Taxes Update 2008

Taxes Update

2008 UPDATE APRIL

CONSTRUCTION LAW, CONVEYANCING AND TAXES

The following information is to inform about the recent changes in the Spanish Law, Courts decisions, and Tax regulations.

Subjects covered are…

Capital Gains 2008. Vendor Spanish Resident. - New requirements to avoid 3% retention.
Wealth Tax.- Bye, bye Spanish Wealth Tax
Council Tax. - New Spanish Tribunals interpretation about who has to pay Council Tax of the year in which the property is sold.

1. - CAPITAL GAINS 2008.

VENDOR SPANISH RESIDENT.-

New requirements to avoid the 3 % retention.

Is widely known that residents in Spain do not have to pay the 3 % Capital Gains retention on the sale of their properties. Before 2008 it was the Residence (Certificado de Residencia), that proved to the Spanish authorities that the vendor was resident the Spanish Residence Card (Tarjeta de Residencia), or the new Certification of Residencia, Residence certificate now however, the vendors must show the Certificate OF TAX RESIDENCE “ (Certificado de Residencia Fiscal).

The reason for this being the Spanish customs have noted that there is a high number of foreigners in Spain, who are living in the territory permanently or for long periods of time, who are in fact Spanish residents, and who never fulfilled their tax obligations, or at least not in the proper way.

Following the Spanish and the EU laws, an EU citizen (also Non-EU national) is resident in the country in which he stays for more than 6 months per year. In that moment, this person ceases to be resident in his/her country of origin, and becomes resident of the country in which he/she stays.

This citizen is considered automatically resident in that country, and it is in that country in which he/she has to make the declarations, and payments, of the incomes and assets he/she has overseas as well as in Spain. The EU citizen who makes the declaration in that way, as Spanish resident, at time to sell the property will be considered as Spanish resident, obtaining the Certificado de Residencia Fiscal easily, and not paying the 3 % retention on the sale of the property.

It is very common to find in our area people living in Spain permanently for years, who never made their tax declaration as Spanish residents.

Very often, other expats make their tax declarations as NON RESIDENTS (214 model). Citizens included in these last two cases will find it difficult to obtain the exemption of the 3 % retention in Spain when they sell their properties, due to the fact that, for the Spanish customs database, they do not appear registered as Spanish residents. This is independent than if they have the residence card, or the certification of residence.

This regulation is very new, so, only a few notaries in the area are applying for it. But it seems it will be gradually extended soon. So, now, the documents that the vendors must present to sell a property in Spain will be:

* ESCRITURA FROM THE PROPERTY (PROPERTY DEEDS)

* WATER AND ELECTRIC BILLS

* Council Tax (SUMA).-

* No Infracción Urbanística CERTIFICATION FROM THE TOWN HALL. - This is called "Certificado de no infraccion"

* ORIGINAL NIE NUMBERS AND PASSPORTS

* CERTIFICADO DE RESIDENCIA FISCAL (If resident)

2. - BYE, BYE SPANISH WEALTH TAX.-

Spanish Prime Minister Jose Luis Rodriguez Zapatero said before the elections he would eliminate the wealth tax if re-elected in the general elections in March, adding that he saw room for further tax cuts.

Wealth Tax is a well known tax paid by Spanish residents, and non-residents. Spanish residents they have exemption till a determinate amount (around 106.000 EUR), but non-residents pay every year this tax since they have no minimum exemption, being the only tax to be declared every year after the first one of the acquisition with the famous 214 model.

The government has not confirmed yet if the tax will be definitely abolished, with the subsequent elimination of the obligation of tax declaration presentation, or if it will survive with a high exemption, keeping the obligation of declaration every year.

Also, it is not confirmed what will be the situation of NON RESIDENTS, in the case of the elimination of this tax.

Hopefully we will know soon.

3. - COUNCIL TAX.-

In the Spanish Council Tax Law, the responsibility for the payment is the person who owns the property on the 1st of January of the year. (Same for car ownership) It means that, if that person owns the property on 1st January from that year, he/she will be responsible to pay for that whole year later when it becomes due even if she/he has sold before the actual tax due date unless it is agreed between both parts (for example, in a contract with the new buyer)

It was an extended practice to retain the vendor the eventual payment of the council tax in case that he/she was selling before the bill of the year was issued. Now, there is a new decision from the High Courts from Madrid (Audiencia Provincial de Madrid between the parts that the vendor is responsible of the payment of the Council Tax proportionally from the time he/she stays in the property before the sale completion.

