TAXATION 8 March 2007278

Spanish tax

LEÓN FERNANDO DEL CANTOlooks at how Spanish tax reformswill affect British owners of holidayhomes in Spain.

Costa del tax changes

THE SPANISH PARLIAMENT has recently passedtwo very important Acts affecting the holiday homestax regime from different angles:

� Ley 35/2006, 28 November 2006. Income Tax Act(LIRPF) and amendments to Corporation Tax Act (IS),Non Residents Income Tax Act (LIRNR) and WealthTax Act (IP)

� Ley 36/2006, 29 November 2006. Tax anti-avoidancemeasures and transfer pricing regulations.

The Acts introduce some important changes impactingparticularly the current tax status for holiday homes forthe tax years starting 1 January 2007 and in broader termsthe Income Tax and Corporation Tax Acts, both for residentsand non-residents. The definition of tax residence for foreigncompanies and a new definition of tax haven jurisdictionhave been also introduced, together with a series ofadditional anti-avoidance rules and specific transfer pricingregulations.

In this article I will highlight the main issues to beconsidered by the international tax adviser currentlyinvolved with Spanish property transactions. It is stronglyrecommended, however, that a qualified Spanish tax adviseris consulted before acting upon this information.

Although the legislation is extensive and affects manydifferent areas, I have considered four issues affecting existing

and new Spanish properties owned by non residentcompanies or individuals. I have then also looked at howthis will affect two typical ownership strategies:

� Spanish sociedades patrimoniales property-holdingcompanies, and

� offshore companies.

New capital gains tax regimeThe previous tax regime was attacked as potentiallydiscriminatory for non-resident individuals and companies,because non-residents were taxed at 35% against a general15% for residents, according to certain rules.

The new capital gains tax rate is established at 18% forresidents and non-residents alike. The withholding tax ondisposal of Spanish real estate by non-residents has beenreduced from 5% to 3% to reflect the change in the capitalgains tax rate.

New corporation tax rateFor the tax year ended 31 December 2006, Spanishproperty holding companies, under the regime of sociedadespatrimoniales, will be liable to capital gains tax at 15% ondisposal of real estate property located in Spain.

For the tax year ending 31 December 2007 andsubsequent years, this regime has been repealed andproperty holding companies will be taxed in the sameway as their trading counterparts. The corporation taxrate has been reduced to 25% on the first 120,000 eurosprofits and 32.5% thereafter. It should be noted thatcapital gains tax for corporations in Spain is calculatedas part of the general taxable base together with all theother profits. The 32.5% corporation tax rate will bereduced to 30% in 2008.

Tax havens and residenceThe new anti-avoidance rules expand the concept ofSpanish residence for offshore companies beyond themanagement and control criteria. There is now apresumption that a company registered in a tax haven ornil tax jurisdiction may be deemed to be resident in Spain,if most of their assets or rights are based or executable inSpanish territory. This also applies if the main trade orbusiness is carried forward in Spain.

In order to overturn this presumption, the taxpayer willneed to demonstrate the materiality of the offshoreoperations and its management and control. If the companyowns real estate in Spain, all other worldwide assets of thecompany will need to be disclosed to revoke thispresumption and demonstrate where the majority of theassets are located.

It will be interesting to see what approach the taxauthorities will take to these companies and the legalarguments they will use to determine the residence onsuch bases.

KEY POINTS

■ Capital gains tax rate equalised for non-residentsand residents.

■ Corporation tax reduced.■ Effect of using a Spanish property holding company.■ Offshore companies owning Spanish property may

face greater scrutiny.

The new anti-avoidance rules expandthe concept of Spanish residence for

offshore companies beyond themanagement and control criteria.

‘‘

TAXATION 8 March 2007 279

Spanish tax

Tax havens and anti-avoidanceThe concept of tax haven in the Spanish anti-avoidancelegislation has been amended to include nil tax jurisdictionsor any other country, even with a double tax treaty withSpain, where no exchange of information rights exists, i.e.Switzerland.

The former regime stating the list of tax havens wasregulated by Real Decreto 1080/1991, 5 July and this newlegislation expands the list considerably.

I will now review a couple of corporate structures typicallyused to own Spanish property by non-residents. The privateownership position as an alternative is something to beseriously considered but goes beyond the scope of this articleas other taxes are involved, such as wealth and inheritancetax, plus consideration must be given to appropriate assetprotection and financial planning counsel.

Sociedades patrimonialesSome property investors, primarily capital gains tax driven,will suffer a setback with the changes if they use a sociedadpatrimonial for investment purposes, as taxes on gains willbe raised from 15% to up to 32.5%. Dividend withholdingwill also need to be considered when repatriating the funds.

Properties owned by regular companies, as most willbe, are better off as corporation tax rates are down from35% to 32.5% and from 30% to 25%.

The new regime optimises the transfer of shares of theproperty holding companies, instead of selling theunderlying assets. Non-resident shareholders will benefitfrom the 18% capital gains tax, down from the previous35%. The good management, accounting and administrationof the Spanish company becomes paramount on thisscenario, as potential buyers will carry out a full duediligence prior to acquisition.

