New tax measures aimed to encourage investment in Spanish real estate

Since the beginning of the financial crisis in 2007, the decrease of real estate prices has reached 50% in many areas of Spain. For this reason, investing in real estate can certainly be an attractive alternative for both national and international investors.

In connection with the downfall of prices, it is interesting mentioning that the Spanish Government and Parliament have adopted
numerous tax measures aimed to stimulate this sort of investment in order to revitalize the sector, deeply affected by the crisis.

1. Tax on the tenure of real estate property by non-resident

Among these measures we can mention the suppression of the Tax on the tenure of real estate property by non-resident entities. This tax is calculated by applying 3% on the so called “cadastral value” of the property (and administrative value well below market value) and taxed the real estate owned by non-resident entities. After the reform, the tax only remains for those entities being resident in tax heaven territories.

2. Improvement of the requirements for companies leasing real estate

Other major amendment refers to the special concept of entities leasing residential real estate. This sort of entities are granted a
85% bonus in their Corporate Income Tax (CIT) due, provided certain formal requirements are met (i.e. the lease of residential real estate must be the corporate object; a communication must be filed to the Tax Authorities, etc.). However, apart from these formal conditions, the fulfillment of other substantial requirements related to the leases must be met. In order to make this business more attractive, such requirements have been smoothed: the number of apartments/houses leased or offered to lease must be 8 instead of 10, as required before; the apartments/houses must be leased for a minimum period of at least 3 years instead of 7, as required before. Also the condition the apartment/house cannot exceed a minimum surface has been removed. Additionally, it must be noted that these companies are also allowed to carry out the activity of developing of real estate, although in such case the leasing income must represent at least 55%of the total income.

3. New regime for certain companies leasing real estate listed in the stock exchange

Another important change refers to the relatively recent concept of a special sort of company leasing real estate, which must be listed in the stock exchange (so called “SOCIMI”, in Spanish). The aim of this sort of entity is channeling the
savings of small investors into the real estate sector. The main amendment in the tax field is the reduction of its CIT rate from 19% down to 0%. The taxation of the profit remains unchangeable, as it is only taxed in the shareholders CIT or personal tax, once they receive the dividends from the company.

It is worthwhile mentioning the legal requirements have been improved: the minimum capital is now € 5 million, instead of € 15 million; the entity is now allowed to be listed in alternative markets, apart from the stock exchange market, as it was the only allowed before; there is no limit to the external financing of the entity (before it could not exceed 70% of the assets); the apartments/houses leased must be for a minimum of 3 years instead of 7; the condition that not a single property can represent more than 40% of the assets has been removed.

4. New CIT deduction for small companies

For those companies with a turnover up to € 10 million, a new deduction in the CIT due has been introduced: the bonus consist of 10% of the capital gain derived from the sale of real estate investments and fixed assets. The conditions are: the amount equivalent to the capital gain must be invested in the same kind of asset in a period ending 2 years since the end of the tax year when the gain arose; the assets must be kept for a period of 5 years; a reserve must be registered, equivalent to the amount of the capital gain.

5. Other changes

New reduced tax rates have been passed for newly incorporated companies: taxable base from 0 up to € 300,000 are taxed at 15%, while the rest of the taxable base is taxed at 20%.

These new rates are applicable in the first and second year the company has profits (i.e., no matter that in first years of existence
the company has had losses).

As it can be seen, all these changes in the tax field together with the existing legislation, combined with the collapse of prices in
the sector make very attractive the opportunity  of investing in real estate in Spain.

Author: Enrique Rebés FORWARD ECONOMICS