Country: Contemporary Spain can trace its history back to 1469 when the kingdoms of Aragon and Castile united through the marriage of Fernando de Aragon and Isabel de Castillo. By 1492 these united kingdoms managed to usurp the Moors from the kingdom of Granada securing virtually all of the Iberian Peninsula. In the same year, the Americas were discovered by Christopher Columbus resulting in the establishment of one of the World's most important empires stretching at one point from California in the north to Chile in the south, not to mention various European and Africa interests. The defining event in modern Spanish history was the 1936 Civil War. It resulted in the death of some one million people and the leadership of General Francisco Franco, the fascist self-proclaimed President of the Spanish Republic 11936 to 1975). Notwithstanding Franco's close relationships with both Hitler and Mussolini, Spain was strictly neutral during the Second World War (1939 to 1945) although his inward-looking and extremely dictatorial regime undoubtedly held Spain back both economically and socially. In fact, up to and until the 1960's Spain was officially classified as a developing country by the United Nations. After Franco's death in 1975 the Spanish monarchy was reinstated with the anointment of Juan Carlos as King of Spain. Despite the fact the young aristocrat was personally groomed by Franco for this position, he soon showed himself to be a unifying force in what was still a potentially very unstable country. However, the greatest force for development was Spain's entry to the European Union in 1986, which resulted in unprecedented economic growth and investment with Spain once more being counted amongst the world's greatest economic powers. Nevertheless, on a per capita basis Spain is only just ahead of Portugal, Greece and the 10 new accession states, which joined the EU in 2004. The country also has doggedly high unemployment and relatively low wages; but on the positive side has a far better health system and lower crime rates than either the United Kingdom or the Republic of Ireland.
COUNTRY FACTS
• Location: Spain occupies most of the Iberian Peninsula (along with Portugal) from the Bay of Biscay and the Pyrenees in the north to the straits of Gibraltar in the south. It also takes in the Canary Islands in the Atlantic, the Balearic Islands in the Mediterranean and Ceuta and Melilla in North Africa. Mainland Spain is mostly plateaux with forestry in the north and open arid land in the south. The country covers an area of 505,957 square kilometres, which makes it the second largest country in the EU after France. The coastline alone is over 4,964 square kilometres.
• Climate: Highly variable from region to region. The Mediterranean coasts generally have hot, dry summers and mild sometimes-rainy winters. The central plateau has very hot summers and cold winters whilst the north Atlantic coast has weather not that dissimilar to Southern England or Ireland. The Canaries are sub-tropical whilst the Balearic Islands have cool wet winters and warm, dry summers.
• Population: 45,116,894
• Development: The per capita gross domestic product of Spain in 2007 was US$27,422 per person. This ranks Spain as the 33rd wealthiest country in the World. For comparison this compares to the UK with a per capita GDP of US$27,700perperson (The 24th wealthiest country) or Ireland with a per capita GDP of US$38,812 per person (The 4th wealthiest country).
• Capital City: The capital city of Spain is Madrid. It has a population of approximately 4,000,000 and is the 3rd largest city in the EU after London and Paris. World famous for its museums, architecture and nightlife. Other cities of note include Barcelona, Valencia, Seville and Granada.
• Currency: The Euro is used in Spain together, at the time of writing, with Ireland, France, Portugal, The Netherlands, Belgium, Luxembourg, Germany, Austria, Italy, Greece, Sweden and Finland. The new accession states plus the UK and Denmark currently use their own currencies.
• Education: According to the OECD the current literacy rate in Spain is 98% compared to a 99% level in the UK and Ireland.
• Language: Spanish is the official language of Spain but Catalan (Catalonia, the Balearics and Valencia), Euskera/Vasco (The Basque Region) and Gallego (Galicia) are both widely spoken and jointly-official in their respective regions. Catalan is closely related to Spanish and Italian, Gallego is part of the Celtic Family of Languages whilst entomologists consider Euskera/Vasco separate from the Indo-European family of languages but with Brethonic (Welsh, Cornish and Breton), rather than Gallic (Irish and Scottish) Celtic undertones.
