Spain's 100% foreign buyer and holiday let tax proposal 'not workable', say critics

A DRAFT law increasing tax on holiday lets, empty properties, and for non-resident homebuyers has been presented in Spanish Parliament – although widespread opposition may prevent the measures going ahead.

Earlier this year, Spain's president Pedro Sánchez announced plans to impose a 100% tax on non-residents from outside the European Union buying homes in the country, causing an international media furore – despite the slim chances of the move ever seeing the light of day, as we explained at the time in Spain's proposed property tax of up to 100% for non-EU buyers: What we know.

It was proposed as a solution to a shortage of affordable housing, but the ruling socialist (PSOE) party is in a minority, and the necessary cross-party support appears to be lacking.

If the plans went ahead, the 100% tax would only apply to pre-owned homes, not new builds, and cannot be enforced in the northern regions of Navarra and the Basque Country, which have their own devolved fiscal authorities.

Although Spain's government is a coalition between the PSOE and left-wing independents Sumar, the draft law has been registered solely by the PSOE to speed up its application – largely because Sumar opposes many elements of the proposal.

Housing minister Isabel Rodríguez hopes debates will begin in the Lower Chamber by mid-June.

Economists and opposition openly criticise proposals

So far, other critics include the Partido Popular (PP), whose leader Alberto Núñez Feijóo accuses the PSOE of 'chasing away investors in Spain – and goes as far as to call the non-resident foreign buyer tax 'xenophobic'.

Even Spain's tax authorities have weighed in on the proposals, warning they may be ineffective at best – or even inflate already-wealthy landlords' income at the general public's expense.

The Register of Fiscal Advisor Economists (REAF) – part of Spain's General Council of Economists – believes many of the measures introduced, such as extra tax on empty homes, will have no effect on availability of affordable rental properties.

Concerning the idea of a 100% tax for non-EU buyers, the REAF has not held back: Its chairman Agustín Fernández calls it 'madness'.

Here's what the PSOE proposes, and what the dissenters say.

Higher tax on corporate-owned rental properties

Rental income on investment homes bought through a company would be taxed at 25%, instead of the current 15%, unless these properties are offered at affordable prices. The holding firm would get a 50% tax discount if at least six in 10 properties are let out as permanent homes for a figure equal to or less than those listed in the government rent price index, below €26,400 per annum, or less than 30% of the tenant's monthly household income, whichever is the lower of the three.

In addition, if all profit is reinvested in guaranteeing affordable rent for more than 60% of the company portfolio within three years, rental income would be tax-exempt.

Income tax breaks for landlords offering 'affordable' rent

Homes let out to permanent or long-term tenants for affordable prices would attract an income tax deduction for their owners. Those in high-demand, low-supply housing zones already get tax breaks, but if the law comes into force, they could potentially save up to 95%.

Even outside these housing-crisis hotspots, income tax cuts on profits from rent could be up to 100% if tenants pay below the going rate for the area.

Owners renting their property for the first time would get a 60% discount, rising to 85% if the tenant is aged 18-35 inclusive.

Existing landlords would not, in theory, get a tax reduction, although the PSOE proposes discounts to those who reduce rent charged with each new tenancy agreement by 'at least 5%' on the previous.

What the critics say

This measure has generated considerable cross-party controversy: Coalition partners Sumar are against 'giving away money' to people who are already earning from their ownership of an additional asset. They believe it could lead to wealthy, multi-property owners and new companies paying significantly less tax than they rightly should.

What's more, Sumar points out that homeowners can 'get around' the affordable rent requirement through short-term lets or by letting out individual bedrooms - or even taking some of the rent payment in undeclared cash.

Certain costs involved to owners in letting out a property can already be offset against duties paid on rental income, the national tax authority, Hacienda, recalls. Adding a further discount of 60-85% would likely see landlords getting a profit from the State for renting their homes rather than paying any tax at all.

By contrast, economists believe the proposals would do nothing to encourage landlords to lower their prices, as they would lose money either way.

The REAF points out that, where owners reduce what they charge tenants in order to benefit from the 'affordable rent' tax régime, the rebate could well be lower than the rent reduction itself. It would be more beneficial to them to continue charging a higher figure and paying the corresponding tax on it.

Also, landlords with a high tenant turnover who cut rent by 5% with each new occupancy would eventually find themselves charging almost nothing, rendering their tax break insignificant.

Increased income tax on unoccupied homes

Owners of Spain's four million unoccupied homes would face an additional income tax bill, on a tiered scale, and town councils would be urged to load IBI (annual asset tax) for empty properties - including holiday homes used exclusively by their owners.

