Taxation in Spain
IRISH TAX ON OVERSEAS PROPERTY LETTINGS
If you are resident and domiciled in Ireland you must pay tax on your worldwide income. This includes rental income from foreign properties.
Resident
An individual will be regarded as resident in Ireland if they spend at least 183 days in a tax year in Ireland, or if you spend 280 days in the State over a two year period.
Domicile
Generally an individual's domicile is the country in which they were born, "domicile of origin". An individual can acquire a new domicile, "domicile of choice", but they can never have more than one place of domicile. It is very difficult to change you place of domicile.
Tax Treatment
The rental profits on foreign property assessable to tax are calculated in the same way as Irish rental income. Certain allowable expenses are deducted from the Rental Income due in the year.
Note rental income is assessed on the income earned in the year, not what was actually received.
Although the income is derived from rent, as it is from a foreign source, it is taxable under Schedule D Case III (foreign income); however, the rules for calculating the taxable income are the same as Irish rental income.
Unfortunately, as the rent is foreign source, any rental losses or property based tax reliefs from Irish property cannot be utilised to reduce the taxable income.
Expenses and allowances - what counts?
You can deduct that same expenses and allowances from overseas property as from Irish rental property, including travel costs. In order for an expense to be allowed it must be incurred wholly and exclusively for rental purposes. Therefore, expenses, including mortgage interest, management expenses, accountancy fees, repairs and insurance are generally deductible in determining taxable foreign rental income.
What happens if you've already paid tax on the income abroad?
Currently Irish has taxation agreements with 44 countries. Thus if you pay tax in a foreign country with which Ireland has an agreement a credit is given against the Irish Tax for any foreign tax arising.
Note however, that the credit system will not give rise to a refund of tax. If the foreign tax is greater than the Irish tax, then the credit offset will result in no additional Irish tax being paid.
Normally, if the income arises in a country with which Ireland does not have a tax agreement the foreign tax paid is treated as a deduction against the Irish taxable income.
Note that the rules for calculating taxable rental income differ significantly between countries. Thus the taxable rental income in the foreign country is not always the same as the taxable foreign income in Ireland.
Tax if you dispose of your overseas property
Again if you are resident and domiciled in Ireland you are subject to Irish Capital Gains tax on your worldwide capital disposals.
If you are non-domiciled you are only liable to Irish Capital Gains Tax on the amount of monies remitted to the State.
In addition, to the Irish Capital Gains Tax liability an exposure to foreign Capital Gains Tax may also arise. Again, similar to the taxation of rental income, the rules for calculating the taxable gain differ between countries.
If the property disposed of is situated in a country with which Irish has a Capital Gains Tax agreement, then credit is normally given against the Irish tax for the foreign tax paid. However, a word of caution is that some of the very old tax treaties, e.g. France, do not contain a Capital Gains Tax provision, thus no credit is available for the foreign tax paid.
Capital Acquisitions Tax
A gift or inheritance made by an Irish resident and domiciled person will come under the gift and inheritance tax rules in Ireland. It is irrelevant where the property, the subject of the gift or inheritance, is situated or where the beneficiary resides. The level of CAT to be paid depends on the relationship between the disponer (the person making the gift or inheritance) and the beneficiary. A charge to gift or inheritance tax may also arise in where the foreign asset is situated. Unilateral relief is available for foreign tax suffered to ensure that the Irish taxpayer does not suffer double tax on the same transaction, where a tax treaty in not in force.
Other Issues
In many jurisdictions, it is recommended, or even a requirement, that property be acquired through a corporate structure. Careful consideration should be given to such arrangements, to ensure that the tax implications are fully understood. For example, S.590 TCA'97 will impose a charge to Irish Capital Gains Tax on Irish resident participators on gains accruing to non-resident companies.
In addition, gains arising out of certain "off-shore funds" are liable to Income tax at 42%. Funds in EU/EEA and OCED countries with tax treaty agreements are taxed at 23%.
This document, which is intended as a general guide only, is based on current legislation and revenue practice in Ireland and in foreign countries, and may be subject to change. Formal advice from foreign tax professionals is advised.
For further advice on the tax implications please contact a member of the Anne Brady McQuillans DFK, Tax Department.
Niall Grant - Tax Manager - ngrant@annebrady.ie , Tel: 01-4786620
Lisa Ahern - Ass. Tax Manager - lahern@annebrady.ie, Tel: 01-4786617
For further information regarding properties aboard, please contact Aquarius Properties Abroad. Tel 01-2782900, or email noreen@aquariusproperties.com .
SPAIN
Residency
The Spanish tax year runs on the calendar year and Spanish residents have to pay income tax (Impuestos sbore personas fisicas) on their worldwide earnings when they complete a declaration (Declaracion de la Renta) during May or June of the following year.
A Spanish resident is defined as someone who spends more than 183 in a year in Spain whether the individual has a residence card or not.
Non-residents are taxed on income from Spanish sources only and may be liable for income tax, capital gains tax and inheritance tax. Like Ireland, the Spanish tax system is based on self assessment.
