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Two bills have been passed by the Spanish parliament and will take effect on January the 1st, 2007: the new Income Tax Act and the Tax Fraud Prevention Act, both of which will affect non-residents owning or intending to buy a holiday property in Spain.

The Income Tax Act will change certain articles of the Non-Resident Income Tax Act affecting, amongst other things, the capital gains tax rate which will drop from 35% on net gain to 18%, which will be the same rate of tax applicable to the residents. These changes are due to EU pressure on the Spanish Government after receiving reports from foreign taxpayers complaining that the existing system discriminates against non-residents by applying a different Capital Gains Tax (CGT) to them than to residents.

Another significant change in the Law is the withholding tax which a property purchaser must pay to the Tax Office on account of the potential Capital Gains Tax liability of a non-resident seller. This will also drop from the existing 5% of the purchase price to 3%. This reduction is in line with the equivalent reduction for the CGT rate as the resulting tax will be (as of the 1st of January, 2007) substantially lower than it is under existing legislation. Also, do be advised that if a non-resident incorporates property into a Spanish Company it will not be subject to this withholding tax. If payment of the withheld tax is not made by the purchaser, the property will be affected by the lowest of the following sums: either the CGT on the sale or the 3% on the purchase price.

The new Income Tax will do away with the special system regulating Asset Holding Companies. These were companies owned by at least one physical person with most of their assets not affected by economic activities. The letting of property was not considered an economic activity unless the Company had an employee and premises dedicated exclusively to carrying out business. Under the existing system any non-resident owner of real estate in this type of Company would benefit from the same CGT tax rate as individual residents if assets were deposed of by the company after one year. At present that rate is 15%. Under the new regime, for companies with a net turn over below 8M Euros corporate profits will be taxed at 25% up to 120.202,41 Euros profit and the reminder at 30%. There will be a transition period so that owners can opt to wind up the company and acquire the property in their individual names. The payment of Stamp Duty is exempted, CGT and the Plusvalía Tax will be deferred up to the moment the individual transfer the property in future. Individual owners can benefit from the 18% CGT rate when they sell.

The Tax Fraud Prevention Act creates new obligations when it comes to property transactions. First of all, in order for the Land Registry to register a transaction, the Title Deed must include the Fiscal Identification Number (NIF or NIE in case of non-residents) and the means of payment for the purchase price. Also, in order to subscribe to basic utilities (water, telephone, electricity, gas, etc.) it will be necessary to provide the reference number on the property’s Local Rates Bill (Referencia Catastral). Evidently, these measures represent the Spanish Government’s attempt to avoid future money laundering through real estate transactions and to use utility contracts in order to gain more control over the use of real estate property.

This Act includes important changes affecting Offshore Companies. These are companies from a list of jurisdictions (from the so-called Spanish Tax Authorities. These Offshore Companies face severe tax legislation, with a 3% tax on the rateable value of property when the company holds real estate and with transactions they carry out with third parties valued (for tax purposes) at market value. Now the law attempts to close the circle, enlarging the list to include not only companies on the “Black List” but also those from jurisdictions of practically null taxation or those with which Spain has not worked out a double taxation treaty with provisions for exchange of information. The Law will consider Offshore Companies resident in Spain if their main assets consist of real estate property situated in Spain. As far as CGT goes, the existing Non-Resident Income Tax Act provides for the taxation in Spain of the share transfer from a company whose main assets are directly or indirectly (through a subsidiary holding) real estate assets in Spain. Under the new draft bill, if an offshore company is involved, the appraisal of these transactions will be based on the market value of the real estate, regardless of the property price declared and the real estate assets of the company will be affected by the payment of the tax.

The foreseen consequences of the new legislation will be significant. One the one hand, mainly with the drop to 18% in the CGT, properties, even the expensive ones, will be purchased in the name of individuals instead of companies. The reduced rate for capital gains will certainly be an incentive for foreign investors who will be prone to purchase and sell property with a relatively low tax burden. Real Estate and all professionals involved in this sector will also certainly welcome the reduction of the CGT as they will see the benefits of the surge in the real estate market when the new legislation takes effect. On the other hand, to great extent it will help prevent tax fraud.

Please note the information provided in this article is of general knowledge only and is not to be construed or intended as substitute for professional legal advice.

