Clarity is essential when advising foreign nationals who wish to comply with their tax obligations in Spain.
As the person seeking advice is not currently used to deal with legal issues, it is essential to summarise the basic facts in order to avoid misunderstandings.
The first key concept is the residency for tax purposes: an individual who lives in Spain less than 183 days a calendar year is considered as a non resident for tax purposes and consequently he is obliged to pay Non Resident Income tax and also the wealth tax.
However, if such individual lives in Spain more than 183 days a calendar, or if his wife and children live in Spain, then he would be subject to the Tax on personal income as any other Spanish national.
The difference is highly relevant: the non resident tax and the wealth tax are calculated just on the basis of the assets and income obtained in Spain, whilst the Tax on personal income covers potentially all kind of income, even the earnings (pensions, wages) which are obtained and taxed abroad (Great Britain, Germany, etc).
Consequently, the first step is always checking if the client seeking advise can be considered as a resident or as a non resident, as the tax impact will be different.
As the typical case is the non resident who just owns real estate in Spain, the first misunderstanding to clarify is the fact that the lack of proper income does not mean that there is no obligation to pay tax: the mere possession of a property in Spain gives rise to a “presumed income” which is usually calculated on the basis of the value which appears in the Council tax bill.
This means that many foreigners who live in Spain may find themselves in a situation of breach of tax obligations, which the Spanish Agency for tax (Agencia Tributaria Española) is struggling to correct.
In the last year, many purchasers have received a “reminder letter” from the tax office, in English, with a brief explanation of the rules concerning Non Residents Income tax.
However, given that the assistance given by the tax office personnel is not usually in English, it becomes necessary to seek professional assistance, at least for the first time.
As to the rates, these change depending on the kind of income which is obtained: if the property is rented, then the taxable basis shall be the rent obtained during the calendar year, and the rate 24%.
However, different rules apply to the transfer of property (18%), to dividends, and especially to the income which comes from salary and from a permanent establishment, where the individual consideration is necessary.
The wealth tax is calculated on the basis of the net wealth owned by the individual during the calendar year; in contrast to the Non Residents Income tax, the basic value taken into account is the purchase price which usually appears in the Title Deed, and the amount of outstanding mortgage by the end of the year counts as a deduction.
In order to comply with their tax obligations, non residents are obliged to submit different forms depending on the kind of income (212 for transfer of real estate property, 210 in general, etc) and also for each tax although they can also submit one simplified form 214 which covers both, provided that the income received just covers the “presumed income” which arises from the possession and ownership of a property in Spain.
The form 214 is the most used tax form for non residents owning a property in Spain , this form cover both taxes.
1) Property owner’s imputed tax
2) Wealth tax
These taxes must be paid on an annual basis, usually in the end of the year. In order to comply with this tax obligation it is convenient to appoint a fiscal representative before the tax authorities.
This representative will represent you before the Spanish Inland Revenue and he will handle directly the payment of your annual taxes with the tax offices.
Should you fail to pay your wealth and income tax to the Spanish tax office every year, in case of the sale of your property in Spain you will not be able to recover the 3% retention, on the sales price made on account of possible capital gains tax (in the event that there is no profit in the sale), due to the fact that the Tax office will deduct your wealth and income tax for the previous five years, plus accrued interest over the period of time and the corresponding penalty, from any potential reimbursement
Therefore, it is very convenient to appoint a Fiscal Representative who can be your local lawyer in Spain and will inform you about any incidence with the tax office and the payment of your taxes.