Transfer TAX on Real Estate Investment in Spain
When transferring real estate, if the seller is a person or a company, “Transfer Tax” becomes due (in UK better known as “Stamp Duty Land Tax”).
Since it is a tax which the state delegates to the autonomous governments, the latter can set the tax rate. In the Balearic Islands, this tax is progressive and the minimum tax rate currently stands at 8% for real estate up to a value of €400,000 and for real estate whose value exceeds €1,000,000 up to a maximum tax rate of 11% can be charged.
The taxpayer is the purchaser or buyer and the subject of taxation is the “real value” of the property to be transferred.
The definition of what is meant by “real value” has been much discussed. The jurisprudence of the Supreme Court has defined it as the “market value”, meaning the price that an independent buyer would be willing to pay under normal market conditions.
Obviously, it is very difficult to determine the market value for a property purchase or sale by means of objective criteria, since many different factors influence this.
Therefore, many foreign investors who have purchased a property at a purchase price freely agreed with the vendor are surprised to later receive a notification from the tax office after the acquisition and payment of the tax rate, stating that a file for the tax review of the value reported has been opened, indicating that the declared selling price is below the “real value”, and with a request to settle the difference with the corresponding default payment (there is no sanction applicable in these cases).
Example: A property is purchased at a price of €300,000 and after application of the corresponding tax rate (8%) and payment of the resulting amount of €24,000, the Autonomous Financial Authority notifies the buyer of the opening of a file for verification of the value and informs the buyer that the real value of the property is €350,000 according to the valuation carried out by the autonomous tax office, and that a subsequent payment of the difference is required, in this case €50,000 x 8% = €4,000 plus interest on arrears from the end of the voluntary payment period for payment of the tax until the date of the final payment.
In many cases, the justification for the above-mentioned value checks is that they are based on the references obtained from the cadastral register by automatically applying a coefficient multiplier or, in the case of acquired real estate financed with a mortgage, will be based on the notarial mortgage deed estimates.
Frequently, standard values are used as the expert opinion of the above-mentioned value check, which is usually annulled if taken to court and often is not reclaimed by the Autonomous Financial Authority. This is the case when, for example, the property is acquired in a poor state which would oblige a government official to undertake a personal inspection of the property but which is never actually carried out due to staff shortages or inactivity.
According to law, it is possible to apply for an estimation of the property value before acquiring it, which allows the buyer to know the minimum reference value which may not correspond to the market value and to which the financial authority is bound for a certain period.
Example: In the event that an estimate of the value of a property that is the object of sale is requested from the tax office with the resulting minimum reference value of the property amounting to €375,000, the tax would be calculated on this amount, even if the purchaser bought the property for €350,000. Nevertheless, if the sale was ultimately agreed at €400.000, the tax office would consider this last value as market value and not the minimum reference of €375,000, so that the tax on the sales price agreed with the seller would be calculated on the higher value.
Once the real estate purchaser has been informed of the opening of a value verification file by the tax office, together with the accompanying provisional proposal for application and payment, the purchaser can object to it, stating the reasons why the property does not comply with the provisional calculation suggested. It is important to point out that every particular case should be properly analysed, not only to calculate the potential for success, but also with regards to the lawyers, architects or consultants who must be paid by the taxpayer, and therefore, taking all this into account, it would not be considered advantageous to file an opposition to the provisional proposal for regulation by the Autonomous Financial Authorities. This article has been posted by Solicitors & Tax Advisors Bonilla & Partners SLP. Many thanks for that.