Buying a Property in Spain through a Limited Company
Buying property through a company in Spain constitutes about 10 to 15% of all real estate transactions, with the remaining 85% typically involving individual buyers taxed through personal income tax (IRPF). This article will delve into the complexities of this investment strategy, highlighting the advantages and disadvantages associated with buying property in Spain through a limited company. Factors such as whether the property is acquired to conduct economic activity or for personal residence significantly influence the decision-making process. We aim to guide potential investors and homeowners through these considerations, offering a comprehensive understanding of the various implications involved. Whether your motivation for purchase is personal or business-oriented, this guide will help you evaluate your unique situation and make an informed decision.
Buying spanish property through a limited company
The prospect of buying Spanish property through a limited company has, historically, appealed to investors, particularly large corporations and foreign entities, for a variety of reasons. Despite being a relatively popular strategy, there is often confusion surrounding its legal and fiscal implications. Unlike in the United States and other similar jurisdictions where property acquisition through a company is commonplace, in Spain and much of Europe, a company should ideally be used only to carry out genuine economic activity.
One of the major advantages of purchasing property through a company in Spain is the potential for tax benefits. Specifically, the process may allow an entity to avoid the 10% tax levied on the purchase price, a benefit that applies equally to both domestic and foreign buyers. This, along with anonymity and increased legal security, makes the option of using a Spanish limited company (S.L.) an attractive one for some.
Historically, individuals and entities often purchased property through a company to bypass inheritance taxes, a practice that was illegal. Now that inheritance taxes for non-residents have been leveled to match those for residents, this need has largely been eliminated.
However, we strongly discourage the use of foreign entities like UK Limited Companies for acquiring residential properties. While the property purchase tax is identical for both Spanish and foreign acquirers, careful consideration should be given to each individual circumstance, particularly when acquiring property for personal use.
Navigating these processes can be intricate and may require professional guidance to optimize fiscal consequences and avoid any issues with the Spanish Tax Agency. Thus, if you’re considering using a Spanish S.L. for purchasing property, especially to maintain anonymity, we highly recommend seeking expert advice.
Advantages of buying property in Spain through a company
Purchasing property in Spain through a company brings several advantages, spanning various financial, legal, and strategic areas. First and foremost, one of the significant benefits lies in the clear separation of personal and company assets. By holding property within a company structure, the property does not become intertwined with the owner’s personal wealth, thus providing an additional layer of financial protection.
Another advantage arises when the property is intended for economic activity. In such cases, all associated expenses become tax-deductible, potentially leading to substantial savings. Similarly, buying property through a company can facilitate avoidance of the Property Transfer Tax (Impuesto sobre Transmisiones Patrimoniales or ITP) that applies to property sales between private parties. This tax, which varies between 6% and 11% depending on the autonomous community in which the property is located, does not apply to company acquisitions.
Finally, non-resident individuals with properties in Spain typically need to pay the Non-Resident Income Tax (Impuesto sobre la Renta de No Residentes or IRNR) on a fictitious income, usually 1.1% of the cadastral value. When the property is owned by a company, this tax does not apply.
These advantages, though appealing, must be weighed against the potential disadvantages and legal implications that such purchases might involve, as we will explore in the following sections.
VAT deduction
A key financial advantage of purchasing property in Spain through a company relates to the potential for VAT deduction. If the property is bought by a company and is intended for economic activity, VAT can be deducted in its entirety. This can represent a substantial cost saving, reducing the overall expense associated with the property purchase and ongoing maintenance.
However, it’s essential to understand that VAT deductions may not be available in all circumstances. Specifically, when the property is intended for personal use or when the company engages in exempt activities not subject to VAT, these deductions may not apply. As such, careful consideration should be given to the intended use of the property and the nature of the company’s activities when evaluating the potential financial benefits.
Tax advantages
One of the most significant benefits of purchasing property through a company in Spain relates to the numerous tax advantages that this method offers. When the property is sold, individuals typically face capital gains tax on the profits realized from the sale. However, when the property is owned by a company, transferring ownership via the company’s shares can be a more tax-efficient strategy. This approach may reduce or even defer the capital gains tax liability, leading to considerable savings.
