Wealth Tax: deductible charges
for non-resident individuals owning real estate in Spain

Nowadays, few people venture to acquire property in Spain without the guidance of an expert tax advisor. It is common knowledge among non-resident investors in Spain that acquiring and holding property in paradise is not cheap and involves the payment of various taxes.

One of the taxes that generates the greatest concern among investors is the Wealth Tax

This tax, in the case of non-residents - subject to a real obligation to contribute - is levied on assets and rights that are located, can be exercised or must be fulfilled in Spanish territory, with  deduction of charges and encumbrances that affect said assets and rights, or can be exercised or must be fulfilled in Spain, as well as debts for capital invested in the aforementioned assets. In other words, every December 31, a "photograph" of the non-resident's net assets in Spain must be taken and taxed between April and June of the following year.

The non-resident is also allowed to opt to apply the Autonomous Community regulations in which the property is located. In the case of a property in the Balearic Islands, for example, a non-resident would always maintain the application of the state regulations, given that the Autonomous Community regulations are more burdensome and would result in a higher tax payable.

Property buyers in Spain should be aware of the Wealth Tax regulations of the area where the property is located

As a general rule, and without prejudice to the special regional regulations that modify such amount, there is a minimum exemption of 700,000 euros, and up to a net value of 700,000 euros, no amount is payable for this tax. It should be noted, however, that in those cases in which there is no tax payable, but the value of the assets or rights exceeds 2,000,000 euros, it is necessary to file a tax return for information purposes only. Thus, a non-resident who is the sole owner of a property with a value for tax purposes of 3,000,000 euros and a mortgage charge of 2,500,000 euros on December 31, although there would be no tax payable, would have to file a tax return stating the property and its value.

The Wealth Tax, which was re-established in 2011 on a temporary basis, is a tax that seems to have come to stay, and even to be extended, with the new Temporary Solidarity Tax on the Great Fortunes presented in the Bill (Solidarity Tax), which aims to ensure that all residents and non-residents with properties in autonomous regions that to date have not been taxed on their net wealth in Spain, will now be taxed.

For this reason, it is essential, prior to the acquisition of a property in Spain, to seek advice and know in detail the tax implications that will derive from it, both for its acquisition and future ownership and / or development.

Mortgage Lionsgate Capital

The ruling of the High Court of Justice of the Balearic Islands (hereinafter, TSJIB), opens up the possibility of including mortgage charges acquired after the purchase of the property

Modifies the current interpretation by the Tax Agency through the resolution of binding consultations submitted by taxpayers over the years, regarding the charges and levies that can be deductible when determining the taxable base of the tax. This ruling opens up the possibility that non-resident taxpayers who have been paying Wealth Tax to date may see their situation change and may even consider requesting a refund of undue income from the Spanish Tax Authorities (as long as it corresponds to non-prescribed tax years).

The fact is that the interpretation which the Tax Administration had been considering was that non-residents who owned property in Spain had to pay tax every December 31 on the property located in Spain, and could deduct the amount of the mortgage debt outstanding at that date, or the debt acquired, provided that it had been obtained for the investment of the property in Spain, i.e. prior purchase of the property and the money had been used for the purchase of the property.

This prevented non-residents who had acquired the property, and subsequently acquired a mortgage loan, which effectively encumbered the property located in Spain, from being deductible, since the administration understood that only those mortgages that had been invested in the acquisition of the property were deductible.

Mortgage Lionsgate Capital

Wealth Tax deductible charges for non-residents

However, and as the TSJIB rightly acknowledges, the Wealth Tax Law states that, in cases of real obligation to contribute, the following are deductible:

  1. Charges and encumbrances affecting assets and rights which are located in Spanish territory or which may be exercised or must be fulfilled in Spain.
  2. Debts for capital invested in the aforementioned assets.

The law includes as deductible, and separately, the deduction for charges and levies and for debts for capital invested. And only for the latter - those that do not involve a charge, such as a mortgage - does it require that they be for capital invested in the assets in question.

Thus, the limitation on the part of the administration to allow the deduction of a mortgage if there is a clear and unequivocal relationship between the deductible charge or debt (mortgage) and the asset whose value decreases (real estate) to the extent that the acquisition was not made with such funds, has no regulatory support whatsoever. In the words of the Court, it is emphasized that "if the legislator had wanted only the charges linked to the investment made for the acquisition of the property to be deductible, he would have specified this. On the contrary, in point Four he indicates that charges such as the litigious charge are deductible, which distinguishes them from debts for loans received for their acquisition. A distinction which results from the expression 'as well as...'.

Therefore, regardless of the purpose of the mortgage, it is indisputable that the value of the property is diminished by the encumbrance of the mortgage, which must be reflected in the amount to be paid for Wealth Tax. The mortgage charge, as an encumbrance affecting the property, reduces its value to the extent that the right of ownership of the property is limited as it is subject to the burden of the duty to respond to a possible breach of the guaranteed obligation, and must therefore be deducted from the taxable base of the Wealth Tax.

Thus, as long as there is no fraudulent purpose, both prior to the acquisition and after the purchase of high value properties, it may be convenient from a tax point of view to finance with a bank loan with a mortgage guarantee. In this way, certain tax advantages can be obtained, and not only in Wealth Tax, but also in Inheritance and Gift Tax and Non-Resident Income Tax (provided that they reside in another state of the European Union or turopean Economic Area and in this case, it is prior to the purchase of the property).


Article by Aina Colom

International Department Associate at Joan Cerdá Tax Advisors

Joan Cerdá is a tax advisory firm based in the Balearic Islands with more than 50 years of experience in advising international and national companies, individuals and family groups. If there is one thing that defines them, it is professionalism, teamwork, and the pursuit of excellence, which together with practicality and efficiency, has made them a leading company in the sector.

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