The approval of the much-awaited Law 14/2013, of September 27, to support Entrepreneurs and Internationalization, imposed a series of measures that accentuate the attractiveness of the Spanish economy in the eyes of foreign investors. Among the advantages, the new Law offers residence permits for those foreign nationals who acquire real estate investments with a particular net value. This means that the investment — not having encumbrances of any type — must value 500,000 Euros or more. This represents a great opportunity for investors outside of the European Union who, in addition to obtaining a residence permit, will benefit from the current state of the Spanish economy considering that the cost of homes has fallen considerably, accumulating a decrease of 38.6% from maximum home values reached at the end of 2007.
However, acquiring a home in Spain comes with the duty to pay taxes, and foreign investors must keep this in mind when calculating the total value of the operation and the return on the investment. This article seeks to offer an initial guide for foreign investors on the distinct taxes that they must pay when purchasing real estate in Spain as non-residents.
Taxes Associated with purchasing a home in Spain
Spanish law provides for two different types of taxation depending on the property itself, as the taxes associated with the purchase of a new home differ from those involved in the purchase of a home with a previous owner.
This dichotomy forces us first to explain what Spanish law considers a new home versus a used one. A new home is turned into a home purchaser for the first time, which the promoter of the sale acquires when the rehabilitation construction is complete — unless individuals other than those who acquire it had used the home continuously for a period equal to or greater than two years. Homes not included in this description are previously owned homes.
Taxation for purchasing new homes
The acquisition of new homes involves the payment of the Value-Added Tax (VAT) of 10%, with some exceptions in certain Autonomous Communities of more reduced rates. In addition, there also exists a Stamp Duty Tax on Documents (Stamp Duty Tax). The Stamp Duty Tax applies in the Autonomous Communities. These Communities, in the exercise of their powers, have established the rates they have considered convenient. The difference in current tax rates in Spain (general and reduced of each Autonomous Community) varies by a maximum of 1.5% for the general rate and 0.1% for the reduced rate. The reduced rate applies mainly to the purchase of homes under official state protection and those that are the objects of public advocacy.
Therefore, the purchaser of a new home must pay a maximum of 11.5% VAT and Stamp Duty Tax.
Taxes for purchasing used homes
Purchasing a home from a previous owner does not subject the purchaser to either the VAT or the Stamp Duty Tax; however, the purchaser of a home from a previous owner must pay the Transfer Tax (TT). This Tax, like the Stamp Duty Tax, applies in the Autonomous Communities and has wide variability. The general rate of the TT ranges from 6% to 10%, while the reduced rate applicable in cases of public housing and large families falls between 1% and 7%.
With some exceptions, or when the parties to a purchasing agreement have agreed, the purchaser of the previously owned home must also pay the Gains Tax (Gains Tax). This municipal tax applies to the increase in the value of urban properties. To calculate it, we consider the time between when the seller acquired the home and when he or she sells it. However, we note that each municipality will apply its own criteria to determine the applicable rate, which cannot exceed 30% (this represents the maximum rate — a truly exceptional case). In principle, as a rule, the seller must pay this Gains Tax, which in turn is likely to affect the sale price. However, as we mentioned at the beginning of this section, the parties to the purchasing agreement can agree that the purchaser pays this Tax.
Considering the possibility that the parties may agree that the purchaser pays the Gains Tax, the purchase of a previously owned home may be subject to a distinct tax rate depending on the municipality of the home and the years that have passed since the seller purchased it. The sum of the applicable taxes to the purchase of a previously owned home (TT and Gains Tax) will produce a maximum rate of 40%. However, unless the purchaser and seller agree otherwise, only the TT will apply with a general maximum rate of 10%.
The potential disparity among the taxes and their percentages applicable to the acquisition of a home (11.5% to a hypothetical 40%) must not lead to the erroneous perception that the purchase of a previously owned home will result in higher taxes than those imposed on a new home. This is because the applicable rates of one home to another may vary in considerable form based on final prices adjusted to the market. However, to avoid unpleasant surprises, it may be necessary to consider the purchasing agreement clauses to avoid the application of taxes to the purchaser like the Gains Tax, unless this proportionately affects the sale price of the home.
Lastly, the investor must not forget about the existence of other expenses associated with purchasing a home in Spain such as the costs of notaries and lawyers, Property Registry fees, and commissions from real estate agents.
This article is not considered as legal advice