• Trade Block Membership: Spain has been a full member of the European Union since 1986 and is also a member of the Organisation for Economic Co-operation and Development (OECD)
MAJOR LEGAL ENTITIES
As already discussed in respect to purchasing property there are two major limited liability entities in Spain; the sociedad anonima (SA) and the sociedad de responsibilidad limitada (SL). The former is equivalent to a UK or Irish public limited company or PLC whilst the latter is equivalent to a private limited company limited by shares or Ltd. Unlike the British Isles far fewer small businesses use a limited liability entity primarily for reasons of cost - the average cost to set up a SL is between €1,500.00 and €2,500.00, with the minimum capitalisation level being €3,000.00 plus 1% duty - but it is still recommended for all but the smallest enterprises. Apart from the two Spanish SA and SL companies, there is also the possibility of setting up a branch of a UK company, which has the considerable benefit of being far cheaper than setting up a SL whilst being governed by UK company law, rules, procedures and accountancy practices - The more familiarity that exists when moving to Spain the better. The general corporate tax rate is 35% (see Law 43/1995) but small to medium sized enterprises are taxed at the lower 30% rate, capital gains are taxed at only 15%. In addition, it should be noted that the Canary Islands are treated as a Special Economic Zone (Zona Especial Canaria) and offers distinct Holding Company benefits (There is no Stamp Duty) together with a TVA rate of only 5%. Further, companies setting up in the Canaries and that carry out their activities within the Canaries are subject to a progressive corporate tax rate starting at 1% and then rising to 5% over a 5 year period. Canary Island companies cannot avail of these lower rates if really trading outside of the Canaries or simply repatriating funds to the Islands. Apart from Stamp Duty the cost of registering companies in the Canary Islands is analogous to the Spanish Mainland.
PARTNERSHIPS
Partnerships in Spain may be either general (compania colectiva) or limited (compania en comandita). It should be noted that in both cases below the partnerships are fiscally transparent save for non-resident partners who will be taxed according to the appropriate double taxation treaty provisions.
Compania Colectiva (CC): Most British companies and annual submissions are now formed electronically at Companies House in Cardiff or Edinburgh. SCF Legal & Corporate Management Services Limited is an authorized electronic company formation agent for Great Britain and a member of the Fe Phrainn Scheme in the Republic of Ireland
Compania en Comandita (CEC): This is the Spanish equivalent to the American limited partnership with both general and limited liability partners. The words "compania en comandita" must always follow the names of the partners concerned. There must always be at least one general partner who contributes to the capital and engages in the management of the partnership and one limited partner who simply contributes to the capital. General partners are jointly and severally liable for partnership debts and liabilities. Limited partners are only liable - as a shareholder would be in a limited liability company - in respect to the amount they have contributed. Where one is a limited partner and one has confidence in the general partner or partners this vehicle is fine.
BUYING A SPANISH SOCIEDAD LIMITADA (SL).
Good tax planning advice can literally save you a fortune, protect family assets for future generations and make your property more attractive to prospective purchasers. Not convinced? Well below we have created a realistic illustration of what could be achieved if buying a new property in Spain.
Important Note: In Spain it is a legal requirement that all Spanish SL companies have a local representative to deal with and take fiscal responsibility for the company – This requirement can cause difficulties where the beneficial owner(s) of a Spanish SL are not resident in Spain but the SCF Group can provide a local Spanish resident (not an equity owner or company officer but a fiscal representative) for a monthly charge of €45.00 pcm + VAT. For further information please enquire
CONVEYANCING & PROPERTY SURVEYS IN SPAIN & PORTUGAL
Pre-Purchase Services in Spain & Portugal - The key benefit of the SCF Group's service is that we are independent of both property developers and estate agents, preventing any potential 'conflict of interest' and ensuring that our interests correspond exactly with yours. In this vein, we have carefully built up relationships with both Spanish and Portuguese based mortgage and structural surveying companies to ensure that your Spanish or Portuguese Dream doesn't become a Nightmare!
In particular, it is our aim to prevent our Clients from making costly mistakes, which can happen all to often to the ill advised
Our Fees - For properties up to €1,000,000.00 we have a standard 1% + VAT fee with fees falling to 0.75% + VAT for properties valued over €1,000,000.00. All properties in Spain valued over €500,000.00 will have a 'survey' carried out by a tazador (Building supervisor) or a UK/Irish chartered surveyor depending on availability included within the set conveyancing fee. Where, after all standard searches are carried out, we do not recommend that a purchase continues or the client has second thoughts a 0.25% + VAT will be levied to cover our legal and administrative expenses.
Surveys - The first thing that must be appreciated in Spain or Portugal is that there is no equivalent to Chartered Surveyors but local tazadors can be used to carry out the same functions.
In addition, it should be noted that there is no equivalent to the concept of 'subject to' survey or valuation contacts, so people have to be far more careful before signing any agreements. In most cases, (especially where individual, older and/or rustic/rural properties are involved) SCF would recommend that an SCF 'Style' pre-purchase inspection is carried out normally by expatriate UK or Irish chartered surveyors or structural engineers. The benefit of this is that SCF 'Style' Reports follow a similar format to a UK Chartered Surveyors Report and should prevent any nasty mistakes.
