If the property bought through the company is for your principal or second home, the company must bill you for rent at market rates. This rental income attracts tax at the ratio f 25%. You must also apply VAT and taxes such as transfer tax (ITP in Spanish).
When you buy a buy-to-let property through a company, Spanish fiscal law considers that all rental income is profit for the company. If you wish to benefit from this profit, you must declare it in the form of dividends shared out from the company.
A company generally has more than one shareholder (at least two usually) and by extension, the property bought through the company has multiple owners. In this scenario, you have less control over the property than you would if you had bought it as a private owner.
Unless you plan to purchase a large number of assets in Spain, we advise you buy the property as an individual. That said, any purchase through any vehicle requires professional legal advice from a lawyer representing your interests.
One such ploy involves buying a property in Spain using either a UK limited company, or purchasing a Spanish property as an individual and then transferring the ownership to a UK limited company. The apparent logic behind this tactic is that if one of the owners of the company passes away, any beneficiaries will inherit shares in the UK limited company with the possible benefit of Business Relief on Inheritance Tax, if that were to apply. In theory, as the Spanish property in question is situated in a different jurisdiction, this arrangement also serves to free the beneficiaries from any Spanish tax liabilities they would otherwise be liable to pay.
Although owning Spanish property as a foreign company is not unlawful in itself, if you are found to be actively trying to evade your Spanish inheritance liabilities by using this practice it most certainly will not be tolerated. This has been confirmed by the Sub-directorate General for Taxation (SG de Impuestos Patrimoniales, Tasas y Precios Públicos), by way of binding consultation number V3350-13 of 12 November 2013, which leaves no doubt that it is unlawful to transfer Spanish property into a UK limited company, if the aim of the transfer is to avoid Spanish inheritance tax.
If you are considering buying property in Spain and you are concerned about the potential impact of inheritance tax upon your estate please contact us on 020 3478 1420, by email at info@solicitorsinspain.com or by completing our contact form.
The advantages in the eyes of the owner were clear: when selling the property, he could offer for sale the shares of his holding company, instead of selling the property from the company. This could be accomplished without having to issue any Spanish public documents which recorded the sale, since the public title deeds of the property were already issued in the name of the company. Upon purchasing the company shares, and hence the property held within, the buyer accepted the unrealized capital gains tax liability which would only have to be paid in the case of selling on the property outside the company structure, since the original book value of the company asset would remain unaltered. In those days, this type of transaction was very common and it was relatively easy to continue to sell the company on to yet another buyer simply because the seller paid no taxes thanks to the Spanish Tax Office not having any information on the transfer of assets, even though the tax was due.
The result of this evolution is that sellers of properties which are still owned by companies often end up having no option but to sell the property out of the company and pay penal taxes as a result.
3. It is clear that when we talk about buying a company we refer to a company which has had no commercial activity whatsoever, whose only purpose is to own and perhaps rent out a property, and to pay the running expenses of that property: a holding company. These companies will obviously have a history. This is not normally a problem, but the company must have a professional audit and it must pass all the normal tests and due diligence. Otherwise, if there are any obligations undertaken by the company which have not been disclosed, there will be unpleasant surprises. Fortunately, most company owners leave all control in the hands of a professional company administrator who keeps the books and can give warrants and representations as to the good health of the company. When buying a company owned property, caution should be exercised to make sure it is owned by a visible and solvent seller, and letters of responsibility should be obtained both from the administrators of the company and the real owner, in addition of course to a good audit. The problem arises when there is a seller who has Powers of Attorney himself, and it is difficult to find out who he is and what he does and the use he might have made of the POA. This situation should be avoided.
4. The use of a company home by the company owner has already been declared as a taxable item by the Spanish Tax Office. So, what many the owners do is to rent the property from the company, at a fair market rental value, and from the rent received the company can pay the running expenses of the property, with the intention of reducing the profit gained and hence the corresponding taxes to be paid. This rental value you are paying might be challenged by the Tax Office as not to be a market value rent.
In other words, what do we want to develop in Spain? What do we want to do with the property? . Is it about a sale of real estate in which we want to spend our type holidays and vacations? Is it about buying a property in which we want to change our residence and we come to live in Spain? Is it about a property in the that we have projected an investment project?, are we looking for profitability?, Or are we looking for a conjunction between profitability and vacation?.
In this case, in most cases, our answer is quite clear, we usually recommend clients who wish to purchase a property for individual use, for their family, to do so through a natural person. Therefore, in 80% of the cases, those who wish to acquire real estate in Spain for leisure, the formula to use will be the natural person.
However, in the case of reaching the necessary funds for the acquisition of the property will be found in a company, we would have to study the possibilities of transferring said funds to the owners to act as a natural person, or, the possibilities of acquiring the real estate company in Spain, which may allow the individualized use of the owners.
In the both precedent cases, you may opt to buy the property 100 % in the name of a natural person, or a non resident company, or buy it in conjunction with a determinate percentage on your name, and another percentage in the name of the company (or using another alternatives as buying yourselves the usufruct of the property, and the company to buy the bare ownership).
However, as in the previous example, in case of reaching the necessary funds for the acquisition of the property will be found in a company, it will be necessary to study the possibilities of transferring said funds to the owners to act as a natural person, or to study the eventual possibilities of acquiring the real estate in Spain in the name of the company in a manner which may allow the individualized use of the owners (for example, to acquire the property in the name of the company, and then, renting it out to the family).
We may also opt to buy in the name of a foreign company when funds available for the acquisition of the property are in a foreign company, and/or the intention is to make an investment in Spain, or a business or professional activity, at a low scale. In other words, acquiring a property, or two, in which it is intended to carry out a certain rental activity, without this implying a large investment nor a high business structure, nor to employ significant human and material resources, so in a small-scale activity.
Certain Spanish property industry organisations have actively promoted ownership of Spanish property through a UK Limited Company to avoid Spanish inheritance tax, even for relatively low value properties.
The current economic climate makes it less attractive to own Spanish property through a company. Tax authorities worldwide are taking a keener interest in company ownership of property and closing tax avoidance loopholes. For example, the double taxation Treaty between the UK and Spain means that any profit from share sales in a UK company, with assets mainly in Spain, is subject to Spanish Capital Gains Tax. Recently, there have also been a number of UK companies based in Spain that have been subject to investigation by Spanish tax authorities involving strict scrutiny of filing and registration.
Overall, the current climate is moving in favour of personal ownership. However, circumstances remain in which corporate ownership of Spanish property may make sense. The key is to balance long term tax savings with the relatively high set-up and maintenance costs of running the company.
It currently costs no more to purchase from an arms-length Seller as a company or as individuals. However, if you have already registered the Spanish property in your personal name/s, then the re-registration of a Spanish property into a Company name will attract another set of transfer expenses as well as triggering tax on any capital gain. Both factors make doing so an expensive exercise.
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