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Local Spain
11 hours ago
- Business
- Local Spain
EU slams Spain for taxing non-residents on theoretical property earnings
The European Commission has said that it is "discriminatory" for Spain to tax non-resident foreigners on the value of their Spanish homes even if they don't earn income letting them out. According to Brussels, the non-resident tax rule violates the fundamental principles of the European Union, including the freedom of movement of workers and capital. The commission has demanded that the Spanish authorities modify their non-resident income tax (IRNR), specifically when it comes to real estate income. Spanish law states that non-fiscal residents have to pay tax of up to 2 percent of the cadastral value of their Spanish homes, even if they make any rental income from them. This 2 percent of the cadastral value would be 1.1 percent if the cadastral value has been revised within the last 10 years. The Spanish Treasury is essentially just charging non-residents a tax for theoretical income, even if they are not making any money from renting out their second home while not using it. However, this rule also affects Spanish residents who have a second home in Spain. For example, a Spanish fiscal resident who has their habitual residence in Barcelona but has a second home in Málaga would pay the aforementioned tax on the latter, even if they didn't make any money from it while not using it. Therefore, some commentators in Spain have said that the tax is not prejudicial at all for non-tax residents. An unfair tax for everyone perhaps, but not discriminatory towards non-residents or foreigners per se. The reason why Brussels may consider it discriminatory for non-residents with second homes in Spain is perhaps the fact that these people presumably pay any income tax derived from letting it out any of the properties they own in their own country of fiscal residence. There's also the fact that in most cases their Spanish home will be their habitual residence during the periods they spend in Spain, and in many cases their one and only Spanish property. The EU believes Hacienda's non-resident tax on theoretical earnings is incompatible with the Treaty on the Functioning of the European Union (TFEU) and the Agreement on the European Economic Area (EEA). Specifically, the Commission invokes Articles 45 and 63 of the TFEU, which guarantees the free movement of workers and capital. It also cites Articles 28 and 40 of the EEA Agreement, which provide similar guarantees for countries in the extended economic area that are not part of the EU, such as Norway, Iceland, and Liechtenstein. They argue that this tax could discourage non-EU citizens from investing or temporarily moving to Spain and creates a barrier to the freedom of movement. The Commission has urged Spanish authorities to correct the situation within a maximum of two months. If the EU find the response does not solve the problem though, they may consider starting further proceedings at the European Court of Justice. Whatever happens, it certainly indicates what could happen to the Spanish government's plans to introduce a 100 percent property tax on home buyers who reside outside of the EU, a proposed measure to help alleviate the current housing crisis. The so-called 'supertax' suggested by Spain's ruling Socialist party was officially presented in a draft proposal in the Congress in May. The text confirmed that the 100 percent would be applied to the taxable base or value of the property itself, not on the property transfer tax. This would effectively double the price of the property for these buyers. The document specified that it would be a 'State Complementary Tax on the Transfer of Real Estate to Non-Residents of the European Union'. This suggests that EU residency determines this extra property tax, rather than EU citizenship. Incredibly, if a Spanish citizen who lives in the UK wanted to buy a holiday home in Spain, they would be charged this 100 percent tax. In any case, this headline-grabbing 100 percent property tax would have to get approval in the Spanish Parliament, where Sánchez's PSOE have a weakened position, and there's every likelihood that Brussels could once again have the last word.
Local Spain
15-03-2025
- Business
- Local Spain
Inside Spain: Discrimination of non-residents and more droughts
In recent months, Spain's targeting of non-residents has made headlines, especially after Prime Minister Pedro Sánchez announced that he will either impose a supertax or completely ban non-resident buyers from outside of the EU as a means of addressing the country's housing crisis. Now the European Commission has announced that it will take Spain to the Court of Justice of the European Union for keeping a discriminatory tax for non-resident taxpayers which relates to the taxation of capital gains from the transfer of assets. The European Commission believes Spain is violating the principle of free movement of capital by denying non-resident citizens who pay taxes in Spain a possibility that it offers to resident taxpayers. That's because Spanish law allows residents in Spain to choose to defer capital gains tax when the payment for the transfer of assets is postponed for more than a year or is paid in instalments over a period exceeding one year. In this case, the tax is paid proportionally as each instalment is received, allowing for a "cash flow benefit" since only the portion of the capital gains corresponding to the payments made is taxed. In other words, a lower amount of capital gains results in a lower capital gains plusvalía tax rate than if a large bulk profit was made. However, in the case of non-residents, the tax is collected in full at the time of the asset transfer, which prevents non-resident taxpayers from deferring payment of the tax, "even if they receive payment in instalments over time." Non-residents in Spain pay a non-resident income tax called Impuesto sobre la Renta de no Residentes, or IRNR, which can include property rental income tax, inheritance tax, wealth tax and capital gains tax. Brussels already opened a case against Spain for this same issue in December 2021 and issued an ultimatum to amend the legislation by May 2024, but Spanish authorities "have maintained that their tax legislation complies with EU law". According to the European Commission, this differential tax treatment means that non-residents "face a significant cash-flow disadvantage compared to residents." The EC has now given Spain a two-month ultimatum for failing to adapt its rules on withholding tax on capital gains received by non-resident taxpayers to the freedom to provide services. A London law firm has also recently called Spain's Beckham Law a "tax trap" for foreigners, taking full page adverts in respected British financial newspapers criticising the special tax regime's rules as "inconsistent with fundamental European law and human rights". In other news, Spain may be nearing the end of a four-year drought, but it can expect such dry spells to become increasingly "frequent and severe" due to global warming, according to a scientific report published on Thursday. Spain has long faced "semi-permanent water stress" due to its geographic location, admitted the report by climate and oceanography experts from the global Clivar network that studies climate change. But while rainfall in recent years has been around average, "higher temperatures have led to greater atmospheric evaporation, causing longer and more intense droughts," said the report, which reflects scientific consensus on the topic. At the beginning of this century, Spain experienced "the highest frequency of severe droughts in the last 150 years", so it can therefore expect "more frequent and severe drought conditions", the report said. This in turn will increase the risk of wildfires, which will be "more extreme" and occur over a longer period from June to September when temperatures are warmer. They will also hurt two key sectors of Spain's economy, agriculture and tourism. "Optimal conditions for summer tourism will deteriorate" but will improve "during the intermediate seasons", something many of us were already expecting. But it's still worth cautiously celebrating the national weather agency Aemet's announcement this week that the drought that has parched fields and prompted water restrictions since 2021 will soon end thanks to all the abundant rainfall we've had recently. The drought has caused a drop in the harvests of cereals, olive oil and wine, and prompted authorities to draw up plans to have fresh water shipped in by boat to Barcelona, Spain's second-largest city.