Of course, this is very much a 'belt and braces' approach and will cost extra money (normally between €1,000.00 to €2,000.00 -) but our view is that it is better to be safe than sorry!*
* This service is not available in all areas of Spain or Portugal. Included within the price for Spanish properties valued over €500,000.00.
What our Conveyancing Service includes - Our conveyancing service is aimed at the €350,000.00* plus end of the market and includes pre-purchase tax planning advice from our trained London Tax Planning Consultants, full property searches and checks, advice from our Spanish Lawyers plus a "turnkey" service whereby our Clients needn't visit Spain or Spanish notaries - Everything will literally be done for you with your only job being to collect the keys at the end of the conveyancing process.
Our professional fees minus disbursements and duties are between 1% and 0.75% + VAT of the Purchase Price of the Property.
* This fee is based on a €350,000.00 plus property.
The Spanish Conveyancing Process - We do all of these steps for you:
Advise on potential tax planning issues, capital gains, inheritance & wealth taxes
Advise whether a property should be bought directly, through a SL, Branch and whether there should be an overhead Offshore Company
Draft, prepare and execute a Power of Attorney in favour of Strong Abogados to represent you in Spain
Carry out a Land Registry Search
Confirm that the property is free of debts, charges or mortgages
Confirm planning permission & license status
Confirm that building guarantees are valid (new properties)
Draft and/or check the proposed Contact of Sale - Suggest amendments where necessary
Sign the Property Deed before the Spanish Notary
Arrange for the transfer of funds to the Lawyers Client Account
Carry out a final "Point of Sale" Search to reconfirm that there are no debts, mortgages etc. attaching to the property
Pay appropriate Stamp Duties and other fees associated with the property purchase
Register the conveyance with the Spanish Land Registry
Forward or "Safe Deposit" the Title Deeds when returned from the Land Registry
Confirm completion of transaction to Clients and offer any additional advise or services that may be necessary such as obtaining a Spanish Tax Identification Number.
Purchasing a Spanish Property:
An Overview of the Process & Costs Involved
A Full A-Z Service Provided by The SCF Group
Pre-Purchase Services - The key benefit of SCF is that we are independent of both property developers and estate agents, preventing any potential 'conflict of interest' and ensuring that our interests correspond exactly with yours. In this vein, we have carefully built up relationships with both Spanish based mortgage and structural surveying companies to ensure that your Spanish Dream doesn't become a Nightmare! In particular, it is our aim to prevent our Clients from making costly mistakes, which can happen all to often to the ill advised.
The Spanish Purchasing Process - An Overview:
(a) Estate Agents: should preferably be licensed (although not a legal requirement) by either the API (agente de la propiedad immobiliaria) or by GIPE (gestor imtermediario en promociones de edificiones). Of course, there are some perfectly reputable estate agents that are not members of either organisation but it is recommended that potential purchasers keep to members of either the API or GIPE. It should further always be borne in mind that, like the UK or Ireland, the primary obligation of the estate agent is to the seller and not the buyer.
Further, whilst good estate agents can be fountains of knowledge for a given area they should not be used to source key personnel such as lawyers, surveyors, etc. The reason is simply that recommended professionals tend to have an inherent?conflict of interest' between the buyers interests and those that recommended them in the first place. In particular, buyers should be very wary of estate agents who have?exclusives' with developers since such relationships can literally be worth millions of Euro to the estate agent and hence creating a serious potential ?conflict of interests'.
(b) Lawyers/abogados: Always use lawyers conversant with UK/Irish and Spanish Laws. A Spanish abogado might be an excellent lawyer but the needs of an investing/property purchasing expatriate, whether he/she is going to be fiscally resident or not, requires a holistic approach. It should also be remembered that as in England debts can attach to the property so not only should searches be carried out but also contracts should be properly drafted. For example, when you buy a property there should be a clause (cláusula) in the contract which states that you buy the property Free of any Charges or Incumbrances (?libre de cargas y gravámenes?) meaning that the property does not carry any debts. If both parties sign the contract and the property carries any debts you can always sue the person or legal entity that sold you the property as he or she would be in breach of the contract. It should also be noted, that under Spanish Law if you buy from a non-resident individual or company you are required to keep-back 5% of the purchase price for the benefit of the Spanish fiscal authorities. In effect, the Spanish are trying to make sure that non-resident property owners do not try and circumvent their tax obligations.