According to Marbella’s New Draft Town Planning Regulation, there are around 30.000 dwellings in the municipality which either have been built or are in the process of being built with illegally issued building licences. Basically, these were given in spite of the fact that they violated the 1986 Town Planning Regulation in force at present. The violations range from constructing houses on land not designated for building, for example in green belts or on land set aside for public facilities, to granting licenses in spite of the fact that buildings did not meet regulations or building codes, for example, building more homes or square metres on a plot than regulations allowed. Many of these dwellings have been completed and have been purchased by bona fide owners who have registered their title in the land registry and inhabit them. Now they have found out that they are illegal despite the fact that their solicitors had checked that the Land Registry showed the developer had a clean title and the latter had obtained a presumed legal building licence. Furthermore, in some instances the property even has a license known as the “First Occupation Licence” which is granted by the Town Hall and allows people to occupy their dwelling. Now some of these buildings are in danger of being demolished as result of court orders that declare their building licences null and void, and this has given rise to certain social alarm.

This situation has been reached by a number of factor. First of all, developers signed planning agreements with the Town Hall and were paying in exchange for building licences that the future Town Planning Regulation was supposed to support. The Town Hall had started working on that future Town Planning Regulation in 1992, however it was never approved by the Andalusian Regional Government (Junta de Andalucía), which must give its approval in order for any Town Planning Regulation to be legitimate. Secondly the chief of Marbella’s Urban Planning Department has committed a number of irregularities together with developers and some of the former Town Counsellors. These irregularities are under investigation and pending trial for those criminally involved in the so called “Malaya Case”. As result of this critical situation, the Spanish Parliament took an unprecedented decision to “dissolve” Marbella’s Town Hall and appoint an interim Committee until the next municipal elections. The Andalusian Regional Government in turn took over in planning matters in Marbella. The municipal elections took place on the 27.05.2007 and the Popular Party has won majority control of the Council. Immediately after the elections the Andalusian Government decided to give back the competence on planning matters to the Council and has given a draft of the town’s new Town Planning Regulation. The Council will examine same and will introduce the changes they deem fit in the document and will proceed for its initial approval.

The legalisation of illegal dwellings by the Town Plan.

The town’s new Town Planning Regulation can legitimately establish conditions that allow many of the buildings constructed with illegal building permits to become legally approved structures. The Town Planning Regulation can determine the conditions under which these buildings can be integrated in the new planning scheme. However, this capacity of the planning commission to legalise illegal buildings is limited in that legalisation cannot be gratuitous, with the sole purpose of avoiding court orders declaring the building licences null and void. This means that new green belts or public facilities will have to be guaranteed in the new Plan to replace of those occupied by illegal buildings, and compensations will have to be obtained from those who benefit from legalisation of their buildings in order to pay the costs of building infrastructure and necessary facilities.

It must be clarified at this point, that the objective of the legalisation does not mean that the new Town Planning Regulation will establish blanket conditions to permit all illegal buildings to be made legal. On the contrary, those developments which are incompatible with the objectives of the new Town Planning Regulation will not be accepted. For example, imagine a site has been set aside for public facilities in the 1986 Plan but now homes have been built on it. Imagine that in the new Town Planning Regulation it’s also been reserved for public use for a train station, for example. Now imagine that land for the train station cannot be obtained at a nearby location. In a case like this, the new Town Planning Regulation may declare that the illegally built homes are incompatible with the town’s plan. The buildings in a situation like this could only be subject to maintenance works but not to refurbishing or improvement works and may end up demolished by a court order.

For each particular site where an illegal building has been erected, the new Town Planning Regulation will determine the conditions for legalisation, if possible. Thus it is essential for the owners of property in this situation to at least have the initial approval of the New Town Plan as soon as possible to see whether their property can be legalised and also to see what the conditions to so might be. The Local Council has indicated that the new Town Planning Regulation will be initially approved in Autumn. It will then be subject to public allegations, followed by a further provisional approval once the aforementioned allegations have been dealt with and then finally definite approval by the Andalusian Regional Government.

What are the possibilities of owners who occupy illegal properties to carry out transactions with them?

