Mallorca real estate: taxes for non-residents

The local treasury always participates in the acquisition, ownership and sale of a property on Mallorca. Hes just not equally inventive all over the world: right-hand transaction taxes, capital gains taxes, taxes on the advantage of own use - these are taxes that the Spanish tax authorities have come up with.

But the taxes alone are not enough when buying a property in Mallorca. It applies, moreadditional purchase costsmust be taken into account, which account for around 1% to 2% of the purchase price: the notary's fees, the costs for the entry in the land register, the fees for the Gestoria, which handles dealings with the land registry and with banks, and finally the Costs of a lawyer who may be involved in the purchase process.

In recent years, the taxation of real estate in Spain has also been quite confusing: due to the crisis, for example, VAT and real estate transfer tax on real estate purchases were halved at certain times in order to boost the real estate industry and enable the banks to reduce the portfolio of foreclosed real estate . Some taxes were raised (real estate transfer tax), others lowered (income tax).

The wealth tax was also suspended and then revived. In short: a tax mess. The legislative marathon was followed by many months of legislative standstill because Spain was not and is not able to install a government capable of acting. In order to provide a little overview, in this post I will give an overview of all taxes that are associated with the acquisition, ownership and sale of  Majorca real estateof an EU non-resident and the current tax rates (as of January 1st, 2020).

In doing so, I limit myself to the taxes of non-residents, i.e. natural persons who stay in Spain for less than 183 days or who have closer personal and economic ties to another country (centre of vital interests) or have their habitual residence in another country ( Definition of the Spanish-German double taxation agreement (DBA)).

 

Taxes when buying real estate

• One-time taxes

 

Property transfer tax

Buying a resale property is subject to Real Estate Transfer Tax (ITP).

The individual local authorities are entitled to determine the amount of the real estate transfer tax. The following real estate transfer tax applies when buying a second-hand property in the Balearic Islands:

the first €400,000 of the purchase price is taxed at 8%

between €400,000.01 and €600,000 the real estate transfer tax is 9%

the amount between €600,000.01 and €1,000,000 is subject to a tax rate
taxed at 10%

a purchase price over €1,000,000 is taxed at 11.5%

Sample calculation with a purchase price of €800,000

up to €400,000 tax burden 8% = €32,000

for the amount between €400,000.01 and €600,000, 9% is due = €18,000

on the amount from €600,000.01 to €800,000 it is 10% = €20,000

The total tax burden is therefore €70,000

The tax is payable within 30 days of the transfer of ownership.

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Value added tax

While the purchase of a second-hand property is subject to real estate transfer tax, the purchase of a property for first occupancy is subject to VAT (IVA). The applicable tax rate depends on the type of property: For residential properties including garage parking spaces (max. 2 per residential unit), 10% IVA is payable on the purchase price.

The tax rate is 21% for the purchase of land from a commercial enterprise and for the purchase of commercial real estate. Real estate transfer tax and VAT are never cumulative, but always alternative.

 

Certification or stamp duty

On the Balearic Islands it will be 1.5% from 1 January 2020 instead of the previous 1.2%. The old tax rate remains if it is the purchase of the first residential property and its value is less than €200,000. The deadline for paying the stamp duty is 1 month after the signing of the notarial deed. Stamp duty is also levied on mortgage orders, but has to be paid by the lender since 2018 due to changed legislation. Proof of payment of stamp duty is a prerequisite for entry of the notarial deed in the land register.

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Gift tax

If the property is not acquired by purchase but, for example, by donation, gift tax is due. In Germany we have very high allowances for donations in close family circles, and that every ten years, so that the gift is a form of intelligent estate planning.

Spanish tax law does not provide for such allowances, but taxes donations between direct relatives in the ascending and descending line and between spouses and life partners at a uniform, moderate tax rate of 7%.

In order to avoid incurring gift tax in Spain, the gift should be made in Germany using the allowances. Certain formalities should be observed. If a father wants to give his sons money to buy a property in Spain, he should transfer the corresponding amounts in Germany to the childrens accounts so that they can then transfer the payment amounts from their own account to Spain. If, on the other hand, the father would transfer the required purchase price to his own Spanish account and only then provide the children with the money for the purchase price there, gift tax could be incurred in Spain.

It should also be noted that any increase in value that has taken place in the past must be taxed separately by the donor. For example, if the father gives his son a property worth €700,000 that he himself bought for only €400,000, the father has to pay income tax of 19% on €300,000 and the son has to pay gift tax of 7% on €700,000 .

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Inheritance tax

Inheritance tax is an ongoing issue for Spanish-German estates. We remember: According to the national Spanish tax law, the inheritance tax of non-residents was linear at 34% for assets of €800,000 or more; in (rare) extreme cases it could rise to 81%. It all looked much happier for residents: the national Spanish tax law had given the autonomous regions the right to reduce the inheritance tax for residents. The Autonomous Regions had made good use of this, often reducing the inheritance tax on close relatives to 1%, effectively abolishing it (abolition by trivializing). With the decision of the European Court of Justice of September 3, 2014, the Spanish legislature was asked to treat residents and non-residents alike and also to eliminate differences between different autonomous regions. The hope that everyone would now only have to pay 1% inheritance tax lasted only a short time. A new inheritance tax table has been in effect for residents and EU non-residents in the Balearic Islands since January 1st, 2016.

