In the 70s, 80s and early 90s buying a house in Marbella with a company became quite popular, large homes in particular, sometimes through offshore companies mainly based in Gibraltar. Today, the legislation in place (not only in Spain but worldwide), the level of international cooperation and the mechanisms of information exchange may discourage the use of a company to buy a holiday property on the Costa del Sol.
There are many reasons why people used companies, such as anonymity, protection, corporate management, or the application of British Law in case of Gibraltarian offshores but, regrettably, the main reason underlying the ownership of real estate property through a company in the past was purely tax avoidance:
- Individuals are taxed on imputed income just for ownership; Companies are not.
- Individuals are subject to wealth tax on the net value of the property; Companies are not.
- The purchase of a second hand property is subject to transfer tax always; the purchase of shares is subject to transfer tax only in certain cases. In addition, the change of ownership of a property is registered at the Land Registry; the sale of shares is not, so the chances of the authorities “discovering” the transaction are lower.
- The sale of a property is subject to “plusvalía municipal”, a tax on the increase of the value of urban land payable to the Town Hall. The sale of the shares is not, as the ownership of the property remains in the company.
- The seller of a property must pay capital gains tax in Spain always; the seller of shares will pay capital gains tax in the country defined in the applicable Double Tax Treaty. In addition, the sale of a property by non-residents is subject to 3% retention on account of capital gains tax; the sale of shares is not. And finally, the lack of registration of the sale of shares may help to hide the capital gain.
- Inheriting a property in Marbella is subject to Spanish Inheritance tax; finding out that the shares of a company have passed to the heirs can be difficult, and complicated with figures like Trusts.
However, most of these “advantages” are not real or effective today:
- Companies are not taxed on imputed income but, according to our domestic legislation, the “owners” and their relatives cannot use the house for free but at market rental income. And in a long-term rental it is the tenant who normally takes care of utility bills so some costs are not deductible, with the result of a yearly profit in the company and taxes to be paid on it. This is relevant for large homes that may have a substantial market rental income.
- Companies are not subject to wealth tax but the individuals behind are. It will depend on their residence and the applicable Double Tax Treaty, although most of the new treaties shift the taxation to Spain when the Spanish property represents more than 50% of the total assets of the company.
- Due to anti-abuse clauses, the scenario whereby the sale of shares of a company with 50% of its assets made up of real estate property is not subject to transfer tax is almost limited to business premises.
- The lack of registration of the sale is not sufficient to hide the transaction. Spanish companies must report to the tax authorities on any change of shareholders, and information about the Ultimate Beneficial Owner (owning more than 25% of the corporate structure) must be disclosed in the Annual Accounts that are deposited and available to third parties, as well as in front of a public notary in the so-called “Acta de Titularidad Real”.
Moreover, those owning an old property through a company that has been sold several times as a package could face unrealized capital gains tax in the event that they do not find a buyer interested in the purchase of the company, because the original book value of the company asset would remain unaltered. The fact that you paid 1 million euros for the shares is irrelevant if the company is selling the house with a book value of 200.000 euros.
Is it worth buying a Marbella property using a Company today?
Lawyers and Accountants used to say that each case must be studied separately, and the answer to this question is that it will depend on the circumstances of each case despite the apparent adversity. These are some of the facts to bear in mind in order to evaluate if there is any advantage in buying a Spanish property with a Company:
1. The purpose of the investment. If the intention is to buy a house to rent it out, it must be noted that EU residents are entitled to offset the majority of costs related to the rental and pay 19% income tax rate on the net profit. However, non-EU residents are not allowed to offset any cost but pay 24% income tax rate on the gross income. UK residents fall in this latter category since 2021.
For a non-EU citizen who has a lot of expenses, including the interests of mortgage loan for example, it could be worth using a Company and pay 25% Corporate Income Tax but on real profit, once all the costs have been deducted.
2. The value of the investment. There are some old tax treaties that do not give Spain the right to tax on the value of the shares of a company, even if the sole asset is a Spanish property. For someone resident in one of those countries (for example Sweden, Holland or Russia) it might be worth the cost of having a corporate structure in place to own the property.
3. The funds. Transferring the funds to the individual can be expensive if the money to invest is already in a corporate structure. This is quite common with Trusts where withdrawals could be taxed as income. In this case it could be worth using a company under the corporate structure, where the administrative costs could also be less as there is already an existing structure.
4. The investor. It makes sense to use a company if the investment is made for business purposes within an existing corporate structure.
5. Secrecy. For some wealthy investors privacy may be relevant for family reasons, for business reasons or because of oppressive countries for example, and the cost of a corporate structure to own the property is worth the value.
6. The management. For some businessmen it might be worth owning the property through a corporate structure that may give a better and efficient management of the investment, financing, restructuring, etc.
The key point today is tax planning to find the most efficient investment vehicle for each particular case. Of course, buying a small apartment of 200.000 euros for private use with a company makes no sense, at least in principle. Qualified legal services will assure full compliance on the execution of the chosen vehicle.
Update 29/01/2021 – Relevant court resolution about Wealth Tax for non-residents
On the 3rd of December 2020, the Contentious-Administrative Court of Balearic Islands ruled that Wealth Tax is exclusively applicable to assets located or executable in Spain, and foreign companies are not included in the scope of the Act regulating this tax, in spite of the right assigned by the tax treaties. This court resolution has been released publically today.
As a consequence, non-residents owning real estate properties in Spain through foreign companies are not subject to Wealth Tax irrespective of the country of residence and Tax Treaty.
This resolution opens the scope of people for whom buying a property with a company might be advisable.
Partner – Economist