Property owners in Marbella may encounter difficulties to carry out a straightforward sale because the purchaser may realise that although the property is registered and has the “first occupation licence”, the bank does not give a mortgage to acquire the property if it detects the property is part of illegal building project. However, this does not mean that one cannot obtain the same outcome by using adequate legal tools. The property can be let to the prospective purchaser for an amount similar to the proposed mortgage instalment. In parallel, a contract can be agreed to dispose of the property by paying a symbolic sum of money as sign of commitment by the purchaser with completion subject to the initial approval of the New Town Plan. The purchaser will at that stage know if the property can be legalised as well as the conditions required to achieve that legalisation and can then take a decision to finalise the purchase. Any economical consequence to achieve the legalisation of the property should be assumed by the vendor and any rent paid by the purchaser can be agreed to be taken as part payment of the purchase price.

In my opinion, most illegal buildings which have been occupied by bona fide purchasers will be legalised as it is highly unlikely that the new Town Council, which has just been appointed, dares not to legalise them for political reasons. Only those buildings which have been stopped at the construction stage and are occupying green belts or public facilities sites or which are totally incompatible with the objectives and values of the New Plan will not be legalised and are likely to be demolished in execution of court judgements.

Therefore, although there may be a degree of uncertainty in what may happen to dwellings in this situation, accentuated by thoughtless statements that they will be pulled down by certain politicians, those who have bought in good faith and who are enjoying the use of the property, could possibly still carry out transactions with their properties by using innovative legal solutions subject to the legalisation that is to take place in Marbella’s New Town Planning Regulation. This together with new democratically elected Council will bring back the necessary normality to Marbella.

Initial Approval of the new Town Plan of Marbella

Subsequent to the foregoing on the 19th July, 2007 the Marbella Council approved initially the new Town Plan. The said resolution was published in the Andalusian Assembly Gazette on the 30th July, 2007. This means that the Town Plan is exposed to the General Public for allegations until the 15th October, 2007. The Town Plan foresees the legalisation of approximately 18.500 dwellings which are at present occupied or about to be occupied by owners. However, the legalisation will be achieved after the owners affected contribute to the acquisitions of green belt or public facility plots in compensation for the irregularities in the granting on the existing building licences. Some 700 dwellings have been spotted not to be legalised on the grounds that they are totally incompatible with the objectives and values of the New Plan. On view of initial approval of the Town Plan we can take for granted that most buildings will be legalised and therefore not pulled down and the question boils down to money. This is how much each of the affected owner will have to contribute to the acquisition of the green belt or public facility site required for the legalisation of the building or urbanisation his/her property is situated in.

In order to assess the sum of money involved it is essential that the owners affected engage a lawyer specialised in planning matters who must in turn seek a report from an specialised architect who should value the cost of acquisitions of the green belt or public facility sites required for the legalisation of their property. With this in hand there should be no problem for them to sell their property so long as a provision for the said costs is made or guaranteed to the purchaser from the sales price until such time all the charges have been paid and the building has been legalised.

On the other hand the lawyer should lodge allegations against the zoning and planning features given by the Town Plan to his client site. It is essential that the owners present allegations against the initially approved Town Plan on an individual basis as the Local Council may consider taking a different approach if they see thousand of owners opposing to same. To this effect the mayoress of Marbella who has approved the Town Plan as had been prepared by the Andalusian Assembly, has made a public statement with her opinion that the owners should not carry the burden of the compensations as this is a problem of the Administrations involved. Therefore, one should not disregard that the entire Town Plan is changed for this reason if there is massive opposition by the owners affected.

Please note the information provided in this article is of general knowledge only and is not to be construed or intended as substitute for professional legal advice.

This article is aimed to give certain tips as to how to proceed with the purchase of a property in Spain in order to avoid the possible pitfalls.

Preliminary Steps

It is advisable for the prospective purchaser to use the service of a reputable Real Estate Company who will help him find a property in a given location to meet both his requirements and budget. A small reservation fee will be demanded in the region of 1.000 to 6.000 Euros which can be given to the Real Estate to take the property out of the market.

However, as a “caveat emptor” no further monies should be given to any person other than a Lawyer as deposit to be held until a prior inspection of the Title and searches have been conducted which show that the property is registered in the name of the Seller free from any charges and encumbrances. To avoid surprises when it comes to development property, the lawyer should carry out searches in the planning department of the local council to verify that the building licence under which the property is being erected has not been challenged for not complying with the existing zoning and building regulations in the Town Plan as this type of information may not have reached the land registry.