Owning property through a company also provides an opportunity to deduct various expenses related to the property from the company’s taxable income. These expenses may include property management costs, maintenance, and repair costs, potentially reducing the overall tax burden associated with property ownership.
In terms of tax rates, companies in Spain are subject to a flat corporate tax rate of 25%. Depending on an individual’s tax situation, this corporate tax rate may be lower than their personal income tax rate, potentially resulting in further tax savings.
Finally, if the property incurs a loss, such as when rental income does not cover expenses, the company can offset this loss against other taxable income. This can reduce the company’s overall tax liability, providing another financial benefit of buying property in Spain through a company.
Inheritance tax
In Spain, the application of inheritance tax does not differentiate between residents and non-residents. Historically, there was a distinct disparity in the inheritance tax applied to residents and non-residents. For this reason, companies were often used to purchase properties in Spain to mitigate the effect of this tax. However, the Spanish Tax Agency is vigilant in detecting such unlawful practices, recognizing them as tax evasion.
Currently, there is no discrimination between those resident in Spain, within the European Union or the European Economic Area (EEA) regarding inheritance tax. This change has helped to level the playing field, making it more straightforward and fairer for all parties, whether they choose to buy properties through a company or as individuals.
Anonimity
By utilizing a company structure, specifically a Spanish Limited Liability Company (Sociedad de Responsabilidad Limitada or S.L.) to buy property in SPain, one can gain a degree of anonymity. In this scenario, the company becomes the legal owner of the property, and it is the company’s details that are recorded in the public property registers. The key element here is that the information pertaining to the company’s shareholders and directors may not be publicly disclosed. This setup preserves the anonymity of the individuals involved in the company, offering an added layer of privacy that may not be available to those who choose to purchase property as individuals.
Flexibility
Buying a property through a company allows more flexibility in management. For instance, it can be easier to transfer ownership by selling company shares rather than dealing with the legal and tax complexities of selling the property itself.
Asset protection
If the property is owned by a company, in Spain, it may be protected against the owner’s personal liabilities. This is particularly beneficial for those with considerable assets, as it provides an additional layer of financial security.
Disadvantages of buying property in Spain through a company
Purchasing property in Spain through a company, despite its advantages, also comes with certain disadvantages that potential buyers must weigh carefully. This approach may not be ideal for every circumstance, and particularly when the property is intended as a primary residence or a second home.
The main areas of disadvantages are:
- No Income Generation: If the property is meant to be a primary or secondary residence, it does not generate income for personal income tax (IRPF). This means there are no tax advantages to offset.
- Requirement to Charge Market Rent: If the property is owned by a company and used by a shareholder, the company must charge a market-rate rent to the shareholder. This income is then taxed at the corporate tax rate of 25%.
- Additional Taxes: Buying property through a company can potentially incur additional taxes. For instance, VAT must be applied to the rent charged, and there might also be implications for the Transfer Tax (Impuesto de Transmisiones Patrimoniales).
In the subsequent sections, we will explore these disadvantages in greater depth to provide a complete picture of the potential challenges associated with buying property in Spain through a company.
Rental income taxation
When it comes to purchasing a property in Spain as a primary or secondary residence through a company, it’s important to understand the tax implications associated with rental income.
In such a scenario, the operation does not generate any personal income tax (IRPF). However, the company will need to charge a market-rate rent to the shareholder or shareholders using the property, and this income will be taxed at the corporate rate of 25%.
Additionally, the rental charge by the company must include Value Added Tax (IVA), thus adding an additional expense for the shareholder. On top of these, other taxes, such as the Transfer Tax (Impuesto de Transmisiones Patrimoniales), may also be applicable.
Declaration of dividends
For those who opt to purchase a property in Spain via a company with the intention of renting it out, it’s crucial to understand the tax implications related to the declaration of dividends.
From a fiscal perspective, rental income received from the property is regarded as company income. Therefore, if a shareholder wants to personally benefit from this income, it must be declared as a dividend distributed by the company.
This means the owner will not directly receive rental income. Instead, they will receive it as a dividend, which may be subject to withholding tax, depending on various personal circumstances and the company’s structure (in terms of human and material resources for managing the property).
