Capital Gains Tax
Capital gains tax ( Impuesto sobre Incremento de Patrimonio de la Venta de un Bien Inmeuble) is payable on the profit from the sale of certain assets in Spain – and not only property. You must also pay capital gains tax (CGT) when you make a profit from the sale of antiques, art and jewellery, stocks and shares and property and businesses.
When you’re buying property or a business, be very careful that the purchase price declared on the sale contract ( escritura) isn’t too low. Although, under-declaration is illegal, it has been common practice in Spain for the seller to have a very low value placed on the escritura, so that he pays as little CGT as possible when he resells it. However, this is beginning to change, as the authorities try to crack down on the practice and collect the tax owing to them. Don’t get caught in the middle. If you, as a buyer, accept a low declared value, you will find that you’re the loser. When you come to sell, and you appear to have made a larger capital gain than you have, you will be liable for more tax. Note, however, that you may not find anyone willing to sell you premises or a business if you refuse to compromise whatsoever on the declared value. Take advice from your lawyer (some of whom express surprise that this practice is so alien to foreigners!) in order to achieve a satisfactory compromise.
There are a few situations in which you aren’t liable for capital gains tax. If you’re a resident of Spain and are 65 or over, you will be exempt from CGT. Residents below the age of 65 are also exempt from CGT provided that the property they’re selling is their principal residence, they’ve lived there for three years and they plan to buy another home in Spain within three years.
Property Transfer Tax
If you’re legally incorporating a business or buying a property, you will also be liable for a regional tax, known as Impuesto de Transmisiones Patrimoniales y Actos Jurídicos Documentadas, on the following types of transfer:
- Corporate Transfers – You must pay one per cent of the bank deposit made to incorporate your company within 30 working days of incorporation.
- Mergers & Revaluations – You must pay transfer tax at the same rate on any business merger or share capital increase or decrease.
- Property & Land Transfers – Resale properties incur transfer tax at a rate, which is usually 6 per cent of the purchase price declared in the contract, although it varies from one autonomous community to another. Remember that all parties may want to declare a value much lower than the real value, to reduce this tax (see above) but, if its declared value is considerably lower than expected, tax inspectors may be alerted and you may be subject to heavy penalties. Ask your lawyer for advice and ask him to check with the tax office the average market value for the property you intend to buy. If you’re buying a new property, you won’t have to pay transfer tax, but you will have to pay 7 per cent of the purchase price in the form of VAT, as it’s seen as a business transaction between you and the developer.
Stamp duty must be paid when you sign any documents in front of a notaio (these are known as actos jurididicos documentales), which you must do if you’re incorporating your company or buying property and public deeds or registry office documents are involved. The rate varies according to the kind of transaction and the autonomous community but is usually between 0.5 and 1 per cent.
You must also pay a tax on the increased land value since the last sale. This depends on what you buy and how long it is since the last sale. The official value of the land is always lower than the market value and you can find out how much this tax might be by going to your local tax office, where there are records for each property and staff can tell you what the assessed value of the land is.
Spanish property tax ( Impuesto sobre Bienes Inmeubles Urbana/Rustica or simply IBI) is a local tax, similar to council tax or rates in the UK. It’s payable by resident and non-resident owners and is used for local services such as street and beach cleaning, education, cultural and sports amenities and local council administration. IBI is payable on commercial as well as residential property but, if you rent your business premises, the landlord should pay it for you – make sure this is specified in your rental contract. Check when you’re buying property or business premises that there aren’t any outstanding taxes to pay. If there are any unpaid taxes, you, as the new owner, become liable for them. Note, however, that it’s now obligatory for the seller to produce his last IBI receipt, proving that his taxes are up to date.
When you buy a property, you must register your ownership with the local town hall within two months of signing the contract and you can be fined if you don’t do this. Local authorities have become tough on those who don’t register because, until fairly recently, they were losing a tremendous amount of potential revenue from undeclared and untaxed properties.
Your IBI is based on what’s called the valor catastral, which is similar to a rateable value and is usually around 70 per cent of the market value, but this varies considerably with the local authority. The value is calculated according to the size and general assessment of the property (whether it’s considered ‘luxury’, ‘normal’ or ‘simple’) and how close it is to services, amenities and roads. Rates are generally higher in coastal and resort areas than inland, as services are usually better. The tax rate is usually 0.5 per cent of your valor catastral for urban properties and 0.3 per cent for agricultural properties, but make sure you check this, as rates are set locally and can vary considerably according to the local government’s expenses (and debts!).
Pay a visit to your local town hall and find out what you should have to pay and when. Some send out bills, but many don’t, and it’s your responsibility to make sure this tax is paid by the due date. It’s prudent to set up a direct debit to authorise your bank to pay the tax when it’s due so that you aren’t caught out. If it isn’t paid on time, surcharges will be applied: usually between 10 and 20 per cent plus interest and collection costs, depending on how late the payment is. Some town halls have a system of discounts to encourage residents to pay their bills early.
If you live in an area with a large foreign population, your town hall may have a Foreigners’ Department which can advise you, in your own language, about the best method of payment. Payment dates vary with the local council, but you usually have two months in which to pay a bill. If you haven’t set up a direct debit, you must usually take a cash payment to the tax collection office, although you can sometimes pay by bank draft or credit card. Check the acceptable payment methods before you go.
Rubbish Collection & Mains Drainage Tax
‘Rubbish and drains’ ( basura y alcantarillado) is an annual tax payable by both resident and non-resident property and business owners. It’s usually separate from IBI and it varies according to the size of the property or business, the location and the amount of rubbish that you produce. Expect to pay between around €150 and €200 per year.
Value Added Tax
If you’re self-employed or own a business, you must register for value added tax ( Impuesto sobre el Valor Añadido/IVA), irrespective of your turnover. Value added tax (VAT) applies in all of mainland Spain and the Balearic Islands, but not in Ceuta and Melilla, nor in the Canary Islands, where a lower sales tax applies. The standard rate of VAT is 16 per cent, although there are reduced rates for some items. Certain things are exempt from VAT, such as the rental of private property, exports, insurance and financial services. The transfer of a business is exempt from VAT, provided the buyer is going to continue the existing business. VAT is applicable to goods purchased outside Spain and, if you’re supplying goods or services, you must add VAT to all your invoices.
You must register for VAT with the tax authorities at the same time as you apply for your tax identification number ( CIF). This number must appear on all invoices for services or goods that you provide, of which you should keep copies for inspection, along with records of any VAT that you’ve paid on purchases. You’re obliged to keep detailed accounts and file a quarterly VAT return – unless your business has an annual turnover of more than around €6 million, in which case you should file a monthly return.
As in other countries, you may be offered goods and services net of VAT, provided you pay in cash. Not only is it illegal to do so but, if you’re VAT registered, there’s no advantage, as you can reclaim the VAT.
A road tax ( Impuesto de Circulación) is payable for all Spanish-registered cars. It’s payable annually, usually at your town hall, and the cost depends on the make and size of your vehicle; expect to pay around €85 for an average car. When you buy a new car, you will have to make the first tax payment at the time of purchase; take the receipt for the car to the town hall and register it for road tax.
This article is an extract from Making a Living in Spain. Click here to get a copy now.