At present, unoccupied residential property involves having to declare an additional 1.1% in income, but this would increase to up to 3% – tax authorities would 'assume' an empty home generated rental income, whether or not this was the case.

The income tax increase appears minimal at first. Taking the catastral figure – the stripped-down basic taxable value, typically about half the likely market price – those at under €100,000 would continue to pay the current rate of 1.1%. Rates would rise to 1.5% for catastral values under €500,000 and 2% for those of less than €1 million. The 3% band would only affect homes with a catastral value of €1m or more.

But these fractions of a percentage translate to several hundred euros a year extra, and can push some owners into a higher income tax band, increasing their liability across the board.

What the critics say

In a country where owning a weekend or summer home is practically the norm, the proposal has proven very unpopular. A high percentage of the population would face extra expenses on properties that have often been in the family for generations.

Long-term letting means the either the owners effectively have to give up the use of their holiday homes, or tenants are faced with the constant insecurity of having to find somewhere else to live every summer - so nobody benefits, the REAF points out.

Owners would mostly bear the extra expense instead, meaning few or no additional rental options generated.

And given that holiday homes make up the majority of unoccupied properties, they are based in areas not practical for the average tenant - in remote, rural villages, or beach hubs or urbanisations with no local amenities operating outside of summer – rather than towns or cities with job opportunities.

According to the PP, any tax régime designed to increase affordable rental homes 'should aim to encourage, not penalise'.

“For owners to want to let out their properties, what they need is legal guarantees against damage, non-payment of rent, and squatters,” says the party's deputy secretary Paloma Martín.

Value-added tax on holiday lets raised to 21%

Income from holiday lets would be subject to an increase in value-added tax (IVA, known as VAT in the UK and USA) from the current 10% to the top rate of 21%, in line with 'economic activity' in general.

IVA is payable in Spain for all earnings except wages received through an employment contract – no minimum income applies – meaning tourist lets would become either less profitable for the owner, or more expensive for the holidaymaker.

Where tourist accommodation, including AirBnB, is advertised through online agencies, it would be the website owners who deduct and pay the IVA.

IVA increases would not apply to properties let for more than 30 nights to the same tenant. Those based in municipalities with fewer than 10,000 inhabitants would not be charged extra.

The PSOE says the idea is to make holiday lets a 'less financially-attractive option', freeing up more homes for full-time residential use.

What the critics say

Although the REAF is not so vehemently against an IVA hike for holiday lets, it warns that this could end up benefiting international hotel chains at the expense of individuals who rely on the rental income for a living, reduce accommodation availability for holidaymakers, and make holidays in Spain more costly.

“One has to be very careful, since tourism is one of the main drivers of our national economy,” the REAF cautions.

The PP warns that investors in holiday accommodation would simply avoid Spain altogether and buy property in another country, reducing foreign income which contributes to national wealth, but without generating any affordable permanent rentals as a result.

Non-EU, non-resident homebuyers taxed at 100% of property price

The proposed – and controversial - 100% tax on non-EU citizens buying Spanish homes they do not intend to live in comes as part of a new fiscal duty the PSOE has put forward. It would also apply to companies domiciled outside the EU, except where the property is purchased in the course of business.

This duty wouldinclude the usual Impuesto sobre Transmisiones de Patrimonio (asset transfer tax, or ITP) as a proportion of the 100% that would be passed to the regional government, which is responsible for setting its rates - typically around 4% to 11% of the sale price - and payable on purchase of a pre-owned home.

New builds are subject to IVA, currently at 10% - not to ITP - and IVA rates apply to the product or service in question; they cannot be altered according to who the buyer is, as we explained in our above-mentioned previous article.

The PSOE says the 100% tax idea is as a 'deterrent' for 'wealthy foreign speculators' buying homes 'to make money from, not to live in'. Putting these 'investors' off would leave more properties available for average-income residents to buy as their family home.

What the critics say

Beyond the PSOE, practically no support from any quarter has been voiced, inside or outside the political arena. Getting opposition politicians to agree to the move would seem nearly impossible at present – and, unless they do, it is doomed to fail. Even then, its legality could be questionable, experts have said.

Estate agents, notaries and academics already had their say when the 100% tax was initially mentioned, pointing out that non-Spanish buyers – including residents purchasing their main home – account for just 15% of property sales. Of these, three of the top five buyer nationalities (German, Italian and Polish) are EU citizens, who would not be affected by a 100% tax. Any attempt to impose it on fellow Europeans would be illegal under EU rules.