Therefore, it becomes necessary to carefully analyze this operation to ascertain the actual fiscal benefits and implications. Consequently, engaging with a knowledgeable financial advisor or tax consultant to navigate through the complex web of Spanish tax laws is strongly recommended.
Contact our expert tax advisors to understand the tax implications of buying property through a company in Spain.
Legal security
When you buy a property in Spain through a company, one potential disadvantage is the issue of legal security. If the property is owned by a company, it inherently has multiple owners – the shareholders of the company.
This multiple ownership can lead to less control for individuals, as decisions related to the property, including potential sale, major repairs, or renovations, will typically require agreement among shareholders. This can sometimes lead to disagreements or complications, especially if the shareholders have divergent interests or plans for the property.
Hence, it’s crucial to consider the potential legal complexities and diminished individual control that can come with purchasing a property in Spain through a company. Seeking legal advice and having clear shareholder agreements in place can mitigate some of these potential issues.
Tax evasion
While owning a property in Spain as a foreign company isn’t unlawful per se, deliberate evasion of Spanish tax liabilities using this practice could be classified as tax evasion. This offence carries significant penalties, both financial and potential criminal charges. The Spanish Tax Agency (AEAT) is vigilant in identifying and penalising such illicit activities.
The AEAT requires the names of all shareholders and other beneficiaries owning or controlling at least 25% of a company. Therefore, tax authorities have the means to ensure that proper taxes are paid on property owned through a company.
In the event of an audit by the AEAT, if they believe a company has been used to evade taxes, substantial financial penalties will be levied. Moreover, the AEAT isn’t interested in attributing property income to a foreign partner who isn’t a tax resident in Spain and doesn’t pay taxes in Spain. If a foreign partner lives in the property, the only fiscal risk is that the AEAT may require the company to pay 25% of the market rental price of the property as if it were intended for economic activity.
However, it is important to note that each case and situation is distinct. The topic requires careful consideration and is best navigated with the assistance of tax and legal professionals who are familiar with the nuances of Spanish and international tax law.
Other disadvantages
There can be various other potential disadvantages to purchasing property in Spain through a company. These can depend greatly on individual circumstances and may need to be evaluated on a case-by-case basis. Some additional challenges can include:
- Increased Administration: Managing a property through a company involves increased administration, including filing annual tax returns and company accounts. This may require hiring an accountant, which would be an additional expense.
- Lack of Personal Use: If the property is owned by a company, it’s typically required to be used for business purposes. Personal use of the property could lead to additional tax liabilities.
- Increased Complexity in Selling: If you decide to sell the property, it may be more complex to sell company-owned real estate as opposed to a personally owned property. Potential buyers may be wary of taking on a company with potential liabilities.
- Increased Costs: There can be higher costs involved with owning a property through a company. These can include legal fees, accounting fees, and the cost of setting up and maintaining a company.
How to buy a property in Spain with a foreign company?
While it is indeed possible to buy a property in Spain with a foreign company, the process can be somewhat complex and often comes with additional challenges. Here are the general steps:
- Company Identification: The company’s name, address, and tax identification number (or its equivalent) must be provided.
- Documentation: Gather all necessary documentation. This may include the company’s Articles of Association, Certificate of Good Standing, and evidence of who has the authority to act on behalf of the company. These documents should be current, and may need to be translated into Spanish by a certified translator.
- Legal Representation: Engage a Spanish lawyer to handle the transaction on the company’s behalf. The lawyer will guide you through the process, conduct due diligence on the property, and ensure that all legal requirements are met.
- Spanish Bank Account: Despite the challenges, it’s often necessary to open a Spanish bank account in the company’s name. This is particularly necessary for tax refund purposes.
- Notary Public: Once all documentation has been gathered and checks have been completed, the purchase agreement (Escritura de Compraventa) will be signed in front of a notary public in Spain.
- Property Registration: After the sale, the new ownership needs to be registered at the local Property Registry (Registro de la Propiedad).
- Tax Obligations: Consideration should be given to the Spanish tax implications of owning a property through a foreign company, including potentially being considered a permanent establishment for VAT and corporate tax purposes.
