As you would expect, residents in Spain with propertiy abroad must comply with a series of tax obligations, which we at Taxmind would like to explain to you. This includes, of course, declaring the income and capital gains generated by these properties, as well as complying with current Spanish regulations, which we will now discuss.
The current tax framework establishes the requirements for determining residency and the resulting implications. If, as residents of Spain with property outside the country, we fully understand our tax obligations, we will avoid penalties and any other negative tax repercussions.
Determining tax residence in Spain
Firstly, we must identify our tax residence in order to correctly declare our income and comply with tax regulations in Spain. This categorisation is based on several criteria established by current regulations.
Tax residency requirements
To be considered a tax resident in Spain, you must meet one or more of the following requirements:
- Residence in Spanish territory for more than 183 days in a calendar year.
- Have the main focus of activities or interests in Spain.
- The family, consisting of spouse and minor children, must reside habitually in Spain.
Implications of being a tax resident
Being a tax resident means that all income generated worldwide must be taxed, including income from properties abroad. This requires filing an annual income tax return, in which all earnings and rental income must be reported, regardless of their location.
Tax resident in Spain versus non-resident foreigner
The main difference between a tax resident in Spain and a non-resident foreigner lies in taxation. Non-resident foreigners are only required to pay tax on income generated in Spanish territory. Residents, on the other hand, must pay tax on their total global income, which includes income obtained in other countries.
Therefore, being considered a tax resident in Spain entails a series of additional responsibilities compared to those who are not tax residents here. This translates into greater scrutiny by the Tax Agency and the need to comply with the gradual tax obligations that arise from this status.
Tax obligations of Spanish residents with property abroad
First and foremost: Declare properties located abroad.
All residents of Spain with properties abroad must declare ownership of such properties located on foreign soil. Failure to do so will result in significant penalties. Information about such assets must be included in the corresponding income tax return.
Income generated by rentals
Income obtained from renting property abroad is considered real estate capital gains. Therefore, it must be included in your annual income tax return.
Owners must report the total amount received from rentals during the fiscal year. Likewise, certain expenses necessary to obtain this income may be deducted. For example, expenses that are essential for the maintenance and management of the property. This may include:
- Property maintenance costs.
- Local taxes paid in the country where the property is located.
- Insurance related to the property.
- Administration fees, if applicable.
Capital gains from the sale
When a property is sold abroad, the owner is obliged to declare the capital gains generated by the transaction.
Profit is calculated by subtracting the purchase price and associated expenses from the sale price. Both figures are essential for determining the net profit obtained.
Taxable base
Once the gains have been established, they are added to the savings tax base. The applicable tax regime will vary depending on the amount obtained, with the tax rates established in the personal income tax regulations being applied.
Taxes applicable to properties abroad
Owners residing in Spain with properties abroad must pay, among other taxes, income tax, wealth tax and the tax on large fortunes, each with its own specific characteristics and features.
Personal income tax and income from real estate capital
Personal income tax (IRPF) is levied on the worldwide income of tax residents in Spain, including income from property rentals abroad.
Residents are required to include income generated by their properties abroad in their income tax returns. This income is considered capital gains from real estate, and both gross income and expenses related to property management must be detailed.
The returns obtained are taxed at rates ranging from 19% to 47%, depending on the tax base. There are certain income thresholds that can determine tax exemptions, allowing some owners to reduce their tax burden.
Wealth Tax
Wealth tax also applies to real estate located abroad. It is important to be clear about this.
This tax rate is calculated on the total value of the assets owned by a person. And what is the total value of these properties abroad? It is calculated based on the acquisition value, the cadastral value or the value determined by the Administration in each case. The highest value is used to calculate the tax base.
Exemptions and exempt minimums
Exemptions are considered depending on the autonomous community, establishing an exempt minimum that is generally set at 700,000 €, and 300,000 €, for the primary residence, but to know for sure, you will have to consult the specific regulations of each community.
Tax on large fortunes
Recently, the Wealth Tax has been introduced, which also affects residents in Spain with property abroad, specifically those taxpayers whose net worth exceeds a certain threshold (currently 3 million euros, although this limit may be subject to change depending on the regulations in force in each fiscal year).