It means that, if the vendor sells the property at the end of June, he/she would only pay the half of the Council Tax. So, the buyer, instead of retain the whole amount of the Council Tax, should retain only the effective months consumed by the vendor in the year of the sale,

Also, I would like to inform you that some Town Halls with a high number of non residents, used to issue the bill of the Council Tax, from the year of the sale, in the name of the buyer, instead of in the vendor’s name. There is an example of this in San Fulgencio (Alicante), and this creates confusion about who has to pay for it, because the vendors think that, as the bill will be issued in the name of the buyers, they have not to pay it.

This behavior from some Town Halls must not confuse the law. The Council Tax from the year of the sale must be paid by the vendor, independently of who appears in the bill.

So the Council Tax must be paid by the owner of the property at 1st of January 2008 independently of the date they sell in 2008; but we must take care about what was established and agreed between the two parts in the sale negotiations because parts can agree to pay it proportionately if they choose.

Also, we must inform our clients that, although there are some Municipalities which pass the bill to the buyer’s name, it does not create any difference in the matter of who pays for it, because, independently of who appears on the bill’s name, the responsible is the vendor (except if agreed with the buyer to pay proportionally).

Juan Carlos Marhuenda Gómez

Solicitor

NOTE: This guide is, of necessity, both brief and general, and is therefore no substitute for proper professional advice, which we will be happy to provide on request.

For more information contact Juan Carlos or Maria at

Thalassaadvocats
Corredera, 37
03202 Elche (Alicante) SPAIN
TLF: +34 966 614 384
FAX: +34 965 420 960
email: jc@tlacorp.es
website: www.tlacorp.es

Taxes - what you should know

UPDATE from 2007...

We invite you to read the following information which is an up to date Tax Report if you are an owner of a SPANISH PROPERTY in Spain. Whilst the purchase process of the property may be complete and you are now enjoying the ownership of a property in Spain.

Although you have already paid the taxes and the rest of the expenses involved in the actual purchase process of the property, once you have the legal ownership of a Spanish property, you have to pay, and to fulfil, specific taxes and obligations like the ones considered in this report. Unfortunately, the tax payments are not finished on completion of your purchase, as the owner of property here in Spain whether you are a resident or non-resident you have to consider your tax liabilities.

We would like to remind you that, the taxes and expenses involved in the purchase process like notary, land registry and solicitor fees, transfer tax, and others like bank expenses, stamp duty etc., ARE ALREADY PAID. however, following taxes and declarations considered in this report are the ones to be paid, once the purchase process is finished, and complete. These are paid yearly in arrears and to do this you have to fill in a tax return just like you do in your country of origin.

So, to help you understand this we invite you to study carefully the information included here, this will give you an overview about your tax situation now and in the future, and to explain how we can help you by offering OUR SERVICES TO DEAL WITH the sometimes complicated paperwork on your behalf.

As you will see in the structure of the report, there are two main parts:

A) TAXES AND REQUIREMENTS FOR CURRENT OWNERS OF SPANISH PROPERTIES. - (Considering just the taxes derived from the current ownership of the property, not the ones derived for the purchase process).

B) TAXES INVOLVED IN THE SALE. - We are including this part in order to inform you of the tax repercussions if you decide to sell your property in the future.

At moment, if you have not decided to sell your property, your tax obligations will be just the ones included in the part A.

Please, let us know your opinions and questions about the information here and if there is anything that is not clear, we will be very pleased to attend all your queries and or doubts.

We do hope that this information is helpful and clears up the grey areas regarding you and your tax obligations.

Yours faithfully,

Juan Carlos Marhuenda Gómez

Lawyer

A) TAXES AND REQUIREMENTS FOR CURRENT OWNERS OF SPANISH PROPERTIES

When you read about these taxes, and you will probably understand why until recently it was a legal requirement that a non-resident must have a representante fiscal (fiscal representative) in Spain to manage their tax affairs, and why, when the legal requirement was removed, most of the non-residents (as well as many residents) continued to use their services.

- The previous step to consider.- The “Residencia”

For tax purposes, “Residence” is normally determined by whether the person is actually resident in Spain for 183 days in the tax year. There can however be exceptions to this general rule. But what is a reasonable certainty is that a person who spends less than 183 days during a tax year in Spain, and does not have residencia, will not be regarded as resident, and will therefore only pay tax to the Spanish authorities on their assets and income in Spain.

Such a person would be liable in the UK for the tax on their world-wide assets and income, and would generally obtain a set-off under the UK’s Double Tax Treaty with Spain against this for those taxes paid in Spain.

