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Real Estate Spain - Spanish Law

CAPITAL GAINS TAX

When a property in Spain is sold, any gains may be subject to Spanish Capital Gains Tax, The Royal Decree of 7th June 1996 enacted two different systems to ascertain the taxable gain: 1. A system for properties bought before 1st January 1997; and 2. A system for properties bought on or after 1st January 1997. The taxable gain is the difference between the purchase price and the selling price (reduced by any qualifying expenses and taxes in connection with the purchase and/or sale) and reduced by a further 11.11% per year of ownership (to count after the second year of ownership). After the property has been owned by the vendor for 10 years or more, any gains will be tax free. When selling properties bought on or after 1st january 1997, the taxable gain is the difference between the purchase price (reduced by any qualifying expenses and taxes in connection with the purchase and/or sale) and reduced by a percentage to be published every year in the Spanish Budget. In both cases, non-resident vendors will pay tax at the rate of 35%. The Spanish Budget approved in December 1996, introduced some further changes on this matter: From 1st January 1997 purchasers who buy a property which belongs to a person who is not resident in Spain and has owned the property for less than 10 years only need to withhold 5% (instead of the previous 10%) of the purchase price and pay this to the Tax Authorities in Spain on account of the vendor's capital gains tax liability. However, if the vendor is a company non-resident in Spain, the purchaser will need to withhold this 5% unless the company has owned the property for more than 20 years.

PURCHASE PRICE OF A PROPERTY

When a property is bought, the purchaser must pay tax as a percentage of the price (normally 6% or 7% plus 0.5%). However, these percentages are paid on the value of the property (which may not coincide with the price paid). The spanish Tax Authorities have statutory powers to review the value of any property and to request the appropriate additional payment of tax. The danger of declaring a low price is that regardless of whether or not the purchaser actually paid the amount declared, if the price as recorded in the title deed is more than 20% lower than the value of the property, as assessed by the Tax Authorities, the difference between the price and the actual value will be regarded as a gift. In which case, the purchaser will be liable to gift tax (at a variable, quite high percentage) and the vendor will also become liable for Capital Gains Tax at the rate of 35% on the difference between the price and the value as assessed by the Tax authorities. The Tax Authorities decision can be challenged but this may entail Court proceedings. Similar Law applies to properties inherited from a deceased and therefore, care should be taken when stating the value of the properties subject of the Spanish Deed of Acceptance and inheritance.

 

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