Double taxation agreements
Double taxation agreements are agreements between countries designed to avoid double taxation on the same income. It does not apply to all residents of Spain with property abroad, but it may be relevant.
Mainly because it will prevent us from paying taxes in two jurisdictions on the same income generated by properties abroad.
Apply the double taxation deduction
When a resident of Spain owns property abroad, the double taxation deduction must be applied correctly. This deduction allows the taxes paid in the country where the property is located to be offset against the taxes owed in Spain on the same income.
The deduction is applied in the income tax return (IRPF) and can be key to reducing the overall tax burden.
The agreements determine the tax rate that will be applied to rental income, as well as the conditions for recognising deductions. At Taxmind, we recommend reviewing each agreement to understand the particularities that may influence taxation, making it more favourable. We can help you in this regard. Contact our team.
Common complaints and errors
Despite the existence of agreements, taxpayers may encounter problems if they do not apply deductions correctly. A common mistake is not declaring income correctly on the tax return, which can lead to a higher tax burden.
Claims for double taxation must be made with care and must always be accompanied by the documentation required by the Tax Agency.
Failure to comply with tax obligations can result in significant penalties for residents of Spain with assets abroad. Let’s take a look at what these might be.
Penalties for non-compliance with tax obligations
The Tax Agency applies a variety of penalties depending on the severity of the non-compliance. Penalties may include:
- Financial penalties: These are imposed based on the unpaid tax, depending on the percentage determined in accordance with current regulations.
- Late payment surcharges: These surcharges apply if the situation is rectified after the stipulated deadline.
- Tax inspections: In more severe cases, the Agency may carry out exhaustive audits, resulting in additional penalties.
The impact of these penalties can vary considerably, from simple fines to more drastic consequences, such as the opening of files that can complicate the taxpayer’s future tax situation.
How to avoid penalties
To avoid penalties, we must accurately declare all income derived from foreign properties and periodically review current regulations to adjust the declaration to any changes. Be very careful with filing deadlines.
Needless to say that having tax advisory services would provide greater peace of mind when it comes to filing tax returns correctly.
Regularisation procedures
If any type of non-compliance has occurred, it is possible to regularise the tax situation through various means. The Tax Agency provides mechanisms for taxpayers to correct errors, such as:
- Supplementary declarations: These allow you to include income or correct previously declared data.
- Request for deferral: In certain cases, you can request a deferral for the payment of tax debts.
- Settlement agreements: These allow you to negotiate the amount of the penalty in exchange for accepting the tax debt.
Support from a tax advisor for residents in Spain with property abroad
When it comes to real estate taxation, there is nothing better than having the support of experts in international taxation. Taxmind is exactly that: tax managers for overseas real estate and other properties.
We conduct a comprehensive analysis of the tax particularities that apply to each case, including an assessment of personal tax status and assets, identification of applicable tax deductions and exemptions, and, finally, advice on double taxation agreements to avoid excessive payments.
We seek to avoid mistakes that, without professional help, are very likely to occur. The complexity of tax regulations in different countries does not facilitate the ultimate goal of correctly declaring income and assets by residents in Spain with properties abroad.
With an experienced tax advisor in charge of this task, we will avoid serious problems such as:
- Failure to correctly declare foreign property.
- Omitting deductions that could reduce the tax burden.
- Confusion about tax obligations in several countries.
Benefits of proper tax planning
Planning your tax burden in advance allows owners of overseas properties to better manage their tax responsibilities. This enables us to anticipate future tax obligations and create strategies that minimise the financial impact.
This allows us to optimise the asset structure to reduce taxes, minimise the risk of audits and tax penalties, and gain a better understanding and projection of future tax burdens.
Conclusions
Residents in Spain with property abroad must complete form 720 to comply with the obligation to declare assets and rights located abroad. As we explain on our website, this form is an informative declaration, so no taxes need to be paid, but if we fail to plan our taxes properly or make an erroneous declaration on form 720, we will face a certain financial penalty.
We have explained the difference between being a tax resident in Spain and being a non-resident foreigner. Taxation changes. Non-resident foreigners are only required to pay tax on income generated in Spanish territory, while residents must pay tax on their total global income, which includes income obtained in other countries.
Our expert Taxmind management team will help you with all these mandatory tax processes and procedures. We are at your disposal through the usual contact channels.
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