(c) Spanish Notaries: Most Spanish people simply use notaries to convey their properties without the use of a lawyer/abogado. For many Spanish people this is fine as they will have local knowledge and of course understand what are and (most importantly) what are not the obligations of a notary. Unfortunately, there have been many instances where British people have assumed that a notary occupies a similar position to that of a conveyancing solicitor in the UK. In reality, notaries have no duty of care to either party and are only concerned with the validity of the paperwork, that certain government regulations have been satisfied including payment of duties/taxes. What the notary does do however is give legal veracity to the pertinent legal or conveyancing process - Without a properly adhered to notarial process there could be difficulties in enforcing any given agreement/contract. The normal chronology for the purchase of a property would be:
The Signing of a Private Contract (Contrato de Compraventa) between the Buyer and Seller supported by an Initial Deposit. It should be noted that this initial Contract is identical (unless the Notary requires changes) to the later Escritura de Propriedad. One should also be careful as to the form of this contact as it is often supplied by either a developer (for new properties) or by the seller. In such situations a buyer should be aware that there is a potential conflict between the interests of a buyer and the developer/estate agent so caution should always be exercised.
The Approval and Witnessing of the proposed Property Deed (Escritura de Propiedad) by the Notary (Notario) ready for lodgement at the Property Registry (Registro de la Propiedad). At this stage, a wise purchaser will have requested a Nota Simple from the Registro de la Propiedad to confirm that there are no outstanding charges/mortgages leftover from the last owner as debts can be passed on with a property. Accepting that things have been done properly, a Notary - if the seller had a mortgage - would ask a representative of the mortgagor bank to sign off the mortgage at the time of the signing of the Escritura de Propiedad - A small fee will apply. If the purchaser intends also to have a loan/mortgage then the applicable bank will submit an Escritura de Préstamo Hipotecario to be signed together with the Escritura de Propiedad
It is important to note that all contracts which are going to be registered in the Registro de la Propiedad should be signed together. Also very importantly it should be remembered that only those documents approved and witnessed by a Notary are legally able to be lodged with the Registro de la Propiedad.
Lodgement of the Property Deed (Escritura de Propiedad) and, if applicable, Mortgage Deed (Escritura de Préstamo Hipotecario) with the Property Registry (Registro de la Propiedad). It is at this stage that the escritura de propiedad becomes a Public Deed (Escritura Pública). It is important to note that the escritura pública is the only Guarantee of Title in Spain. Before buying a property one should always refer to the escritura pública as it will contain a brief description of the property, details on the owner and whether there are any mortgages or legal charges. If more information is required (in reality this should always be done) then one should apply for a Nota Simple which would be equivalent to a full Land Registry Search in the UK. It should be noted that not all towns or villages will have their own Registro de la propiedad but there will always be a Registry within the locality ascribed responsibility (known as having a different circunscripción). For example, the little village of Benijófar near Alicante is attached to the registro de la propiedad of a nearby town called Torrevieja. It does not matter which Notario you choose, it could be one from Madrid, but if you buy a house in Benijófar you must go to the registro de la propiedad located in Torrevieja.
(d) Surveyor: In Spain there is no direct equivalent to the British or Irish chartered surveyors profession and hence no equivalent to a 'contract subject to survey'. In many ways, this situation is strange as, if anything, extra care needs to be taken when buying real estate (bien inmueble) in Spain not less. Nevertheless, a professional advisor will always recommend that the following precautionary steps are taken:
(i) Confirm that the seller is the absolute owner of the property.
(ii) Make sure that the house is Free of Debts (cargas) or Mortgages (hipotecas).
(iii) Verify that the land where the bien inmueble is located is classified as suelo urbano (not rural but urban land).
(iv) Check the Urban Development Plans (planes de desarrollo urbano) of the locality including any future potential developments that may have applied for planning permission.
(v) Instruct a well known/respected local builder to check out the property for defects, sanitation, build quality, adherence to building and fire regulations, adherence to local planning rules and regulations etc. The process required to garner the required information may vary from area to area or from property to property but one would generally:
(vi) Apply for an Information Note (nota simple) in the Registro de la Propiedad. This is just a document saying who the proprietor (propietario) and title owner (titular) of the property are and whether the property is subject to any debts/charges or other incumbrances.
(vii) Check at the Council Planning Office (Ayuntamiento) for the Urban Clasification (clasificación urbana del suelo) and whether there are any known or intended future developments that may have a bearing on the purchase or on the future value of the applicable land (planes de desarrollo urbano).