For a person who becomes resident in Spain, either officially or by spending more than 183 days there, the position is generally reversed: tax is due to the Spanish authorities on their world-wide assets and income, with a set-off for any tax paid in the UK. This is however a very complex area, and you should obtain specialist advice on your tax status and its implications.

The way in which individuals and corporate bodies pay tax in Spain varies depending on whether or not they are residents of Spain.

A) INDIVIDUALS

Individuals shall be deemed to have their principal residence in Spain if they meet any of the following conditions:

• They spend more than 183 days per calendar year in Spain. Occasional absences shall be taken into account to calculate the period

of residence, except when said individuals prove they have their tax residence in another country. In the case of countries or territories classified as tax havens, the Spanish tax authorities may request proof of residence in the tax haven for 183 days per calendar year.

• Calculation of the period of residence shall not take into account any temporary stays in Spain that are the result of obligations arising from cultural or humanitarian collaboration agreements entered into with the Spanish public administration with no payment involved.

• Their main or central place of business is directly or indirectly located in Spain. Unless there is evidence to the contrary, an individual shall be deemed to be a resident of Spain if, in accordance with the aforementioned criteria, his or her legally non-separated spouse and dependent minor children have their principal residence in Spain.

Individuals of Spanish nationality who prove they have changed their country of residence to a tax haven (Appendix III) shall continue to be liable for Personal Income Tax (IRPF) in Spain for the tax period in which the change of residence occurs and the following four tax periods.

An individual shall be deemed to be a resident or non-resident for the entire calendar year, given that a change of residence does not give rise to an interruption of the tax period.

Proof of tax residence Tax residence shall be proven by means of a certificate issued by the competent tax authority in the country in question. This certificate shall be valid for one year. An individual may have a residence permit or administrative residence in a country and yet not be deemed to have tax residence there.

B) CORPORATE BODIES

Any corporate bodies shall be deemed to be a resident of Spain if they meet any of the following conditions:

• They were incorporated in accordance with Spanish law.

• They have its registered office in Spain.

• They have their its effective headquarters in Spain.

A corporate body shall be deemed to have its effective headquarters in Spain if management and overall control of its activities is based in Spain.

If there is a change of residence, the tax period shall end when this change occurs.

C) OPTIONAL SYSTEM FOR INDIVIDUALS WHO ACQUIRE TAX RESIDENCE IN SPAIN BECAUSE THEY HAVE MOVED TO SPAIN AS A RESULT OF AN EMPLOYMENT CONTRACT

In accordance with the legislation in force as from 1 January 2004, individuals who acquire tax residence in Spain as a result of moving to Spain may choose to pay IRPF (Income Tax for Residents) or IRNR (Income Tax for Non-Residents) during the tax period in which the change of residence takes place and for the following five tax periods if they meet the following conditions:

• They were not residents of Spain in the ten years prior to their new move to Spain.

• The move to Spain is the result of an employment contract.

• The work involved is actually carried out in Spain.

• The work is carried out for a resident company or body corporate or the permanent establishment (PE) in Spain of a body corporate

that is not a resident of Spain.

• The earned income deriving from said employment relationship is not exempt from IRNR.

Taxpayers who choose to pay IRNR shall, as a real obligation, be liable to capital tax.

The regulations that develop the procedure for exercising this option are pending publication.

ONCE THE RESIDENCIA CONCEPT IS CLEAR, HERE THERE ARE THE TAXES TO BE PAID IN SPAIN AS AN OWNER OF SPANISH PROPERTY:

1. Impuesto sobre Bienes Inmuebles – IBI (sometimes known as contribuciones, or SUMA) is the annual real estate tax- the equivalent of your council tax in the UK if that’s where you resided .

This is a tax to be paid to the Town Hall, or Municipality, once a year.

In Spain this is paid by residents and non-residents alike. It is based on the “Valor Catastral”, which is revised every 10 years, and updated annualy in line with inflation. It is paid to the local authority for services such as refuse collection, hospitals, police, schools etc.just as it is in the UK

It is a municipal tax and so can vary considerably from one area to another for the same type of property (just as council tax varies in the UK), but typically it is between 0.75% and 1% of the valor catastral.

2. Impuesto sobre el Patrimonio (Wealth Tax).

This is paid by both residents and non-residents – but it affects them differently: residents have an exemption of EUR 108,000 each, so a property owned jointly by husband and wife is free of patrimonio up to EUR216,000. Non-residents do not benefit from this exemption. Mortgages or other debts registered against the property can be deducted from their value, whether you are a resident or not.

