The end of the Spanish Tax Trap for foreigners leaving the country

Posted on Posted in Publications, Tax

The tax Bill proposed by the Government last week has finally put an end to one of the more ominous tax rules of the entire Spanish Tax system. If the tax overhaul proposed by the Government of the Popular Party is passed by the Parliament, the capital gains derived from the sale of the permanent home of the tax payers living the country would no longer be taxable, as long as the proceeds of the sale are reinvested in the purchase of a new home abroad (“rollover relief”).

So far, the rollover relief was only applicable to resident tax payers. In other words, if the tax payer selling the property moved abroad, thus becoming nonresident, the rollover relief could not be applied, because the Non Resident Income Tax Act did not contain a similar provision. This situation arouse in several very common scenarios:

a) A resident tax payer leaves Spain and goes elsewhere, maybe seconded by his employer, or as migrant or just decide to return to his home country, keeping his home in Spain. After sometime abroad he decides to sell his Spanish property to buy a new one in his new location, when he already is nonresident with regard to Spanish taxation.

b) A resident tax payer sells his permanent home and moves abroad with this family during the first semester of the calendar year. According to the Spanish Tax rules, this tax payer would be treated as nonresident for the whole year and therefore not entitled to apply the rollover relief.

c) A less clear scenario arises if the tax payer sells his home and leaves the country during the second part of the year. In this case, he would be treated as resident for the whole year and consequently could, in theory, enjoy the rollover relief. It the new home abroad was purchased while the tax payer was resident (the same year of the year before), then it seems clear that the relief was applicable. But if the new home was purchased after this timeframe, then the application of the exemption was normally challenged by the tax authorities, on the grounds that the deferred capital gain could be taxed under the “exit tax” rules and that the Non Resident Income Tax Act did not provide for any tax relief for the sale of a permanent home.

d) The tax was also levied under the “inpatriates” tax regime. This regime (commonly known as “Beckam Law”) allows alien individuals coming to Spain under an employment contract to be treated as nonresident tax payers, therefore paying a flat tax rate of 24.75 % on their Spanish source income.

Read more: The tax regimen for expatriates

Therefore, as nonresident tax payers they could not apply the rollover relief.In the some of the scenarios outlined above, the tax could be minimized with a careful timing of the facts (the sale, the transfer and the purchase of the new home). But in other scenarios the tax was unavoidable creating a clear discrimination against tax payers leaving the country, in some cases forced by the poor economic environment in the country.

Happily the new regulations will dramatically change the tax treatment. The bill proposed by the Government clearly state that the sale by a non-resident of the home that formerly was his permanent home will not be taxable if the proceeds are reinvested in a new home. The conditions to apply the rollover relief are the same required to resident tax payers, basically, the purchase of a new permanent home within two years from the sale of the former one. There is also a qualifying look back period, whereby the new home can actually be bought up to one year before the sale of the former one.

The details of the new regulation are still to come, but the bill state that the tax payer qualifying for the relief should pay the tax on the capital gain and afterwards, when the purchase of the new home is closed, claim the refund of the tax paid. This is for the Tax Agency to control if the requirements of the law have been fulfilled. However, if the new home has already been bought when the tax return to be submitted for the capital gain is due, then the exemption can be applied directly, not paying anything.

The new regulations allowing the application of the rollover relief to tax payers leaving the country should be more than welcomed, firstly because it is fair and secondly because it is in the best interest of the country, creating a tax friendly environment aiming to promote the investments in Spain.