The Net Wealth Tax is a tax on the net assets held by individuals in Spain. It affects differently Spanish residents and nonresidents. Resident taxpayers must pay the tax on their worldwide assets, regardless of where they are located. Nonresident taxpayers are taxed only for their assets located within the Spanish territory (real estate located in Spain, bank accounts open in Spanish banks, shares of Spanish companies…). The tax only targets individuals, not corporations or any other incorporated legal vehicle (foundations, reits…). Thus, foreign companies owning real estate in Spain did not pay Wealth Tax. But this is going to change soon.
To elude the tax, many foreign investors chose to buy Spanish real estate (and for, that matters, other assets) in Spain using foreign companies. The shares of foreign companies owning real estate in Spain were beyond the scope of the Net Wealth Tax because the shares were foreign assets held by nonresident individuals. This was a perfectly legal way to shield Spanish assets from the Net Wealth Tax. Many foreign investors, specially highflyers buying big ticket Villas in the Balearic Islands or Marbella, followed this “least taxed route”.
The Tax Office, perfectly aware of this tax strategy, had challenged it many times on the grounds of the general anti abuse clause. The matter was a disputed one. But in 2022 a landmark Judgment of the High Court of the Balearics Islands overruled a Tax Court ruling which had upheld a Tax Office assessment for the Net Wealth to the owners of a foreign Company owning real estate in Spain, Mallorca. The High Court understood that foreign owners of foreign Companies owning real estate in Spain were beyond the scope of the Tax.
The Government reaction was a fast one. They introduced an amendment in the Law, which will come into force in 2023, considering that shares of foreign Companies owning real estate in Spain should be deemed to be assets located in Spain, and therefore subject to the Spanish Wealth Tax.
Shares of foreign Companies owning real estate in Spain will only be subject to the Wealth Tax on their Spanish real estate value and if it represents 50 % or more of its assets. The Law states that the value of the real estate for this test will not be the book value (net asset value) but rather the value for tax purposes of the real estate. This is the higher of (i) the purchase price (ii) the cadastral value and (iii) the market value at the purchase date if audited by the tax authorities for the Stamp Duty Tax. Loans to buy the property, secured or not by the property, can be deducted from these values to assess the taxable base of the real estate.
This legal development is a game changer which will require an in-depth analysis on the legal structures by which real estate in Spain is owned. Specially, as in 2023 other even most dangerous Tax has been introduced targeting the net wealth of Ultra High Net Worth Individuals.
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This post has been written by Emilio Alvarez Arjona for informative purposes. It does not contain, and does not intend to be, legal advice in any sense and does not represent an invitation to act or not to act in any manner.