A few months ago, in the article about the Wealth Tax deductible charges, I explained the possibility of reducing the tax burden in Wealth Tax (hereinafter, WT) of non-residents, thanks to the ruling of the High Court of Justice of the Balearic Islands (hereinafter, HCJBI), where it was understood as admissible the reduction of the taxable base of the WT with the mortgage charges, regardless of whether these had been destined to the acquisition of the property located in Spain, and which allowed a mortgage to be considered after the acquisition of the property.
Unfortunately for the non-resident taxpayer, the Supreme Court (hereinafter, SC) has taken a short time to modify the previous criteria.
Let us recall that the Wealth Tax, in the case of non-residents, applies annually on assets and rights that are located, can be exercised or are to be fulfilled in Spanish territory, with the right to deduct:
The HCJBI understood that the wording of the law does not require a specific destination for the funds obtained from a loan with mortgage guarantee that encumbers a property located in Spain, in order to be deductible when calculating the taxable base of the WT. In their opinion, the WT law allows for the deduction of charges and encumbrances on the one hand (regardless of whether the charge was obtained to finance the purchase of the property or subsequently); and debts for invested capital on the other. Only for the latter - debts that are not encumbrances, such as mortgages - was it required that the purpose was the acquisition of the property. In my opinion and being aware that this is not a trivial matter, this interpretation was the correct one.
The recent ruling of the SC modifies the criterion considered by the HCJBI regarding the deductible charges of non-residents owning real estate in Spain. However, and without wishing to expand on the explanation of the functioning of the Spanish procedural system, the HCJBI ruling was appealed by the General State Administration as they did not agree with the ruling, the SC admitting that the question was of interest to the court, leaving it to the SC to analyze whether it was appropriate for mortgage loans to reduce the taxable base of the WT of non-residents when these were granted after the purchase or reform of the property, the funds received not having therefore been used for the property´s acquisition.
The Supreme Court understands that only in cases where the financing (including a mortgage) has been obtained and used for the purchase of the property in question will it be allowed to reduce the WT base, and indicates: "when it has not been used for the acquisition of the property, or the investment in it, it cannot be deducted from its value for the purposes of determining the WT base by real obligation", reiterating the ruling established by this doctrine.
Therefore, one of the ways to reduce this tax payment is thus no longer valid. Not any mortgage on the property will lower the value of the WT, only mortgages contracted either to purchase the property or to invest in its refurbishment will be taken into account.
The SC therefore differs from the criterion adopted by the judgement handed down by the HCJBI, which is without effect and obliges taxpayers liable for WT to consider the criterion adopted by the SC.
This doctrine can be extrapolated to the Solidarity Tax on Great Fortunes, a new tax that will only tax the part of the taxpayer's wealth on the amount that has not been subject to the corresponding regional taxation, with its validity limited to the financial years 2023 and 2024.
Thus, with the new SC ruling, mortgages obtained prior to the acquisition of the property are the only ones that can be considered for the reduction of the taxable base for WT, and furthermore, there are several interesting tax implications to be considered by non-residents when mortgaging at the time of purchase:
Of course, there are other advantages from a financial point of view why an investor should consider taking out a mortgage when purchasing a property in Spain, so it is essential to contact specialist mortgage brokers, such as Lionsgate Capital, to obtain competitive interest rates, maintain maximum liquidity and diversify your portfolios intelligently.
I understand that it is of interest to the reader to know that the Spanish tax authorities have focused on this tax, with the following analysis being carried out by the Tax Administration in the non-resident tax checks:
It is essential for a non-resident to have a tax residence certificate from their country, signed for the purposes of the Double Taxation Treaty (hereinafter, DTT) signed with Spain, and to analyze which assets and rights will be subject to taxation in the Spanish WT by virtue of said agreement.
Analyzing possible ways of non-taxation or exemption in the WT by the non-resident is a matter that should be entrusted to the tax advisors in Spain, who, among others, will review the following aspects:
- Analyze whether the applicable DTT includes rules on asset taxation:
Normally, the DTTs signed, establish that a non-resident taxpayer without a permanent establishment in Spain is not taxed in this territory for his/her non-real estate assets, since the taxation power is exclusive to the State of residence. This means that current accounts, shares or holdings in non-real estate companies are not subject to taxation in Spain.
However, there are countries with which there are no DTTs or, if there are, there are no rules on taxation of assets, which would mean declaring all assets and rights in Spain. Countries with DTTs with which WT is not regulated, and therefore all the assets of non-residents are declared in Spain, are Albania, Andorra, Australia, Brazil, Cape Verde, Qatar, China, South Korea, United States, Philippines, Finland, Ireland, Italy, Japan, Malta, New Zealand, Portugal, Romania, Thailand, Turkey, Vietnam, Barbados, Hong Kong, Jamaica, Malaysia, Oman, Pakistan, Dominican Republic, Senegal, Singapore, Trinidad and Tobago, and Trinidad and Tobago.
On the other hand, other signed DTTs, although they regulate WT taxation in their respective articles, will not start to take effect until these countries introduce WT taxation in their tax systems, so that all assets located in Spain of the non-resident should be declared. These are: Saudi Arabia, Croatia, Egypt and Nigeria.
- Analyze whether the applicable DTT includes indirect ownership of real estate through foreign companies:
Recently, and with effect to the WT return for the tax year 2022, the WT Law has been amended to include as a taxable event the ownership of real estate through interposed foreign companies. The requirements for them to be subject to taxation are: (i) they are shares in companies not traded on organized markets and (ii) at least 50 per cent of their assets are made up, directly or indirectly, of real estate located in Spanish territory.
This does not prevent the nonresident's DTTs of residence from preventing Spain from considering such securities in the WT return. The DTTs that do not include taxation in Spain for holding real estate through a foreign company are currently the following: Algeria, Argentina, Austria, Bolivia, Bulgaria, Canada, Czech Republic, Chile, Costa Rica, Colombia, Cuba, Cyprus, Ecuador, United Arab Emirates, Estonia, Greece, Netherlands, Hungary, Indonesia, Iran, Latvia, Lithuania, Macedonia, Morocco, Poland, Russia, Serbia, Slovakia, Sweden, Switzerland, Tunisia, and Venezuela.
Residents in other countries, with or without a DTT, should consider including in their taxable income the shares of a foreign company whose main assets are real estate in Spain. This would be the case, for example, for residents in Germany, the United Kingdom or France, among others.
- Exemption for holdings in family companies:
It is possible to obtain the so-called family business exemption, also applicable to non-residents, for those companies that are not considered to be patrimonial companies, provided that a certain percentage of shareholding is held by the taxpayer and/or his/her family, and that one of the members of the family group receives remuneration for management functions in the company, and that this remuneration must reach a certain level in relation to other income.