The Régimen Económico: Under Spanish law, when residents marry they have to make a decision about their regimen económico (financial status). Note that this only applies to married couples. This status can be changed – although it is a complex process - by making a notarial declaration (escritura), certifying this at the Civil Registry at the town hall, paying the fees to Hacienda, then sending it to the property register. The status affects tax, the situation in the case of divorce, and inheritance. Married couples have to decide whether, in their marriage, for tax purposes, their assets (including not only property, but all other forms of wealth – bank accounts, investments, cars, ownership of businesses, valuables) will be held jointly (bienes conjuntos or gananciales) or separately (separación de bienes). Normally, the régimen económico chosen by Spanish people is joint ownership (gananciales). This means that everything is owned jointly, regardless of who actually paid for it. It is however possible to choose separación de bienes, which then means that each person is treated separately as an individual and is regarded as owning 100% whatever they personally buy (i.e. the tax treatment is more or less as though they were not married, in order to put each person on an equal basis). The only exception to this is that in the case of divorce, and with regard only to the main residence, a judge is unlikely to grant possession to one party, if the other party is a dependent.

The advice we have received from a Spanish notary is that the Spanish rules regarding the régimen económico will be applied to residents, but not to non-residents, where in the case of a dispute, the Spanish judge would apply UK law (remember that the rules only apply to married couples). In general, where a married couple are buying a property jointly, and both are contributing, the purchase and mortgage should be in joint names (as “bienes gananciales”). If the property and mortgage are to be in the sole name of one purchaser (“separación de bienes”), then that purchaser must prove to the notary that the money used for the purchase is his/her own (e.g. from an inheritance or an insurance claim – earned income is deemed to be joint). In addition, the other married partner must sign a declaration that they accept the régimen económico of “separación de bienes”. This declaration must also be notarised.

So, patrimonio will be applied in accordance with the régimen económico for residents.

Originally, the tax was introduced as a special tax, called the Impuesto Extraordinario sobre el Patrimonio, in 1978 to encourage Spanish people to declare wealth that was often hidden in undeclared or under-valued property. The tax rate was set at a very low 0.2% up to EUR167,081, the intention being that anyone who did not declare assets in 1978 would then be subject to fines, and the undeclared value or under-valuation would be subject to income tax (at much higher rates up to 48%) in the year in which it was discovered. The “extraordinary” tax worked much as intended, but the authorities found it a good way of keeping track of people’s assets, so it has never been discontinued, and is now known simply as the Impuesto sobre el Patrimonio or Patrimonio for short. The tax rates are 0.2% up to EUR167,000; 0.3% from EUR167,000 to around EUR335,000; 0.5% from EUR335,000 to EUR668,500; increasing to a top rate of 2.5% on properties worth more than EUR668,500. The tax is based on the higher of the market value or the valor catastral.

So a resident couple with bienes conjuntos owning a property jointly worth EUR720,000 with a mortgage of EUR120,000, would each pay tax on EUR192,000 (half of the 720 each = 360, less half of the mortgage each (60) = 300, less 108 exempt each = 192). The tax rate is 0.2% on the first EUR167,000 = EUR334 plus 0.3% on the next EUR25,200 = EUR80, making EUR414 in total each. In this example, the two together amount to around 0.1% of the total property value. In a simpler example of one non-resident owning a property worth EUR150,000 with no mortgage, the tax would simply be 0.2%.

However, on 1st January 1997 the patrimonio was handed over from the central government to the autonomous regions, who can now make whatever changes to the tax they wish. Therefore differences can increasingly be expected in the exemptions and rates of tax in the different regions of Spain.

2. Impuesto sobre la Renta (Income Tax).

Income from employment

In general, income earned by non-residents for work carried out in Spain shall be subject to tax on the full amount at the general tax rate of 25%.

Special cases:

• A rate of 8% shall be applicable to income earned by individuals who are non-residents of Spain (provided they are not liable to pay IRPF) and employed by Spanish diplomatic missions and consulates abroad, so long as specific regulations contained in international treaties to which Spain is a party are not applicable.

However, if work is carried out entirely abroad and the income obtained by the aforementioned individuals is subject to personal income tax in another country, the income shall not be deemed to be obtained in Spain and shall therefore not be subject to IRNR.

• A rate of 2% shall be applicable to income earned by non-resident individuals in Spain by virtue of specific-duration employment

contracts for foreign seasonal workers, in accordance with Spanish labour regulations.

