Hardly a week goes by without one of the UK or Irish tabloids recounting some 'horror' story involving some hapless expatriate couple in Spain. The fact that the Spanish property market is, at the time of writing in May 2014, still very depressed unfortunately means that true values are very difficult to ascertain especially in a property market which historically has not been known for transparency. In fact, there have even recently been whole television series made around such experiences generally along the lines of there never having been planning permission, unscrupulous locals taking advantage of the ever so nice British couple, builders from hell and so forth. In reality, Spain has a highly developed legal and conveyancing system but one fundamentally different than that of the United Kingdom and Ireland. However, if independent advice is sought from specialists conversant with BOTH the UK and Spanish legal and tax systems there is very little to fear together with a number of surprising benefits.
The Spanish Purchasing Process a Quick Overview
- 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';
- 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 (cldusula) in the contract which states that you buy the property Free of any Charges or Incumbrances ("libre de cargas y gravamenes") 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;
- 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 Prestamo Hipotecario to be signed together with the Escritura de Propiedad (See mortgages P40). 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 Prestamo Hipotecario) with the Property Registry (Registro de la Propiedad). It is at this stage that the escriiura de propiedad becomes a Public Deed (Escritura Publica). It is important to note that the escritura publica is the only Guarantee of Title in Spain. Before buying a property one should always refer to the escritura publica 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 lin 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 circunscripclon). For example, the little village of Benijofar 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 Benijofar you must go to the registro de la propiedad located in Torrevieja.
- 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 Icargas] or Mortgages Ihipotecas). llii) Verify that the land where the bien inmueble is located is classified as suelo urbano (not rural but urban land), livl 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 (clasificacion 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);
- 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;
- 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;
- Tax Identification Number: In Spain it is the law that all fiscally resident individuals have either a NIE (Numero de Identificacion de Extranjeros) or Foreigners Identification Number, or in some areas a NIF (Numero de Identificacion 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;
- 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;
- Stamp Duty: ITC (impuesto sobre transmisiones patrimoniales) is roughly equivalent to UK Stamp Duty and is levied at 6% to 7% of the purchase price depending on the Autonomous Region (Comunidad Autonoma). However, it should be noted that the above DOES NOT apply to NEWLY BUILT PROPERTIES but just for privately owned or resale properties. The tax is paid by the buyer after the final exchange of contacts to the Tax Collection Agency (Agenda Tributarial);
- Value Added Tax (Impuesto sobre el Valor Anadido or IVA) and DOCUMENTARY STAMP DUTY (Impuesto sobre Actos Jundicos 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 Autonoma) involved. If a deposit is given before signing 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 (Agenda Tributaria);
- 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;
- 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 Contribucion, 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 rustica (rural areas).
Spain - the need for Independent Advice
Although many developers, estate agents, lawyers etc., assisting people to move and/or purchase their dream home/business in Spain are scrupulously honest; it is nevertheless better to avoid situations where the advisor has a potential 'conflict of interest' between his/her relationship with you and any third party, in particular, where an estate agent or developer recommends local professionals (abogados, notaries, surveyors etc.] you should ask them to confirm that no past, present or future commissions or other 'benefits-in-kind' have been or will be proffered. Where commissions etc. are being paid, they must be transparent maintaining suitable opt-out clauses for those clients who want independent advice/services. It should also be remembered that many larger developers have sought to maintain an ongoing management and/or letting agency relationship with their clients including in many cases the maintenance/management of local SL limited and/or offshore companies. In such cases, apart from ensuring that the charges are fair and reasonable it is also vital to ensure that the providers of the services are qualified and further that the services being suggested are really the best in your circumstances. Where individual properties are being bought directly it is always recommended that an independent advisor is instructed to ensure that your interests remain paramount - Empirical evidence has shown that the greatest danger faced by the foreign Spanish property purchaser is when the heart starts ruling the head. In fact, the most common 'horror' stories tend to have a common theme along the lines of: "I just fell in love with the property and had to have it"; "The agent seller seemed so nice and friendly"; "I was told that all I needed to do was to sign some documents in front of the notary" etc. To avoid this make sure in such circumstances that you seek advice from an independent advisor familiar with both the UK/Irish and Spanish fiscal systems/double taxation treaties. In certain situations, an independent advisor might recommend that you don't proceed and still charge you for his or her time but this is still far preferable to making potentially one of the biggest financial mistakes of your life!
The Purchasers Check List
- Never sign anything until you are completely satisfied that the property is exactly what you think it is. In Spain there is no equivalent to a preliminary "Subject to Contract" stage in conveyancing;
- Check who is selling the property? Generally it is better to buy from UK or Irish based developers for reasons of safety but on the other hand such developments tend to represent bad value compared to making a direct purchase;
- Is there any potential conflict between the advisors and the seller of the property? If yes, then try and seek out alternative advisors even if you don't like their comments;
- Has a proper survey been carried out specifying exactly what needs to be surveyed? Remember that a Spanish survey is generally less rigorous than its UK or Irish equivalent;
- Has there been a full charges search? Remember that just as in the UK/Ireland debt can attach to a property even if it had nothing to do with you;
- Has there been a full and in depth investigation into whether appropriate planning permissions were granted?