However, for those who are more interested in sellingthe underlying assets, the Spanish legislator has provideda temporary benefit for companies considering liquidation

the experts in:

◆ unquoted share valuationsfor tax planning

◆ negotiations with Inland RevenueShares Valuation unit

◆ valuations in connection withemployee share schemes

◆ pre-sale valuations of privatecompanies/shareholdings

◆ valuations for family law, Companies Act and other litigation purposes

For more information contact:Steve LygoTel: 020 7849 3018Fax: 020 7849 3171Email: steve.lygo@parmentierarthur.com90 Long AcreCovent GardenLondon WC2E 9RZ

Roy HoggTel: 01480 465522Fax: 01480 461221Email: roy.hogg@parmentierarthur.com7 The WaitsSt IvesHuntingdonCambridgeshire PE27 5BY

www.parmentierarthur.com

PARMENTIERARTHURG R O U P P L C

SH

AR

EV

AL

UA

TI

ON

◆T

AX

PL

AN

NI

NG

◆C

OR

PO

RA

TE

FI

NA

NC

E

£

£

photo © Istockphoto/M

atthew D

ixon

TAXATION 8 March 2007280

Spanish tax

during the first six months of 2007. The company mustbe considered a sociedad patrimonial according to Spanishtax legislation, for the tax year ended 31 December 2005and 2006.

This is an important factor to be evaluated prior todissolution as not all the so-called sociedades patrimonialeswill qualify. The tax advantages of liquidating a companyusing this temporary regime are a series of exemptionswhich will defer some taxes to a later date:

� Stamp duty and transfer tax exemption (impuesto sobretransmisiones patrimoniales y actos juridicos documentados)referred exclusively to company operations (operacionessocietarias).

� Municipal capital gains tax exemption (plusvalía orimpuesto sobre el incremento del valor de los terrenos denaturaleza urbana).

� Exemption from corporation tax on liquidation forSpanish resident shareholders

� From an income tax perspective for residents and non-residents, the main feature is that the base acquisitioncost will be considered on the date when the companyacquired the assets originally. There are calculationsand tax adjustments that will need to be done for loansand cash assets and specific accounting procedures tobe followed.

Offshore companiesOffshore companies owning property in Spain have been,are, and will be under increasing scrutiny by the Spanishtax authorities, following the Organisation for EconomicCo-operation and Development trends. The newpresumption of residence for offshore companies owningproperty in Spain will need to be considered carefully.

There may be instances where the offshore structure isvery valid from an inheritance or wealth tax point of view.They could be equally optimal from a capital gains taxperspective as it could be more favourable to sell theproperty direct from an offshore structure, taxed at 18%,than doing it from a Spanish company at 25% to 32%.Would this be considered discriminatory, however? Wouldthe Spanish authorities tackle further these offshorestructures? These issues will need to be kept under review.

The following paragraphs are a review of how incometax and capital gains tax will affect these structures,considering the new changes.

Income taxThe income tax situation has not changed. The non residentcompany suffers a 3% tax on a deemed income calculated

�

according to its value. This is an annual tax payable by anyinternational company, unless it is resident in a double taxtreaty country and the ultimate shareholders have beendisclosed accordingly as a resident in double tax treatyjurisdiction. This is under the assumption that the companyis considered non-resident.

Under the new legislation, if the company is consideredresident, the Spanish corporation tax rules will apply asfor any other trading companies. Some companies maybe better off being treated as residents, especially if theydo not have an economic activity in Spain, as the 3%annual tax may not be applicable if they are consideredresident companies. From a capital gains tax point of view,the situation is not good.

Capital gains taxSelling property by a non-resident company, withoutpermanent establishment, will be taxed at 18% on gains.The position has therefore improved from the previous35% regime.

As before, the sale of shares of the offshore company,owning property or assets in Spain, is taxable in Spainaccording to the property value. This is an old antiavoidance rule included in the Non Resident Tax Act, whichis likely to be reinforced.

Reflections on the new changesIt is still very soon to venture a general opinion on how allthese new rules are going to affect existing structures. Forthe time being, it will be necessary to start planningaccording to the new rules and to begin evaluating existingstructures. It will also be important to keep an eye on thetax authorities’ activity and opinions.

It would be advisable for existing structures to bereviewed by a qualified tax adviser in Spain. Anyoneconsidering a new acquisition or disposal should also getadvice from expert counsel.

Owning property with a company has been traditionally,and still is from many different perspectives, the preferredroute to hold Spanish real estate. There are still innumerableadvantages with regard to inheritance tax, as well as froma wealth tax point of view, without mentioning the assetprotection element, which in some cases will determinethe legal structure. The capital gains tax position for non-resident companies should also be considered.

Whether or not to use a company, and where the holdingcompany is to be located, is something to be discussed.Should we use Spain, UK, Ireland, Holland, Belgium, Hungaryor the United States? Should we use a double tax treatycountry with or without exchange of information agreement?Is it worth using a tax haven jurisdiction? Should we considerindividual property ownership?

These are some of the questions that will need to bepondered with adequate expert counsel while consideringthe overall tax planning intentions of the client. León Fernando del Canto is an international taxbarrister, C International Tax Legal, Sotogrande, Spain. Hewrote How to buy your home in Spain published by theOffice of Commercial Affairs of the Spanish Embassy inLondon and has contributed to several publications andseminars.

Some companies may be betteroff being treated as residents, especially

if they do not have an economicactivity in Spain.

‘‘