Income from economic activities

In the case of income from economic activities carried out in Spain by non-residents without a permanent establishment, the tax base shall be calculated based on the difference between the gross income and the following expenses:

- Staff costs

- Cost of supplies

- Utilities

A general rate of 25% shall be applicable to the resulting tax base. Income from economic activities shall be deemed to include income from services rendered, from freelance professional activities and artistic and sports activities.

Income from real-estate property (this could be your case)

Regardless of whether or not the real-estate property is leased out, income from said property shall be subject to IRNR. However, the tax treatment varies depending on whether or not the property is leased.

· Unleased urban property: Non-resident taxpayers who own urban property that is used by the owner but not for economic activities, that is transferred free of charge or is unoccupied shall be liable to pay IRNR. The tax is based on the estimated income of 1.1% of the property's cadastral value (or 2% if the cadastral value has not be subject to revision or modification since 1 January 1994) and the applicable tax rate is 25%.

· Leased or subleased property: The full amount received from the lessee for all purposes shall be taken into account. Said amount shall include, where applicable, any assets leased with the property, but shall exclude VAT and no deductions of expenses shall be made.

The applicable tax rate is the general rate of 25%. When premises are set up in Spain and used exclusively for the management of a property leasing activity, whose staff have a full-time employment contract, the activity carried out on said premises shall be understood to be a business run through an Permanent Establishment and shall be subject to tax as per the regulations indicated in the section on Income otained through a Permanent Establishment (PE).

Income from dividends and interest

Non-residents of Spain who obtain dividends or interest paid by a resident individual or public or private corporate body in Spain shall be subject to IRNR in Spain. When an agreement is applicable, the relevant tax rate shall be lower than the general rate. Furthermore, interest received by residents of an EU Member State shall be exempt from tax, provided said interest is not obtained through a tax haven.

Interest deriving from investments in public debt (except when obtained through a tax haven) and yields of non-residents' bank accounts shall likewise be exempt from tax.

• Tax base: Full amount of said dividends or interest.

• Tax rate: In general, the rate of 15% shall be applicable as from 1 January 2003. For residents of a country with which an agreement exists, the tax rate shall be the rate established in said agreement.

Pensions obtained in Spain

When residents abroad receive a pension paid by a Spanish resident, the full amount of the pension shall be subject to Spanish tax. Iffor any reason, you are receiving pensions from a Spanish company, or institution, this pension will be taxable in Spain.

Pensions obtained out Spain by non-residents (this could be your case)

Pensions are deemed to be earnings as a result of prior employment and are treated differently depending on whether they are public or private pensions.

A public pension is understood to be a pension received as the result of prior public employment, i.e. as a result of services rendered to a state, a political subdivision thereof or a local agency. A private pension is understood to be any other kind of pension received as a result of prior private employment.

• In the case of private pensions, most agreements stipulate that taxation rights lie exclusively with the country where the taxpayer is a resident.

• In the case of public pensions, said right is held by the country where the pensions originate rather than the country where the taxpayer is a resident, except in the case of some agreements, which stipulate that if the taxpayer holds the nationality of the country where he/she is a resident, said country holds the taxation rights.

Capital gains from the sale of real-estate property

Capital gains from the sale of real-estate property are subject to tax.

In general, capital gains are determined by calculating the difference between the conveyance value (price at which a property is sold) and the acquisition value (price at which the property was originally purchased).

The acquisition value shall be made up of the actual price paid for the property, plus any expenses and taxes inherent to the acquisition paid by the current seller at the time he/she purchased the property. Depending on the year of acquisition, this value shall be modified by applying certain updating coefficients established every year in the Spanish Budget Act.

The regulatory depreciation amounts applied shall be deducted from the amount thus calculated, when applicable, and at least the minimum depreciation shall be calculated in all cases. Said depreciation amounts shall be updated in accordance with the corresponding year.

The conveyance value shall be the actual price at which the sale is made, minus any expenses and taxes inherent to the conveyance paid by the seller. The conveyance value shall be the actual price at which the sale is made, minus any expenses and taxes inherent to the conveyance paid by the seller.

The difference between the conveyance value and the acquisition value thus calculated shall be the capital gains subject to tax.

However, if the property was acquired by an individual before 31 December 1994, the calculated capital gains shall be reduced by 11,11% per year for each year after the second year the property has belonged to said individual. This time shall be calculated based on the number of years between the acquisition date and 31 December 1996 and shall be rounded up.

The taxable gains may then be determined by applying the percentages in the following conditions to the previously calculated capital gains:

• Tax rate:

- A rate of 18% shall be applicable to the tax base thus calculated.