- Are there any intended future developments that could compromise the purchase?
- Could any third party have an interest in the property, resultant on mineral deposits, water wells, and property location or otherwise?
- Have you sought advice on your personal tax position from a tax consultant conversant with both the UK/Irish and Spanish tax systems and appropriate double taxation treaty provisions? If not there could be unnecessary exposure to Spanish wealth, capital gains and inheritance taxes;
- Have you sought advice as to the best method of buying your properly? i.e. should it be bought directly or through a company.
Buying a Spanish Property using an Offshore/Tax Haven Company
Up until the end of the 1980's the most common way for individuals purchasing more valuable Spanish properties was to simply use an offshore company - most commonly a Gibraltar Exempt or Non-Resident Company - to make the initial purchase. Of course, at the time of purchase all the standard duties/taxes would be paid. However, thereafter any future dispositions could avoid all capital gains and inheritance tax consequences, not to mention the not inconsiderable savings made from avoiding the property acquisition taxes and duties. When it was time to sell a property the seller would simply go with the buyer to, in most cases, a Gibraltar firm of lawyers who would simply register the change of beneficial ownership, witness the handover of the 'bearer' shares and keep the company documents until the next disposition. This situation saved Spanish property owners literally hundreds of millions of Euro absolutely legally but obviously at considerable cost to the Spanish Exchequer. To add insult to injury, the principal beneficiary was Gibraltar - A territory that it considers to be illegally held by the United Kingdom.
Law 31/1990 (Royal Decree 1080/1991) and Law 18/1991 (Royal Decree 1841/1991 Section 74):
In the early 1990's Spain introduced two Statutes aimed specifically at closing the offshore company loopholes': The first, Law 31/1990, created a 'Black' List of jurisdictions which if employed to purchase a Spanish property would be subject to an annual 3% Special Tax based upon the 'Catastral'* value of the property (levied each December and payable by January). This in one sweeping action ended the economic direct use of virtually all Tax Haven' companies. However, tax planners immediately reacted and noticed that the legislation did not 'black' list respectable jurisdictions - such as Ireland and Delaware in the United States - which at the time did not tax companies registered but not administrated from their respective territories. *2 However, this anomaly was corrected by Law 18/1991 which meant that companies from jurisdictions that allowed external management and control would either be subject (subject to certain caveats - see page 28 below to the 3% Special Tax above or the Agencia Estatal de Administracion Tributaria (AEATI could ascribe, depending on circumstances, Spanish domicile and hence direct liability to Spanish taxes. Further, as with a branch of a foreign company offshore/tax haven companies need to have a local representative in Spain for service of process and receipt of official Hacienda (Inland Revenue correspondence. Also, if an offshore/tax haven company refuses to supply fiscal and/or beneficial ownership information the Hacienda can register o charge against the property with obvious detrimental consequences for any potential resale.
*1 The Catastral value of a property is roughly equivalent to its rateable value and is generally lower than its real market value.
*2 The Republic of Ireland no longer allows the registration of non-resident companies save in very specific circumstances (see S.58 of the Finance Act 1995).
Conditions that must exist to avoid the 3% Catastral Tax: Spain, as with all countries, cannot introduce legislation that would contravene its international treaty obligations. For this reason, there are a number of caveats relating to the implementation of Law 18/1991 which, in effect, mean that it will not apply if one of the following circumstances exist:
- The property is owned by a foreign state or an international body such as the United Nations;
- If there exists a double taxation treaty with Spain where there is an 'exchange of information clause' between the appropriate tax authorities and that the ultimate beneficial owner of the property is resident either in Spain or the other contracting country;
- If it can be shown that a non-resident company is making genuine and ongoing business investments into Spain, which can be separated from 'passive' or 'pure' real estate holdings. To assist with this distinction the Spanish government has laid down some guidelines:
- Ongoing Spanish business activities must result in a turnover of at least €800,000.00 Real estate holdings should not constitute more than 20% of the company's Spanish assets;
- The Catasfral value of the property constitutes no more than 25% of the company's business activities in Spain;
- If the identity of the ultimate beneficial owners and the source of the funds are declared, together with an undertaking to notify the Spanish authorities of any change in ultimate beneficial ownership. Note: Whilst the last declaration might avoid the payment of the 3% tax it simply puts the entity in the same position of a foreign branch having registered with the Spanish fiscal authorities.
|PROSCRIBED TAX HAVEN JURISDICTIONS UNDER LAW 31/1990|
|Antigua & Barbuda||Hong Kong||San Marino|
|Aruba||Isle of Man||St. Vincent & Grenadines|
|British Virgin Islands||Liberia||Trinidad & Tobago|
|Brunei||Luxembourg (1929 Co.'s)||Turks & Caicos|
|Cayman Islands||Macao||United Arab Emirates|
|Channel Islands||Malta*2||US Virgin Islands|
For more information on these benefits please contact one of our tax planning consultants.