Please note, due to the intricacies involved in using a foreign company, we generally advise against it. This is because of increased costs, potential tax implications, and the complex nature of managing foreign documents. Instead, using a Spanish company such as a limited company may make the process smoother, as documents would already be available in Spanish and the company would already be recognized under Spanish law.
At Lawants we can help you start a business in Spain, taking care of all legal matters. We offer comprehensive services to guide you through each step of the business establishment process.
What are the taxes and costs when purchasing a property via a company?
When buying or selling a property in Spain via a company, various taxes and costs are involved. Here are the primary ones:
- IVA (Impuesto sobre el Valor Añadido): This is the Spanish equivalent of VAT (Value Added Tax). IVA applies to all new property purchases, whether the buyer is an individual or a company. The current reduced rate for property purchases is 10% of the total declared value.
- AJD (Impuesto de Actos Jurídicos Documentados): This tax applies to notarial, mercantile, and administrative documents. The amount payable will depend on the rate approved by each autonomous community in Spain, which ranges between 0.5% and 2%.
- IBI (Impuesto sobre Bienes Inmuebles): Also known as the property tax, IBI is an annual tax based on the cadastral value of the property. The rate typically ranges from 0.4% to 1.1% of this value, varying by municipality.
- Impuesto sobre la Renta de No Residentes: This is the income tax for non-residents. If the property generates income, such as through rentals, the company may need to pay this tax.
- Plusvalía Municipal (Capital Gain Tax): This is levied on the increase in the value of the land from the time of purchase to the time of sale. The calculation for this tax depends on factors like the length of ownership and the location of the property.
- Other Costs: Other potential costs can include notary fees, legal fees, property registry costs, and real estate agent commissions.
Remember, each transaction is unique, so it’s recommended to seek advice from a tax professional or legal counsel to understand the full extent of potential taxes and costs.
How to choose wether to buy property in Spain through a company or as an individual
Deciding whether to buy property in Spain through a company or as an individual depends on several factors. The choice will largely depend on your personal circumstances, financial goals, and the intended use of the property.
Buy through a company when:
- Investment property: If you plan to rent out the property, owning it through a company may provide tax advantages such as the possibility of deducting expenses related to the property.
- Property development: If you’re planning to develop or renovate the property for selling it later at a profit, a company structure may allow for VAT deductions and other tax advantages related to business operations.
- Anonymity: If you prefer to keep your property ownership confidential, buying through a company can provide more anonymity.
- Multiple owners: When a property has multiple owners, holding the property through a company can make management easier, particularly in relation to shared expenses and profits.
Buy as an individual when:
- Primary or secondary residence: If the property is intended to be your main or secondary residence, it may be simpler and more tax-efficient to buy as an individual.
- Lower administration: Buying as an individual means fewer administrative burdens and costs. With a company, there are annual filing requirements, potential audits, and the need for ongoing legal and accounting services.
- Less complexity: Owning property personally is more straightforward than owning it through a company, as it avoids the complexity of corporate law, tax regulations, and potential disagreements among shareholders.
Ultimately, the best choice will depend on your personal and financial circumstances. It’s advisable to seek advice from real estate, legal, and tax professionals to ensure that your decision aligns with your goals and meets all regulatory requirements.
Conclusion
In conclusion, while buying property in Spain through a company can present various advantages, it’s not a one-size-fits-all strategy. This approach can provide significant benefits for investment properties, especially for larger companies or entities dealing with multiple properties or significant real estate operations.
However, it’s important to stress that buying property through a company for the sole purpose of evading inheritance taxes is neither legal nor ethical, and it could lead to serious consequences, including substantial financial penalties.
For individual buyers, or those intending to use the property as a primary or secondary residence, the simplicity and lower administrative burden of personal ownership may outweigh the potential benefits of corporate ownership.
Each scenario has its specific considerations, and what works best will ultimately depend on the individual’s or company’s specific circumstances, objectives, and the nature of the property itself.
At Lawants, we understand that the process of buying property, especially in a foreign country, can be complex. Our dedicated team of professionals, experienced in both Spanish law and international transactions, are on hand to provide guidance and advice tailored to your unique situation. We take pride in delivering personalized service that takes into account all aspects of your situation, ensuring that your property investment in Spain is both legally compliant and financially sound.