• Tax form:

- Form 212. When the property conveyed is owned jointly by a married couple in which both spouses are non-residents, a single tax return may be filed.

• Filing deadline:

- Within the 3 months after the purchaser's deadline for paying the withholding tax (said deadline being one month from the date of sale)

• Place for filing tax returns:

- The offices or branch of the tax authorities corresponding to the location of the property.

Withholdings at source: The party acquiring the real-estate property, Regardless of whether or not said party is a resident of Spain, is obliged to withhold 3% (in the past was 5%), of the agreed sales price and pay it to the tax office.

For the seller, said withholding shall be deemed payment at source of the capital-gains tax corresponding to the conveyance of the property.

The purchaser shall therefore provide the non-resident seller with a copy of Form 211 (by means of which the withheld amount is paid to the tax office) so the seller can deduct said withheld amount from the tax liability resulting from the capital-gains tax return. If the amount withheld is higher than the tax amount to be paid, refund for the excess may be applied for.

However, in the case of individuals, if more than 10 years elapsed between the date the property was originally purchased or the latest reforms were made to it and 31 December 1996, no capital gains shall be payable and there shall be no obligation to file a capital-gains tax return. In this case, there shall consequently be no obligation to withhold and pay the 5% withholding tax.

• Filing deadline:

- Within 1 month after the date the property is sold.

• Tax Form:

- Form 211.

Refund of excess withholdings: In the event of capital losses or if the amount withheld is higher than the actual tax liability, refund of the excess withheld may be applied for by means of Form 212. The refund will be made by bank transfer to the account indicated on said form.

So how do you pay these taxes?

The best way of dealing with the IBIis to set up a domiciliación (direct debit) from your bank. You can include any other municipal charges with this. You obtain a form from your bank which authorises them to pay the bill, and you lodge this with your Ayuntamiento, to tell them to send the bill to your bank.

For the wealth tax and imputed income tax, if you are a non-resident owner of one property only, the procedure is the following: Your tax adviser, or your lawyer, has to complete a Form 214 where you can declare wealth tax and imputed income tax as well as income tax for non-residents. You can file this form at the local Agencia Tributaria (Tax Office) at any time during the year.

But if the property is owned jointly, both partners will have to file a form. In order to file the form, you need to take with you the IBI receipt (as this shows the referencia catastral, to enable the office to check the catastral value), and the escritura (which shows the market value/ declared value).

If you are a resident, or a non-resident with more than one property, you cannot use the simplified Form 214 procedure. In this case, you (and your partner if the property is owned jointly) need to file a Form 714 for wealth tax and a Form 210 for the imputed income tax. These can only be filed between May 1st and June 20th - hence the need for a fiscal representative.

2.- TAXES INVOLVED IN THE SALE

A) VENDORS SPANISH NON-RESIDENTS

A.1.- BEFORE 2007

When you, as vendor, bought your property in Spain, you paid the taxes involved in the same transaction. These, apart from other general expenses like notary, land registry or solicitor fees, the 7% for the Transfer Tax, and the 5 % for the Capital Gains retention (this last one, if the previous owners were non residents).

So, as buyers, you paid the 7 % of the price of the property as shown in the property deeds.

While you owned your property in Spain, you had to make the following declaration of taxes:

- The first year after completion: After completion, the Spanish government considers that you, just for the reason to own a property in Spain, have to pay the 0.25 % of the official price of the property. It is paid only once, and specifically the year in which you bought the property. This tax is a part of the General Income Tax.

- The following years: You have to make the proper declarations of the Income Tax, and the Wealth Tax. These taxes are calculated over the general incomes received, and from the official value of the property.

If you have not made any of these declarations, please, feel free to consult us in order to instruct you how to do it.

- When you sell your property: You have to pay Capital Gains for the benefit obtained from buying-selling your property.

Till 2007, the Capital Gains Tax was the 35 % of the net benefit obtained from the price paid for buying the property, and the price obtained in the sale (considering “price”, as the one established in the deeds).

The system was even more complicated, because there was established a retention, or withholding, for the payment of this tax for the 5 % of the declared price in the sale.

Please, note the difference:

- A) This was before 2007, the seller had to pay 35 % for CG, from the NET PROFIT (which means Selling Price - Buying price – Less general expenses and taxes paid on the purchase- improvements in the property). Please, pay attention to the following example:

Example 1:

You bought the property for an official price (Declared Value) of 100.000 EUR. You paid 7.000 EUR Transfer Tax (7% over the declared value), and 4.000 EUR in the rest of general expenses (notary, land registry, etc.), and you have reformed your property, the reform costs being 12.000 EUR.

