Recent real estate tax developments in Spain

During 2021, there were a number of developments affecting the Spanish real estate market and investors in that market. Firstly, the Spanish government introduced draft legislation of particular relevance for real estate investors in Spain, including measures that may impact on the value of certain transactions for individuals, the taxation of Spanish REITs (also known as SOCIMIs) and residential leasing companies. In addition, there are a number of further measures included in the draft Bill for Start-ups and a controversial draft Housing Bill recently published by the Spanish government and which will be discussed in Parliament soon. Some of these measures are already in force with effect from 1 January 2022, others are expected to be approved during 2022 and come into force in January 2023.

In addition to these legislative initiatives 2021 was also an eventful year in Spain in terms case law developments affecting real estate taxation, the main highlight being the Municipal Capital Gains Tax (Plusvalía Municipal) case. Finally, at an EU level, the publication of the draft Unshell Directive (ATAD III) is a further and very relevant milestone for cross-border real estate investors generally. In this article, we comment briefly on each of these developments.

The taxable base for the Plusvalía Municipal

The tax imposed on the increase in the value of urban land, commonly known as Plusvalía Municipal is one of two direct taxes payable on the sale of a Spanish property, along with either capital gains tax under Spanish Corporate Tax or Non Residents Income Tax rules or along with the Inheritance and Gifts Tax.

This tax, which is levied by each town council (though subject to Spanish State-wide framework regulations) is often a significant cost for the transferor in real estate transactions, especially where property has been held for long periods, where it can amount to more than the actual capital gain and can even be payable where the transferor has actually made a loss on the disposal of the property.

A number of previous rulings of the Spanish Supreme Court over the past few years have held that the Plusvalía Municipal is not payable in cases where there is no actual capital gain on the sale of a property. However, on 26 October 2021, the Spanish Constitutional Court went further and declared null and void the methodology provided in the law for the determination of the taxable base of the Plusvalía Municipal, as it departs from the assumption that there has always been an increase in the value of the land during the property holding period, regardless of whether there has been any gain and regardless of the actual amount of that increase in value.

Following the judgment of the Constitutional Court, the Spanish government moved quickly to release within a matter of weeks a new method to calculate the taxable base of the Plusvalía Municipal, which applies provided that the value of the land has actually increased. Therefore, the taxpayer is now able to choose the most favourable of the following two options: (i) an objective method, where the coefficients that are used to determine the increase in value of the property will be updated annually in line with developments in the real estate market; or (ii) a more specific method based on the actual capital gain, which will be determined by the difference between the sale and the purchase price.

Valuation applicable to certain transactions involving Spanish properties

One of the most common disputes with the Spanish Tax Authorities (STA) has been the determination of the market value of properties for certain tax purposes. These conflicts typically happen when the taxpayer must report the market value of the property to the STA and pay indirect taxes (Transfer Tax, stamp duty or Inheritance and Gift Tax) accordingly.

From 1 January 2022, certain transactions involving Spanish properties are subject to the newly created concept of “market reference value” (valor de referencia de mercado). The market reference value is determined by the General Directorate of Cadastre on the basis of an analysis of the prices of all property sales and purchases made before public notaries and will be taken in many cases as the market value for the purposes of calculating certain taxes with the aim of reducing disputes between the taxpayers and the STA.

The market reference value of each property serves as the taxable base for Transfer Tax (for example payable on the acquisition of properties unless the parties opt to waive the VAT exemption applicable by default to such transfers), Stamp Duty (generally applicable - together with VAT - to commercial properties and new dwellings) and the Inheritance and Gift Tax when the reported value (usually the price or the consideration paid) is lower than the market reference value of the property. However, if the taxpayer can evidence that the market value is below the market reference value, it is possible to apply that difference (generally by making a claim before the courts). In the absence of a market reference value for a specific property (this may happen if the competent authority has not published an official valuation in respect of a single property), the taxable base for Transfer Tax, Stamp Duty and Inheritance and Gift Tax purposes will be the higher of the market value or the purchase price.

Finally, it should be noted that in those cases where the market reference value is the taxable base for the tax levied on the acquisition of a property, the same value shall also be used for determining the taxable base for the application of the Wealth Tax where applicable (only for individuals in some Spanish regions). Therefore, the market reference value may also impact Wealth Tax liabilities, though only in relation to properties acquired by individuals from 1 January 2022 onwards.

Draft Housing Bill

On 1 February 2022, the Council of Ministers released a new draft Bill regulating the residential housing market. The draft Bill includes regulations on which will impact a number of areas, including measures to improve access to the housing market, evictions, the creation of “affordable housing”, and restrictions on rents in certain circumstances. In addition, the Bill will allow municipalities to increase by up to 150% the Property Tax payable on dwellings unoccupied for at least two years on owners of at least four dwellings in the same municipality.

The draft Bill has been heavily criticised by certain groups which consider that the Bill may dissuade foreign investors from investing in the Spanish real estate market. Prospective investors should carefully monitor the parliamentary process of this Bill to identify any potential impact on their investments if the law is finally approved in its current form.

Additional taxation for Spanish REITs (SOCIMIs)

Undistributed profits obtained by listed real estate investment companies (SOCIMIs) will be subject to a special corporate tax charge at a rate of 15% to the extent that those undistributed profits were neither taxed at the general Corporate Tax rate nor reinvested in due time in accordance with the tax free reinvestment scheme provided for under the SOCIMI tax regime.

This special tax charge was approved in July 2021, with effect from 1 January 2021 onwards.

Reduction in the tax relief applicable to residential leasing entities

The special Corporate Income Tax regime for residential leasing entities will be significantly less attractive for the tax periods starting on 1 January 2022. From this date, the current 85% relief on gross tax due in relation to qualifying income will be reduced to 40%. This means that the effective Corporate Tax rate for these entities will increase from the former 3.75% to 15%.

Draft Unshell Directive (ATAD 3)

On 22 December 2021, the European Commission published a proposal for a directive laying down rules to prevent the misuse of shell entities for tax purposes, also known as Anti-Tax Avoidance Directive (ATAD) 3.

Details of this proposal may be found in our article, Walking on egg shells – exploring the impact of ATAD3.

Cross-border investors in Spanish real estate which currently use holding companies as investment platforms (the most common being Luxembourg or The Netherlands) should carefully review the potential impact of this proposal on their current investment structures. Although the Directive is not expected to come into force until 2024, the fact that a number of factors for the application of its rules will need to be assessed in respect of the two years prior to it coming into force means that there is some urgency for investors to identify and address any issues in their structures as soon as possible during 2022. Such issues may include, for example, addressing any shortfalls in substance in those structures.