When a property is owned by a married couple or by various people, each one is defined as an independent taxpayer, which means that an individual tax return must be separately filed by each of the co-owners.
Fiscal Identity Numbers
If a non-resident owns Spanish property a fiscal identity card is compulsory (NIE). The number identifies you to the Spanish taxman and is required when you pay your taxes or have any dealings with the Hacienda (Spanish tax office).
To obtain a NIE, one must go in person the nearest police station with a foreigners' department (comisaria), along with a passport and a photocopy of it. Forms must be completed at the comisaria. Check with the comisaria how long the process will take as it varies from a few days to a few weeks.
Obtaining this NIE is this first thing you should do if you plan buy a property (whether resident or non-resident). This system however is currently under review, and may even be abolished.
Income Tax - IRPF
A non-resident is taxed in Spain on income arising from Spanish property at the rate of 25% on gross income without any deductions of expenses or interest costs. It is the tenant who has an obligation to file a tax return and to pay the 25% to the Agencia Tributaria (tax office). The tenant should withhold 25% from the rent payment to the non-resident landlord.
The landlord must ask for a copy of this return in order to prove that the tax has been paid, and it will also be required as evidence of overseas tax paid for any double tax claim. The rental income remains liable to tax in Ireland with a credit available for Spanish tax paid.
For non-residents, the Spanish tax authorities levy a deemed rental income tax for urban real estate not rented out or not used as a permanent residence (holiday home). Spanish Tax Authorities will charge at tax rate of 25% of the 1.1% of the reviewed (before 1994) cadastral value or 2% of the non reviewed cadastral value of the Spanish property.
Property Tax
IBI (Impuesto de Bienes Inmuebles) is the name of the local property tax. This tax is levied annually on owners of real estate or on holders of rights in them thereon based on the Cadastral value determined pursuant to the Property Cadastre regulations. IBI´s tax period is annual year and is due to the first day of the tax period.
For urban and agricultural properties, the value of the properties or the cadastral value is calculated by the Property Cadastre.
IBI has a maximum tax rate of 1.1% of the cadastral value for urban properties and 0.9% for rural properties. For example, Madrid's urban property tax rate is 0.512% and rural property tax is 0.6%. However, Local Tax Authorities could increase the rate percentage in accordance with the number of inhabitants and the services given.
Often the IBI (and other local taxes) are collected by provincial tax collection agencies.
Stamp duty & VAT
These taxes only apply if the property is being sold for the first time and the seller is a property developer. The Sales Tax (known as IVA in Spain) is 7% on the price of the purchase, and the Stamp Duty is fixed between 0.5% and 1.5% on the price of the purchase, depending on the Spanish Autonomous Region in which the property is located. If any deposit is paid before completing of the sale, this deposit will be subject to VAT (7%) at the moment of its payment.
The buyer always pays VAT and Stamp Duty. VAT is paid directly to the seller, and the Stamp Duty is paid to the tax office. Usually the Stamp Duty is paid by the lawyer representing the buyer through a previous provision of funds.
Transfer Tax (Impuesto Sobre Transmisiones Patrimoniales -ITP)
This tax only applies if the property has been bought and sold before. The amount is 7% (in some places it is 6%) on the price of the purchase, depending on the Spanish Autonomous Region in which the property is located, and the buyer always pays the tax.
In this scenario, if any deposit is paid before completion of the sale it is not subject to the transfer tax. However the full amount of the transfer tax still has to be paid upon completion directly to the tax office.
Usually the buyer pays this tax to the lawyer who deals with the acquisition on behalf of the buyer. The lawyer uses to require the buyer to advance a provision of funds.
Wealth tax
Along with personal income tax, non-resident property owners are also liable to Wealth Tax (Impuesto sobre el Patrimonio). Wealth tax is a direct tax levied on assets and property (car, houses, bank accounts etc) located in Spain as at 31 December every year. The value of the house for the purposes of calculating wealth tax is the higher value of:
- The cadastral value which appears on the Real Estate Tax Receipt
- The price of purchase value
- The value given by the administration in an evaluation carried out for tax reasons.
Tax rates are progressive depending on the type of the property, ranging from 0.20% to 2.50% according to the Spanish law applicable; national or regional law.
Capital Gains Tax
When a Spanish property is sold, Spanish CGT arises on the difference between the sales proceeds and the purchase price, minus the inflation established each year by the Spanish Government General Budget Law. CGT is applied at a rate of 18% for non-residents. Withholding tax of 5% of the sale price is retained by the purchaser and paid directly to the Spanish authorities. This withholding tax is held on account and offset against the actual tax liability arising on submission of a Tax Return.
Local Capital Gains Tax (Plusvalía)
A local/municipal tax applies on increases in the value of land upon which urban properties are located, and is levied at the time of transfer of ownership. It is calculated on the basis of the 'valor catastral' of the property (an administrative value that is usually lower than the market value). The amount due will depend upon how long the seller has owned the property, with the tax increasing with duration of ownership.
By law the vendor is obliged to pay this tax but it is common practise for the parties to negotiate on who is to assume responsibility for this tax. For more information on the Irish Double Taxation agreement with Spain please click here