companies of reduced dimension (article 113 RDLEG 4/2004 of the Corporate Income Tax).

In case of transfer of shares of a Spanish company, the transmitter will be taxed depending on his tax residence:

  1. If the transmitter (natural o moral person) is not tax resident in Spain, he will have to pay a tax for the gains he may have obtained as consequence of the transfer according to the Income Tax for Non-Resident Persons. In case there is a DTT applicable we will need to verify its contents.

 

  1. If the transmitter is tax resident in Spain, he will have to pay taxes for the gains he may have obtained as consequence of the transfer according to the Income Tax for Natural Persons.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

Gains obtained by a Spanish company for the transfer of shares in a foreign real estate company, as also the dividends, can be tax exempted to the Corporate Income Tax. See above “Tax Law – General Questions” referring to the section of exemption.

 

Case 7

 

Description

Country of taxation

Taxation in the state of the real estate property

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The property is part of the business asset of an individual.

Property / Deal

Single property
Asset deal

Comments

Same tax treatment as to Case 5

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

According to the Spanish law, all the incomes and benefits obtained by a natural person who has tax residence in Spain, are taxable in Spain (articles 2 and 8.1 a) of the Act 35/2006 of the Income Tax for Natural Persons)

 

Case 8

 

Description

Classification

Taxation in the state of the real estate property

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares are part of the business assets of an individual.

Property / Deal

Share property
Share deal

 

Comments

Non-resident individuals will have to tax in Spain for the benefits obtained for the transfer of shares of a Spanish tax resident real estate company according to the Income Tax for Non-Resident Persons, except if there is a DTT applicable.

Furthermore, as we explained in Case 2, according to the Spanish Law, non-residents have to pay taxes in Spain for the dividends they have obtained as a consequence of the holding of shares of a Spanish company. In case there is a DTT applicable we will need to verify its contents.

In case, the individual has his tax residence in Spain, he will have to pay for all his gains and incomes (such as the dividends) according to the Act 35/2006 of Income Tax for Natural Persons.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

Individuals have to pay taxes according to the Income Tax for Natural Persons for all the gains they may have obtained as consequence of the transfer of shares of real estate company (no matter the tax residence of the company) or for the dividends they may have perceived for holding the shares.

 

III. Real estate is an asset of a legal entity

 

Case 9

 

Description

Classification

Taxation in the state of the real estate property

Type of asset

Residential property

Owner of the real estate

The belongs to a legal entity.

Property / Deal

Asset property
Asset deal

 

Comments

Legal entities are taxed in the same way as real estate companies.

In case of purchase of a residential property owned by a legal entity non resident in Spain, will have to pay taxes according to the Income Tax for Non Resident Persons  (or to the DTT if there was one applicable) for the gains obtained. Furthermore, it will be applicable the Transfer of Ownership Tax and the Increase Value of Urban Land because the property is placed in Spain.

In case of donation of the property, the transmitter will have to pay tax according to the Inheritance and Gift Tax, because the good is placed in Spain.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

Legal entities with tax residence in Spain are taxable in Spain according to the Corporate Income Tax for all the gains they may have obtained as a consequence of the transfer of the property, no matter where the good is placed.

 

Case 10

 

Description

Classification

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by real estate company. The company is domiciled in the state where the real estate is located. Its shares belong to a legal entity.

Property / Deal

Share property
Share deal

 

Comments

Legal entities non resident in Spain will have to tax in Spain for the benefits obtained for the transfer of shares of a Spanish legal entity according to the Income Tax for Non Resident Persons, except if there is a DTT applicable.

Furthermore, as a consequence of the transfer of shares, it will be applicable the Transfer of Ownership Tax if the shares trades in the stock market or the transfer is the result of the exercise of a right of first refusal or the right of conversion obligation into shares, in the following cases:

  1. The share capital or the patrimony of the company is constituted at least in 50% by immovable goods placed in Spain (Article 17.1 RD 828/1995, May 29th and 108 Act 24/1988, July 28th )

 

  1. The transferred shares have been received by the contributions of immovable goods as a result of the company’s constitution or the capital increase.

Furthermore, the legal entity has to tax in Spain for the dividends it obtains as a consequence of the holding of shares of a Spanish real estate company, except if there is a DTT applicable.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

The Spanish legal entities pay taxes according to the Corporate Income Tax for all the gains they may have obtained as a consequence of the transfer of shares of a real estate company or for the dividends they may have perceived for the holding of the shares. In case the shares belong to a foreign company, it is possible to apply an exemption. (See above “Tax Law – General Questions” referring to the section of exemption in Corporate Income Tax.)

 

Case 11

 

Description

Classification

Taxation in the state of the real estate property

Type of asset

Business property

Owner of the real estate

The property belongs to a legal entity.

Property / Deal

Asset property
Asset deal

 

Comments

Same tax treatment to the Case 9.                  

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

See above as to the Case 9.

 

Case 12

 

Description

Classification

Taxation in the state where the real estate property is located

Type of asset

Business property

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares belong to a legal entity.

Property / Deal

Share property
Share deal

Comments

See comments as for Case 10

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

Same tax treatment as for case 10.