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The Spanish government has recently prepared the draft of a legal modification of the wealth tax, which is likely to be approved before the end of 2022, and which may negatively affect those who own real estate in Spain, directly or indirectly, through foreign companies. (It would affect residents in Germany, France, UK, but fortunately not residents in Austria, Switzerland, Holland, as we will explain later).

The wealth tax has always been an obstacle for non-residents in Spain wishing to acquire a luxury or high-priced property in Spanish territory, and therefore tax advisors have had to recommend strategies to lessen or avoid the high tax burden that the wealth tax may entail.

One strategy that has been frequently used to avoid wealth tax on the purchase of real estate in Spain has been the direct purchase through foreign (non-Spanish) companies, or through Spanish companies that are wholly owned by non-Spanish companies.  The High Court of Justice of the Balearic Islands in its ruling of December 3, 2020, and the Spanish Treasury itself in tax consultations V2070-21 and V1947-22 recognized that effectively if real estate was acquired directly or indirectly through a non-Spanish company, there was no taxation for wealth tax, The reason for this is that the non-resident individual was considered not to have direct assets in Spain, but rather to be the owner of a non-Spanish company, which directly or indirectly had real estate located in Spain in its assets, and therefore was not subject to wealth tax.

Unfortunately, the voracity of the Spanish Treasury has no limit, and in case of approval of this legal change, of which we only know a draft that may or may not be definitive, the Spanish Treasury will subject to wealth tax the holding of shares in these non-Spanish companies, by establishing that shares in non-Spanish companies that directly or indirectly have an asset composed of more than 50% of real estate located in Spain will be considered as wealth located in Spain.

In order to calculate whether more than 50% of the assets of such companies are comprised of real estate, with respect to the real estate located in Spain, the book value of the real estate will be replaced by the higher of the following values:

  1. A) The purchase price.
  2. B) The cadastral value
  3. C) The value verified by the Administration in an inspection of values.
  4. D) The so-called reference value that has been recently approved by the government (only applicable to properties acquired as of 1.1.2022).

And for the computation of the rest of the assets of these companies, the book values will be substituted by the market values.

Therefore, it is essential, in order to avoid wealth tax, that less than 50% of the assets are composed of real estate in Spain.

We do not yet know which is the final text that can be approved, but the current situation is very worrying, since if this draft is approved, many owners of luxury real estate in Spain would be subject to taxation, with a very serious and very high tax burden. A totally unfair tax burden that does not exist in any other country in Europe, and that could be a serious obstacle to foreign investment in Spain.

If this modification of the wealth tax is approved:

 What can we do to avoid wealth tax?

Undoubtedly contact a tax advisor and add assets to the assets (even if they are associated to debts) that allow real estate in Spain to be less than 50% of the assets.

In addition, taking into account that the wealth tax is due on December 31 of each year, our interpretation is that it would be sufficient that the real estate located in Spain has a valuation of less than 50% of the assets, on that date.

 Does it affect all companies with more than 50% of their assets comprised of real estate in Spain?

No, there are certain companies with economic activity that can benefit from an exemption if they meet certain requirements, but this does not apply to the owners of a residential property used as a holiday home or second home, since they are not considered to be carrying out an economic activity.

 Does it affect all non-residents in Spain?

No, it affects residents in many countries, such as Germany, United Kingdom or France, but not residents in Switzerland, Austria or Holland, since the double taxation agreements with these countries do not allow these types of companies to be subject to wealth tax.

What do we recommend?

Undoubtedly contact a tax advisor specialized in taxation of non-residents, and for this purpose, our office is at your disposal.

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