Spanish Prime Minister Pedro Sánchez grabbed international headlines this week when he announced that his government intends to dissuade non-resident non-EU nationals from buying homes in Spain by taxing them more.
"We have decided that we are going to limit the purchase of properties by non-EU foreigners from outside the EU," the Socialist leader told the Spanish Congress.
It’s one of 12 measures proposed by the ruling Socialists to address the country’s housing crisis, though still quite light on detail. It remains unclear exactly how the Spanish government plans on doing this, but Sánchez stated that for non-resident, non-EU foreigners “the tax burden will be up to 100 percent of the value of the property."
READ ALSO: Q&A - How and why does Spain want to stop foreigners from buying property?
How Spain's 100 percent tax on non-EU house-buyers will work
Initially, experts thought this 100 percent value tax could be done through any number of different taxes including capital gains or stamp duty. Some suggested that in all likelihood it would have to be a new type of tax aimed specifically at non-residents from third countries.
Some described the proposal as "absurd" and possibly "illegal". Alejandro Del Campo, lawyer at DMS Consulting in Mallorca, told The Local: "It would be incomprehensible if non-residents from non-EU countries, for example the United Kingdom, who want to invest their capital in the acquisition of properties located in Spain were now discriminated against."
The tax may be raised, Del Campo added, "by imposing a higher tax on the Tax on Onerous Property Transfers that is paid on the purchase of second-hand homes (which is surely the measure they are thinking of), or by increasing the VAT on the purchase of first-hand homes, for which 10 percent is currently paid."
READ ALSO: Why Spain's limit on foreigners buying homes is 'absurd' and 'illegal'
The measure, which although unprecedented in Spain has been rolled out in other countries such as Canada and Denmark, is still being put together on a policy level, according to Spanish media reports.
However, the two main options on the table, government sources say, are some sort of restructuring of property transfer tax (known as ITP in Spain) or by creating a new tax altogether.
On the former, reforms to ITP could prove tricky not only legally but politically as the tax is levied at a regional level. The state sets the minimum ITP rate at six percent and then each region chooses how much more it wants to charge.
The Socialists are in government at national level, but the centre-right opposition Partido Popular (PP) has committed to reducing the ITP rate in regions it governs to 4 percent. That would include Andalusia, Aragón, the Balearic Islands, Cantabria, Castilla y León, Extremadura, Galicia, La Rioja, Madrid, Murcia and Valencia, many of which have long popular destinations for foreign property buyers.
The other option is to create a specialist new tax which would only be levied on non-resident non-EU nationals.
This could operate like the wealth tax or the tax on large fortunes, which are managed by the state and the regions, respectively. This, if created, would create in practice an almost total veto on property purchases by non-EU nationals, apart from those willing or able to pay 200 percent of the market value of a property.
READ ALSO: What’s the difference between Spain’s wealth tax and the solidarity tax?
There are still many unknowns. For example, what will happen with new build properties? Purchases of new builds in Spain do not pay ITP, but a fixed rate VAT of 10 percent. It's also unclear what would happen if the buyer is a limited or public limited company with Spanish or European tax headquarters.
Put simply, the Spanish government has taken a big step by announcing this measure but the fine detail still needs to be worked out.
What is ITP?
ITP stands for Impuesto sobre transmisiones patrimoniales. It’s essentially a type of transfer tax that you pay when you buy a second-hand property or a car for example. It can also be levied on corporate transactions.
The majority of the time, you will hear about it if you are buying a home in Spain. It’s referred to as a transfer tax because it’s a fee you pay when wealth is transferred from one person to another.
How is ITP calculated?
ITP is levied on one of two figures – the price in the property deeds or the cadastral value found in the Cadastral Registry. Whichever figure is the highest, will be whichever the calculation is based on.
How do I pay ITP?
Generally, this tax must be paid when you purchase the property and sign the deed before a notary. But you have a total of 30 days in which to pay it after signing the contract too. If you don’t do it through the notary when you sign the deeds, you must go to the Delegation of the State Tax Administration Agency and fill out forms 600, 620 or 630 to pay it.
READ MORE: How and why does Spain want to stop foreigners from buying property?
Comments (2)