You are now selling your property for 200.000 EUR.

The Net Benefit is :

200.000 – 100.000 = 100.000

Less 7.000

4.000

12.000

Net Benefit: 77.000 x 35 % = 26.950 EUR.

This figure had to be paid in the proper declaration after completion.

- B) Before 2007, the Retention was 5 % OVER THE OFFICIAL PRICE OF THE PROPERTY (which is the price shown in the deeds). It seems that this 5 % is calculated, not over the net benefit obtained from the buying-selling of the property, just over the price for which you are selling. Following the previous example, the retention is the result to apply the 5 % to the declared price in the selling of the property. So, it is 200.000 * 5 % = 10.000 EUR.

This system was acting in the following way:

Non-Resident Vendors had retained 5 % of the declared value on completion (10.000 EUR), this payment beinga part of the rest which would total the amount for CG (26.950 EUR). So, if the vendors, after completion, made their CG declarations, they were reduced the final CG payments with the retention paid on completion. So, following the example, they had to pay 16.950 EUR (26.950-10.000).

In the majority of cases, if the Non-resident vendor was returning to his country of origin, or to other country different of Spain, they never made the proper declaration of the CG, leaving the retention to the Spanish authorities. For instance, the Spanish customs were satisfied with this retention, and they considered the case closed.

Sometimes, the retention could be higher than the same final figure to pay for CG. Please, note the example:

Example 2 :

A vendor bought the property for an official price of 100.000 EUR. He paid 7.000 EUR Transfer Tax, and 4.000 EUR in the rest of general expenses (notary, land registry, etc.), and he has reformed his property, being the reform costs of 12.000 EUR.

He is now selling his property in 125.000 EUR.

The Net Benefit is :

125.000 – 100.000 = 25.000

Less 7.000

4.000

12.000

Net Benefit: 2.000 x 35 % = 700 EUR.

This figure has to be paid in the proper declaration after completion.

- The Retention was of 5 % OVER THE OFFICIAL PRICE OF THE PROPERTY. Following the previous example, retention is the result ot apply the 5 % over the declared price of the sale of the property, which is 125.000 * 5 % = 6.250 EUR.

As you can see, there was a retention from the vendor of (6.250 EUR) higher than the one he actually had to pay for CG (700 EUR). In cases like this of course , vendors were making the proper CG declarations in order to obtain the difference back. So, if they were retained with 6.250 EUR, and they had to pay just 700 EUR, they had to be refunded with the difference (5.550 EUR). In order to apply for this refund, the vendor had to make the proper CG declaration after completion.

A.2.- AFTER 2007

I.- From 01-01-2007, the Capital Gains system for non-Resident vendors is the same, but with the following modifications:

- Capital Gains is of 18 %, instead if the previous 35 %.

- Retention is of 3 %, instead of the previous 5 %.

II.- In the past, the control for the Capital Gains from the part of the government was weak. It resulted in that hundred and thousands of transactions in the area were made with official prices reduced from the real ones, with the intention to reduce the Capital Gains payments from the vendors, and the Transfer Tax, from the buyers.

In order to control transactions which could result in illegal reductions of prices, between buyers and vendors, the control is extremely higher now than it was in the past.

For instance, taxes are reduced for non-residents from 35% to 18%.

III.- Sometimes, non-resident vendors refuse to declare the real price of the house sale , arguing that, when they bought, the previous owners reduced the official price of the property, and that they are now loosing money if the declared value is high.

Unfortunately,,, the situation is now different inform the past, and this kind of argument must be re-considered very very carefully now for four main reasons:

- First: The tax is now lower than before (18 % Benefit CG, and 3 % Declared Value Retention for CG).

- Second: It is true that, as the previous vendors sold the property to the current owners at a low declared value, now the last ones have to support a higher CG. But is also true that the current owners saved also taxes with that reduction. Please, follow the next example:

Example 4:

You bought the property per an official price of 100.000 EUR. The real price was 150.000 EUR. You paid 7.000 EUR Transfer Tax, and 4.000 EUR in the rest of general expenses (notary, land registry, etc.), and you have reformed your property, being the reform costs of 12.000 EUR.

You are right now selling your property in 200.000 EUR.

The Net Benefit is :

200.000 – 100.000 = 100.000

Less 7.000

4.000

12.000

Net Benefit: 77.000 x 18 % = 13.860 EUR.