(e) Who/what Should Own Your Spanish Property: For most people this is the crucial question as an incorrect decision could literally cost tens if not hundreds of thousands of Euro. Factors determining what is best in any given set of circumstances would include:
(i) The value of the property
(ii) Whether one is going to be fiscally resident in Spain or not
(iii) The centre of economic interest
(iv) Age
(v) Family interests and inheritance issues
(vi) Nationality and double taxation treaty provisions
(vii) Whether one intended to rent out the property
(ix) Whether a business is to be established in Spain, and
(x) One's overall wealth.
Depending on the answers to the above, a property can be bought directly by an individual or individuals, a local Spanish company, a branch of a UK or Irish company covered by the Spanish/UK/Irish double taxation treaties or directly or indirectly by an offshore company.
(f) Powers Of Attorney (poderes): These can be granted to a lawyer or other suitable party to sign the escritura documentation on your or your company's behalf but must be done before a UK notary public and then ratified by the UK Foreign & Commonwealth Office or the Department of Foreign Affairs in Dublin.
(g) Tax Identification Number: In Spain it is the law that all fiscally resident individuals have either a NIE (Número de Identificación de Extranjeros) or Foreigners Identification Number, or in some areas a NIF (Número de Identificación Fiscal) Fiscal Identification Number. Non-fiscally resident individuals but owning a property in their own name will also require a tax identification number. Non-fiscally resident individuals purchasing a Spanish property through a Spanish SL Company or a registered foreign company branch do not need their own identification number as the companies/branches themselves have their own
identification numbers.
(h) Costs Involved When Buying A Spanish Property: The overall cost of purchasing a Spanish property is dependent on whether a property is a New Property or a Second Hand/Resale Property. In the case of the former, the overall direct taxes/duties would be around 8% to 9.5% whilst the latter would generally come in a little lower at 7% to 8%. In addition, one must add the virtually universal property conveyancing fees of 1% plus various disbursements/surveyors/builders fees.
In other words, a realistic overall rate would be between 9% to 10.5% for New Property and 8% to 9% for Resale Property. By definition, these fees are a significant proportion of a property's overall value but as will be shown it is quite possible to mitigate the implementation of these taxes on future dispositions where appropriate tax planning structures are put in situe. It is primarily for this reason that 'aggressive' tax planning methods are quite commonly used for more expensive properties.
(i) Stamp Duty: ITC (impuesto sobre transmisiones patrimoniales) is roughly equivalent to UK Stamp Duty and is levied at between 6% to 7% of the purchase price depending on the Autonomous Region (Comunidad Autónoma) involved. However, it should be noted that the above DOES NOT apply to NEWLY BUILT PROPERTIES but just to privately owned or resale properties. The tax is paid by the buyer after the final exchange of contacts to the Tax Collection Agency (Agencia Tributaria).
or
(ii) Value Added Tax (Impuesto sobre el Valor Añadido or IVA) and DOCUMENTARY STAMP DUTY (Impuesto sobre Actos Jurídicos documentados or IAJD): These taxes DO apply to NEWLY BUILT PROPERTIES and are paid the first time a property is sold normally by the developer (comprador) of the property. The IVA rate is 7% of the selling price and the IAJD is fixed between the 0.5% and 1.5% of the selling price depending on the Autonomous Region (Comunidad Autónoma) involved. If a deposit is given beforesigning the Sales Deed (Escritura de Venta) a 7% IVA tax will apply. IVA and IAJD are paid directly by the seller to the Tax Collection Agency (Agencia Tributaria).
(iii) Notarial Fees: These operate on a set sliding scale becoming proportionally cheaper the more expensive the property; this is on the basis that the amount of notarial time involved does not increase with the value of the property. Thus, for example, for properties valued between €150,000 - €600,000 a notary will charge 0.5% whilst for properties over 600,000.00 the rate falls to 0.3% of the value of the property.
(iv) Land Registration Fees: Approximately 0.5% of the purchase price of a property. Where urban land is involved (with or without buildings) the Town Hall imposes a tax on the notional increase in the value of the land based on the inflation rate from the time of purchase to the time of sale. The applicable rates range between 20% and 30% of the inflation indexed price - The name of this very specific tax is Plusvalia or (impuesto sobre del incremento de valor de los terrenos de naturaleza urbana). In addition, Estate or Council Tax (Impuesto sobre bienes inmuebles, or IBI or sometimes known as Contributory Tax or Contribución, will also be payable each year.
It has to be paid to the appropriate Local Council (Ayuntamiento). This tax is normally paid from the 2nd of October to the 30th of November or 1st of January, depending on the Ayuntamientos. It can be a 0.4% for bienes de naturaleza urbana (urban areas) or a 0.3% for bienes de naturaleza rústica (rural areas).