The Lawyer should recommend his client to carry out a survey of the property should same be more that 10 years old or if it apparent state may lead to believe that there may be structural defects or the installations may not work properly. The Builder of a property in Spain is liable for any structural defects on the property which occur within ten years from the issue of the Certificate of Completion of Works from the Architect. As from 6.05.2000, the developer must subscribe an insurance policy to cover any structural defect within the said 10 year period. This gives additional protection to the buyer, who will become beneficiary on taking out title to the property, as the insurance company will require that all the constructions works are supervised by a quality control company. However, after the expiry of the said period, any remedy from the builder will be non existent and therefore rectification of any of these potential problems can only be sought from the Seller. Thus in case of old properties, the Survey is of capital importance before the buyer is embarked in the transaction.

The Private Contract

Once the searches have been conducted and the outcome is satisfactory, the Lawyer will negotiate the terms of the contract with the Seller or his Lawyer. There are different types of private contracts to be signed at this stage to secure the purchase of the property and take it out of the market, i.e. deposit contract, contract of purchase and sale, option contract, etc, whereby the purchaser pay a deposit, normally 10% and the vendors agree to sell the property. The completion of the transaction is fixed within a particular time scale, usually four weeks when the balance of the purchase consideration is paid and the Title Deeds of the Property is executed and signed by the parties in the presence of a Public Notary.

The choice of the type of contract is something to be assessed by the Lawyer of the Purchaser taking into account the circumstances of his client and the terms of the negotiations with the Lawyer of the Seller. Please note that not all private contracts will lead to the same consequences as for instance sometimes the Seller may pull out of the transaction paying a compensation, usually double of the deposit paid to the Purchaser who may find out that although he may obtain certain economic compensation this is not what he wanted as he was interested in acquiring a particular property on which he has paid a deposit. This may be avoided if properly negotiated by the Lawyer who may draw up a contract whereby the Seller will be committed to sell the property on the agreed date to the Purchaser once the remaining conditions of the contract have been met by the latter, especially the payment of the balance of the purchaser consideration, therefore not leaving any contractual possibility for the vendor to pull out of the transaction. If the Purchaser fails to complete the contract on the agreed completion date, the deposit or option price paid shall be forfeited.

Purchase of Property under construction

When purchasing a property off the plans or under construction an obvious risk is added to the transaction, i.e. that for some reason the property is not started or once commenced is not delivered on the agreed date. In order to protect the prospective purchaser of any of these eventualities the Lawyer should demand a bank bond or an insurance cover from the developer whereby any amounts handed over by the purchaser plus interest shall be returned to him should the property not be started on a certain date or same is not completed on the agreed date. In these cases the buyer can rescind the contract and execute the Bank Bond or Insurance Cover in order to obtain his monies back plus interest.

The specifications and plans of the property must be agreed and attached to the contract. If the property is within a Complex, another plan of the Common elements where the gardens and pool must be shown should be attached to the contract.

Completion Title

On the agreed completion date the Title Deeds or Escritura is executed by the parties before a Notary Public and the Title is vested in the name of the Purchaser. On completion possession is given to the Purchaser and the signing of the Title Deeds in Spain equates delivery of the property to the Purchaser unless otherwise agreed.

In normal conditions the final payment is effected by the Purchaser upon completion before the Notary. The Tax Fraud Prevention Act creates new obligations when it comes to property transactions. In order for the Land Registry to register a transaction, the Title Deed must include the Fiscal Identification Number (NIF or NIE in case of non-residents) and the means of payment for the purchase price. If the vendor is a non resident the law provides for the obligation of the Purchaser to withhold 3% of the purchase consideration to be paid to the Tax Office as a payment on account of the vendors Capital Gains Tax liability as result from the sale. If this retention of funds is not made and paid the Property conveyed will be affected to the payment of the Capital Gains Tax. This affection will be shown in the Land Registry Books.

The Vendor must produce a Capital Gains Tax Assessment within the next four months from Completion and the said 3% will either be deducted from any Tax to be paid or partially or totally refunded if the amount withheld exceeds the Capital Gain Tax to be paid. Capital Gains Tax applicable to non residents is 18% on the net Gain.

Upon completion the Lawyer must check that all the outgoing expenses on the property are paid up to date and make the corresponding apportion with the Vendors Lawyer to this effect.

The Original Title Deed of Purchase will remain in perpetuity at the attesting Notarys Office who will issue an authorised Copy of the Title Deeds which is the working copy which must be processed by the Purchaser for the payment of the taxes involved and the Registration in the local Land Registry. Payment of the taxes should take place within 30 days of completion and surcharges are applicable therefrom.

