Since Brexit was finalised on 1 Jan 2021, British property owners in Spain will now be treated in the same way as all 3rd Countries.
Tax treatment for income and property ownership by 3rd country property owners in Spain is a long established and understood process. However, this is new to British property owners, and might come as a bit of a shock!
What does 3rd Country Mean?
It is important to understand what 3rd country means. In the context of EU, countries are defined as following:
- First countries are the Members of the EU
- Second Countries are countries within EFTA/EEA/Single Market members such as Norway and Iceland
- Third countries are all other countries, which now includes United Kingdom.
Who sets the tax in Spain?
As Spain is a Federal State with high degree of autonomy for the Regions, Spanish taxation in general has 2 elements, namely Federal and Local. Property rental is a Federal tax, which is set by the Federal Government in Madrid. Some Regional governments also apply additional taxes, but for the purposes of this article we are covering the Federal Taxation in general and Andalucia in particular. For information on local taxation you need to contact your local Regional Government.
Currently in Andalucia, there is no additional taxation for either Vacation Rental or Long Term rental. However, for Vacation Rentals, owners need to obtain a licence for the property, and also register their guests with the authorities within 24 hours of arrival (Guardia Civil or Policia Nacional depending on the Town Hall).
The information below is subject to change as the annual Federal budget can add, reduce, or change any of the points below, so please check that these rules are still valid before making any decisions. This information is correct as of Jan 2021.
The Good news first
UK and Spain have had a “Double Taxation” agreement for a many years, and this agreement is outside of the EU competencies, which means it will survive Brexit.
This means, under this agreement you only pay income tax to the country that the revenue was generated within. In the case of rental income, revenue is generated by the property, no matter where you take the reservation, or the agent is based, rental income is taxable in Spain.
Once you have paid your income tax in Spain, you can obtain a certificate from the Tax Office in Spain (Hacienda) that shows you have paid your taxes in Spain. Submit this to HMRC in the UK, so that they do not demand tax on this income.
Important to note that Agents and Portals are obliged to report your income from your property, so if you do not declare your income, you may end up with large fines as well as backdated taxation by both the Spanish Hacienda and the UK’s HMRC.
Taxation & Tax Residency
Important to remember that Tax Residency (Tax Domicile) is not a matter of personal choice but an event that occurs naturally. The tax payer does not get to choose where they are resident. The fact that a person is resident in Spain (or the UK) for more than 183 days in a calendar year, automatically defines their tax residency (Tax Domicile), and therefore must file tax return in that country.
For the purpose of property income tax, Spain has 2 categories of owners, namely EU Tax residents or non-EU tax residents. It is important to distinguish that the definition of EU or non-EU is not related to the nationality of the owner, but what country is considered as their Tax Domicile.
For example, if you are a Spanish Citizen, but live, work, and pay your taxes in the UK, you are considered as an non-EU-Tax Resident, as UK is no longer part of the EU. Of course the reverse also applies, so if you are a British Citizen, but live, work, and pay your taxes in the Republic of Ireland, you are considered as a EU tax resident.
Expense Deductions
Non-EU Tax Residents cannot make deductions for any direct or indirect expenses.
EU Tax Residents can deduct their indirect expenses such as:
- Community Fees
- IBI
- Basura
- Internet
- Utilities
- Property Management Fees
- Commission
- Repairs or replacements
Indirect costs can only be deducted on pro-rota basis. This means you can deduct costs based on the number of weeks you have rented your property during the tax year. So if you let your property for 8 weeks out of 52 weeks of the year, you can deduct 8/52 of all your expenses.
Property Management fees and Commissions are fully deductible as they are direct costs for rentals.
Tax Allowance
Non-EU Tax Residents do not get any tax free allowance for rental income.
Spanish Tax Residents are allowed a certain income per year from their property, before they have to pay any tax. This can vary from one tax year to another, and can change with the annual Federal budget.
This is currently not being applied to EU Tax Residents, hence it is being challenged in the European Court of Justice, and Spain may be forced to offer this to all EU Tax Residents. However, until the outcome of this case is known, and unless you are a Spanish Tax Resident, you are not entitled to any tax free income.
Whatever the outcome of the ECJ case, the ruling will not apply to non-EU Tax Residents.
Depreciation
Non-EU Tax Residents cannot depreciate their property for tax purposes.
EU Tax Residents can depreciate the property, based on the cadastral value on an annual basis. Currently this is set at 2% per annum.
Tax Rate
Tax residents of all non-EU countries are taxed on Gross income, as they are not allowed to make any deductions. The current rate for non-EU Tax Residents is 24%.
EU Tax residents (including Iceland and Norway) pay tax on rental “Net” of expenses allowed. Currently the rate of tax is 19%.
Submission
All property owners who have an income from their properties must submit their income declaration on Quarterly basis.
Both EU and non-EU Tax Residents must submit their final tax declaration by 10 January each year, when they can make any deductions that they may be entitled to.
Spanish Tax Payers, must submit their final income tax submission by June of each year as part of their personal income tax submission.
Summary
Your tax residency has a profound impact on your net annual income. In essence EU Tax Residents (and Spanish tax payers), pay income tax on “Net Income”, whilst non-EU Tax Residents pay tax on “Gross Income”.
It is very important that you get advice from tax experts before making a commitment to purchase a property, or decide to rent it. Contact us, and we will be delighted to offer you specific advice via our tax experts.
About the Author:
Ali Zartash-Lloyd is Managing Partner at Cognisant Associates a business consulting partnership. He is a management graduate from the University of Leicester. He held Senior Management positions at a number of Multinationals for over a decade including Director of Global SME Products at Avaya Inc. and European Sales & Marketing Director at Samsung Telecom.
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