In the previous example, vendor pays 13.860 EUR for CG, but, as the property was declared in 100.000 EUR, when it was really paid for 150.000 EUR, the vendors has saved at least 3.500 EUR in Transfer Tax, because:

· He paid 7.000 EUR for transfer Tax (100.000 * 7%).

· He had to pay 10.500 EUR (150.000*7%).

10.500-7.000= 3.500 EUR

So, right now, what the vendor has to really pay for CG is 13.860 EUR, this amount less 3.500 EUR from the saving he had from Transfer Tax, makes a total of 10.360 EUR.

Also, the rest of taxes involved in the property after completion (like Wealth tax and Income Tax) are considered over the declared value base. So, as the base of the tax is lower, another 2-3.000 EUR are saved by the non-resident vendor.

Thus, 10.360 EUR less 3.000 EUR=7.360 EUR.

- Third: If the Spanish customs detect a non declared value, fines will be double than they were in the past, and, in some situations vendors and buyers could be denounced not only for fiscal actions, but also for money laundering.

B) VENDORS SPANISH RESIDENTS

- FOR CAPITAL GAINS:

· They pay 18 % of the net benefit.

· They do not have the 3 % Retention.

· If they are selling their main residence, and they invest in another main residence in Spain in less than 2 years, they have 100% exemption of CG tax for the sale of the property.

· If they are aged than 65 years old, they have 100 % exemption for CG tax for the sale of the property.

NOTE: “MAIN RESIDENCE” is considered when the vendors can demonstrate that they are living in the property for at least 3 years. The way of proof this can be the Padron, water and electric consumptions, etc.

Also, the “Spanish fiscal residence” can be obtained in the Spanish Customs just showing the Padron, the escritura, the Passport, and the NIE number. This is important for EU nationals, because they will not be forced to get the old and uncomfortable “Residence Card” (Tarjeta de Residencia), to demonstrate that they are Spanish residents. They can demonstrate that they are residents with the Padron, or with the Spanish Fiscal Residence or new residence certificate

OTHER TAXES FOR VENDORS-PLUSVALÍA

Mainly, the PLUSVALÍA, is a tax over the increase of the value of the land on which your property is sitting, from the buying and the selling time. It is the sole tax that we are not in the position to calculate previously to the sale, because depends on specific criteria from the town hall. And only after completion they quote it in some municipalities.

In these cases, a retention from the buyer to the seller is enough to cover the payment of this tax. Overall when seller is leaving the country after the sale.

TRANSLATION ONLINE SERVICE

WHAT IS THE TRANSLATION ONLINE SERVICE?

This is a service created to help our clients who are Spanish non-nationals to understand relevant information related with their stay in Spain, and to help them to communicate for private and/or official purposes.

WHY IS THIS SERVICE IMPORTANT?

Because, from our experience, we have found that our clients, even though they may speak some Spanish, find problems to understand sometimes what the public or private companies are asking for, or simply, just to help them form filling or communicate with them via letter or telephone etc, or sending them a letter.

WHAT IS THE DIFFERENCE BETWEEN THIS SERVICE AND OTHERS?

The main difference is that, although there are several translation companies in the market, Spanish Online Translation Service is formed not only by Solicitors but those that are also English speakers.

It means that the document will be translated by a Solicitor, or by a Legal Assistant with enough experience and understanding of the subject more so than other translations which, are made by non-Solicitors, who may always not understand entirely what they are translating.

WHAT IS INCLUDED IN THIS SERVICE?

Translating legal texts, contracts, deeds, certificates, bills, official or private documents etc. from English to Spanish, or visa versa.

This service includes:

Translation of 10 legal documents with no more than 3,000 words in each.

Delivery by email or fax of the translated text, or with an explanation of the content (sometimes is better and necessary to explain what the document is, and how to proceed with it, ie. a bill, rather than to translate the content).

Areas covered: Intellectual property and patents, agreements, contracts, witness statements, correspondence, laws and regulations, annual reports, licenses, registration documents, expert reports, litigation, arbitration, bills, supply contracts, private or official communications, etc..

Interpretation of the document.- Our Solicitors will not only translate to you the document, they will also make a resume of what the document is in order to help you to understand it

Redaction of letters.- Our Solicitors can redact a private or official letter with your permission on your name.

Fulfilment of forms and/or documents.- Our solicitors can fulfil the forms, or the application letters on your name.

For more information contact Juan Carlos or Maria at

Thalassaadvocats
Corredera, 37
03202 Elche (Alicante) SPAIN
TLF: 34 966 614 384
FAX: 34 965 420 960
email: jc@tlacorp.es
website: www.tlacorp.es