Costs

The costs involved in the acquisition of a property in Spain are different if the property is bought from a developer as 7% VAT plus 1% Stamp Duty must be paid than if it is a resale as only Transfer Tax is paid at the rate of 7% on the agreed consideration.

Apart from the tax on the transfer the Purchaser must face the Land Registry fees and his own Lawyer fees. The Land Registry fees are based on a scale and ranges from an average of 300 to 1000 Euros and the Lawyer fees varies from 1 to 2% of the purchase consideration.

In addition to the said strictly costs attributed by the Law to the purchaser, Notarys fees and a local tax known as Plusvalia Tax has to be paid. Although these are the liability of the vendor it is widespread practice that the parties agree, based on a demand from the Vendor, that the Purchaser pay all the taxes and disbursements on the transaction. The Plusvala Tax is a one time payment local tax which levies the increase in value of the land on which the property has been built since the last recorded transfer of ownership and is based on the value of the property for local rates purposes (Valor Catastral). It is strongly advisable for the Purchaser that the amount of this tax is checked by his Lawyer before agreeing the demand from the Vendor that the Purchaser pays same.

In summary the Purchaser has to allow for an additional 11% of the Purchaser consideration to meet the transfer costs involved in the transaction.

Foreign Company Registration

Up to very recently there was a tendency to use Foreign Companies as vehicle to register property being purchased by non resident purchasers in order to avoid the payment of Transfer Tax and Death Duty. These taxes were avoided when the shares were exchanged abroad and the Authorities would not know when the property was changing hands. Nearby Gibraltar did a booming business with the result that there are more companies registered in Gibraltar than inhabitants in this colony.

The Spanish Tax Authorities reacted and passed a law whereby Non Resident Companies owning Real Estate in Spain must pay annually a tax consisting of 3% on the Value of the Property for Rates Purposes (Valor Catastral). The Valor Catastral has no resemblance with the real value of the property and normally does not exceed 50% of this. Only the States, International organisms, Non Profit Making Organisations, Companies which develop business in Spain which can be differentiated from the mere holding of the Real Estate are exempted from the payment of this Tax. When property is indirectly held through the use of a non resident company the exemption of this Tax can be achieved so long as both Company and the Physical Persons who are the ultimate beneficiaries of the capital of the Company are residents of a Country which has a double taxation treaty with Spain with provisions for exchange of information between the Tax Authorities of both Countries. In addition to this, the new Tax Fraud Prevention Act in force since January, the 1st, 2007, includes important changes affecting Offshore Companies. These are companies from a list of jurisdictions (from the so-called Black List) which were subject to prime attention from the Spanish Tax Authorities. These Offshore Companies face severe tax legislation, apart from the 3% tax on the rateable value of property when the company holds real estate, the transactions they carry out with third parties are valued for tax purposes at market value. Now the law attempts to close the circle, enlarging the list to include not only companies on the “Black List” but also those from jurisdictions of practically null taxation or those with which Spain has not worked out a double taxation treaty with provisions for exchange of information. The Law will consider Offshore Companies resident in Spain if their main assets consist of real estate property situated in Spain. As far as CGT goes, the existing Non-Resident Income Tax Act provides for the taxation in Spain of the share transfer from a company whose main assets are directly or indirectly (through a subsidiary holding) real estate assets in Spain. Under the new draft bill, if an offshore company is involved, the appraisal of these transactions will be based on the market value of the real estate, regardless of the property price declared and the real estate assets of the company will be affected by the payment of the tax.

Upon the enforcement of this legislation the use of an Offshore Company to vehicle an investment in Spain will be something belonging to the past.

Spanish Will

For those who purchase property in Spain is strongly advisable to execute a Spanish Will confined to their Spanish Assets as this will avoid backlog to their heirs upon their death who will save to translate, notarise and legalise any Grant of Probate or Letters of Administration issued in their own country and will allow the heirs to simultaneous wind up the British and the Spanish Estates left by the Testator.

In Summary when dealing with purchase of property in a foreign country, irrespective the size of the investment, the prospective foreign Purchasers should be assisted by a Lawyer as they would do in their home country. This will defend their interest before the Vendor and help them in adhering to all legalities and not least important, will give them peace of mind.

Please note the information provided in this article is of general knowledge only and is not to be construed or intended as substitute for professional legal advice.