Non-resident, non-EU buyers, of whom over half are British, account for just 2.6% of properties sold. Most purchases are holiday homes, and a high percentage of buyers intend for these to eventually become their main residence when they retire. Others are seeking a main home to live in, and plan to obtain residence once they acquire a base in Spain.

By definition, if Britain had remained in the EU, its citizens would be exempt from the 100% tax, meaning no 'deterrent' available for the vast majority of what are now third-country buyers: Barely 1% of purchasers would be 'put off'.

The College of Registrars, along with estate agencies in housing-crisis hotspots, said non-residents from third countries typically bought homes valued at 113% more than those sold to Spaniards as family homes – they were largely uninterested in property classed as 'affordable'.

Wealthy speculators would be the least likely to see the 100% tax as a deterrent, property experts say.

Now, the REAF has warned the proposed tax would 'very likely' be legally considered 'confiscatory', which means it is more about 'seizing assets' than requiring payment of a 'fair contribution'.

Article 31 of the Spanish Constitution expressly prohibits taxation systems that 'reach confiscatory levels'. It requires that fiscal régimes be 'fair and equitable' and in line with a person's 'financial capacity'.

“When those who've paid double for their property want to sell, will they find anyone to buy it for the amount they originally paid? Will they make a loss? A resale would be completely non-viable,” the REAF says.

Non-EU citizens will just buy a new property from the developer instead, to avoid the 'madness' of 'paying twice the value', the REAF's chairman Agustín Fernández points out.

The PP had some harsh words for the PSOE over 'scapegoating' foreign buyers and 'attempting to stifle the housing market.

“We would never use someone's nationality as a criterion for accessing the property market", says PP deputy secretary Paloma Martín.

According to the opposition party, Spain's 27,000 non-resident third-country buyers create far less of a barrier to affordable rent than 'the 80,000 homes occupied by squatters' and 'the 25,000 occupied by non-paying tenants who refuse to leave'.

What can homebuyers do next?

Firstly, don't panic. As we stated earlier, and in light of the above, the proposed law looks unlikely to come into effect – certainly not in its current form.

Secondly,don't forget that new legislation rarely just comes into force overnight. Extensive Parliamentary debate and proposed changes come first. Even if a majority approves the content, the draft has to be discussed and agreed upon in the Senate, which may well reject it, or return it with requests for amendments. This means the process starts again from the beginning.

Even proposed legislation with unanimous support typically takes a minimum of six months to come into effect. And the PSOE is in a minority in the Senate as well as in Parliament – that's if the proposed law actually gets that far, which seems doubtful.

Thirdly, don't wait before buying your Spanish home. Purchase contracts signed before any new taxation law goes live will almost certainly not be affected.

In the improbable event that the 100% tax on non-resident, non-EU buyers became law, you can still 'get around' it by:

Buying a newly-built home direct from the developer

Wherever you come from, and whether or not you intend to live in Spain, you will still pay 10% in value-added tax (IVA). And even if the government opts to increase IVA on new builds, the maximum rate for this type of tax is 21%.

Check out more than 80,000 newly-built homes for sale in Spain – there's plenty of choice.

Becoming resident in Spain before you buy

If you are a non-EU citizen and plan to live in your new home anyway, you can avoid being taxed at 'non-resident' rates by moving to the country first. Once you have your resident permit, you will be taxed at the same rate as a Spanish citizen for buying property, since penalising inhabitants for 'being foreign' is discriminatory and illegal.

Also, once you own your home, you cannot be retroactively forced to pay a tax which did not exist when you bought it.

Setting up a limited company in an EU member State

This is not the most straightforward route for individuals who just want a holiday home to live in when they eventually retire, but is indeed an option. Corporate buyers based in non-EU countries would be liable for the 100% tax if it became effective, but those domiciled in EU territory are untouchable – European law would not allow them to be treated differently based upon the nationality of their owners, directors or shareholders.

Read more on buying property in Spain through a company first, and make sure you seek sound legal and financial advice.

Buying a home in the Basque Country or Navarra

These beautiful northern regions have separate, devolved tax systems and the central government cannot impose fiscal changes on them for property purchases.

Both enjoy guaranteed warmth in summer, without the humidity of the Mediterranean or south coast, and winters are milder than in the UK and Canada, for example. You can browse over 800 homes for sale in the Basque Country , which has a stunning coastline and even blue-flagged river beaches in inland areas.

Landlocked Navarra offers competitive prices, flats in historical streets, chalet-style villas, and modern, fully-renovated homes – have a look at more than 180 options in this stunning rural region championed by Hemingway.