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Inheritance tax rates in Mallorca 2020

Thus, estates of close relatives up to €700,000 are only subject to 1% inheritance tax, from €700,000 to €1,000,000 at 8%, at €1,000,000 to €2,000,000 at 11%, at €2,000,000 to €3,000,000 € with 15% and over €3,000,000 with 20%.

taxes on ownership

• Ongoing annual taxes

 

Property tax

The property tax (IBI) is levied on the value of rural and urban properties based on the cadastral value by the competent municipality and is payable annually. The owner of the property, the leaseholder and the usufructuary are liable for tax. The property tax rate is set by the municipalities and ranges from 0.4% to 1.1% for developed land and from 0.3% to 0.9% for undeveloped land throughout Spain. During the financial crisis, many municipalities had drastically increased property taxes.

On the Balearic Islands, the property tax is multiplied by a certain factor with the cadastral value and related to the development. The municipal administration will provide the exact values on request.

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Income tax

Income Tax (IRPF) if the property is owner-occupied

The Spanish tax authorities tax the owner-occupation benefit as fictitious rental income for a non-resident who only uses the property for holiday purposes. The tax is 19% on 1.1% of the cadastral value.

Sample calculation: cadastral value €380,000

1.1% of €380,000 = €4,180

Then 19% = annual income tax €794.20

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Income tax on rental

If a non-resident's property is rented out, income tax of 19% is payable on the rental income for that period. However, various costs are deductible, e.g. interest on mortgage loans, community costs for a housing complex, property tax, repair costs, insurance, costs for utilities, depreciation = 3% pa on the value of the buildings.

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Wealth tax

The law of 12/23/2008 “suspended” the wealth tax in Spain, retrospectively as of 01/01/2008, so that from 2008 no wealth tax was payable. Wealth tax was implemented again for the years 2011 to 2016. The tax rate for non-residents ranges from 0.2% to 3.5% (from a net worth of €10,695,996.06) on all property located in Spain. What is the value of a property? The highest of the following values: the cadastral value, the acquisition value or the value determined by the tax authorities.

 

Status: 01.01.2021

There is an allowance of €700,000. If a property has, for example, two owners (married couple with 50% each), each of the owners is entitled to the allowance.

The tax rates for wealth tax can be found in the table above. It is the state table that the taxpayer can choose when the tax rates there are lower than those of the Autonomous Region concerned, which is the case for the Balearic Islands.

If a Spanish property belongs to a Spanish SL with German shareholders who are not resident in Spain, the value of the share is subject to Spanish wealth tax from January 1st, 2013 (DTA). Value is the book value shown in the balance sheet. If no audited balance sheet is available or if it is negative, the highest of the following three values must be used: nominal value of the investments, book value according to the last audited balance sheet, capitalization at 20% of the average profit of the last three closed financial years.

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Taxes on sale

• One-time taxes

 

Income tax on the capital gain

The gain on the disposal of a Spanish property owned by a non-resident is taxable in Spain. The profit from the sale of real estate is calculated from the difference between the purchase price (plus the ancillary acquisition costs at the time - IVA, real estate transfer tax, notary and register costs, value-enhancing expenses - modernization and renovation costs, accumulated depreciation, brokerage fees) and the sale proceeds. 19% tax is payable on the profit determined in this way. In this context it should be pointed out that in Spain - unlike in Germany - there is no speculation period, i.e. the profit is always taxed at the same tax rate of 19%, regardless of whether the purchase took place 5, 10 or 20 years ago.

It is often read that the profit made in Spain is also subject to taxation in Germany, but then the tax paid in Spain has to be credited. This is only partially true. As a rule, the sales profit is not taxable in Germany, namely whenever the Spanish property was only used for personal residential purposes. This is always the case if the Spanish property was used exclusively for residential purposes in the period between acquisition and sale or in the year of sale and in the two previous years exclusively. Holiday apartments are also for personal use, even if they were only actually used for a few weeks a year, but were available to the owner for the rest of the time. You should keep this topic in mind when buying a holiday property – also – for the purpose of holiday rental. If you sell the Spanish property after a holding period of 10 years, the sales process is definitely not taxable in Germany.

 

The 3% tax withholding

With regard to the income tax to be paid by the seller on the capital gain, there is a special regulation in Spain that the buyer must withhold 3% of the certified purchase price and pay it to the tax office within one month as an on-account payment on the seller’s profit tax. The Spanish tax authorities thus secure part of the expected profit tax. The non-resident seller must file a tax return for the property sale within 4 months of the sale, in which he can then deduct the 3% payment already made on the final tax liability.

Capital gains tax (Plusvalia)

In addition to the profit tax, the seller also has to pay the so-called capital gains tax (Plusvalia), which is levied by the local municipalities. It taxes the (fictitious) increase in value of land and land - not the buildings - since the last notarization process. For the calculation you need the cadastral value of the land, the duration of ownership and the calculation factor of the respective municipality. Plusvalia's tax liability must be paid to the tax office within 30 days by way of self-assessment.