THE YEAR 2007 OPENS WITH BIG NEWS FOR PROPERTY OWNERS. SPAIN’S CAPITAL GAINS TAX
FOR NON-RESIDENT PROPERTY SELLERS HAS BEEN DROPPED FROM ITS LONG-TIME LEVEL OF 35 PER CENT TO 18 PER CENT.
By David Searl
On November 28, 2006, the Spanish Congress enacted law 35/2006, modifying the 2007 tax regulations.
As of January 1, 2007, a non-resident owner pays 18 per cent of the profit he makes when he sells his Spanish property. The bad news for resident owners is that their capital gains tax has risen from 15 per cent to that same18 per cent.
The non-resident tax cut comes in response to a sharp reprimand from the European Union that the rate of 35 per cent discriminated against non-resident EU property owners in Spain, when residents were taxed only 15 per cent. Now they are equal. The new rate of 18 per cent applies to all non-residents, even if they are not EU citizens. There are other changes in the law as well. Until January 1 this year, all buyers of Spanish property from non-resident owners were required to withhold five per cent of the total purchase price and pay it to the Spanish Tax Agency against the non-resident seller’s capital gains tax liability.
The new law drops this retention to three per cent.
Non-resident sellers and persons who buy from nonresident owners should be reminded that they are required to make this retention and declare it to the tax authorities. If they do not, the tax agency can charge it to the property itself.
The buyer must file Tax Form 211, on which he declares the details of the sale and deposits three per cent of the total purchase price with the Tax Agency.
The non-resident seller then files Tax Form 212, declaring details of the sale. If the seller owes little or no capital gains tax, he claims a refund of the three per cent deposited in his name. If he owes more tax than the three per cent, which is the more likely case, he must pay the excess at this time. Even with the new capital gains tax at 18 per cent, the seller is far more likely to owe money to the Tax Agency than to claim a refund. Many foreign sellers and buyers leave the declarations to their lawyers or even estate agents. If you are a buyer, make sure you have a copy of your Form 211. If you are a seller, make sure you file your Form 212 and pay your capital gains tax.
Tax Exemption Ends for Long-Term Owners
The new law has further bad news for long-term property owners in Spain. They are no longer free of capital gains tax when they sell their Spanish property. Until this year, owners who bought before December 31, 1986, applied a reduction factor and had no capital gains tax at all. This total exemption was annulled as of January 20, 2006.
Now the long-term owners must pay. Their original reduction is still in force, so they will pay only for the percentage of profits gained after January 20, 2006, but they must pay something. (See below).
The long-term owners applied a reduction factor of 11.11 per cent per year of ownership, meaning that, after 10 years, they had no capital gains tax at all. This reduction factor was cancelled in 1996, meaning that only those who owned their property for 10 years before 1996 had a total exemption. Buyers between 1986 and 1994 had partial reductions. Even when the factor was cancelled, the early buyers retained their right to exemption. They retain their reductions up to January 20, 2006. After that they face capital gains tax of 18 per cent on the portion of their profits generated after January 20. The law establishes a system of the number of days of ownership to calculate how much of your profit was gained after January 20, 2006. If you owned your property for 20 years or so, let’s use nice round numbers. Say you owned it for 7,000 days before January 20 of last year. At the beginning of next year, 2008, you sell it. Let’s call that about two years or 700 days worth of tax.
This 700 days is ten per cent of 7,000 days. As a long-term owner, you are exempt from capital gains tax for 7,000 days, but you must pay tax on 700 days. If your profit is 200,000 euros, you will be taxed on 10 per cent, or 20,000 of those euros. At 18 per cent, this means total tax of 3,600 euros. All sellers, both resident and non-resident, still have the right to use the inflation correction factor. This factor is applied to your original purchase price to bring it up to date with today’s euros. It helps to reduce your taxable profit but never eliminates it.
A Few Exemptions Remain
Resident sellers 65 years of age, who sell their principal home, where they have lived for a minimum of three years as official residents, continue to be exempt from capital gains. Residents who use all the proceeds of the sale of their home to buy a new principal residence in Spain also get a rollover relief from capital gains tax.
Those residents over 65 who sell their home while retaining the lifetime rights to inhabit it, called usufructo, are also exempt from capital gains tax. These three special situations are now the only ones in which a property seller is not liable for capital gains tax.