Extending Wealth Tax to indirect holdings of Spanish real estate

The Spanish government has approved a change in Wealth Tax law to tax non-resident individuals holding Spanish real estate assets indirectly through a non-resident entity. This amendment introduces a potentially significant additional annual tax burden for non-residents with properties in Spain held by 31 December 2022.

Background

Spanish non-resident individuals are subject to Wealth Tax only on rights and assets located/exercised in Spain. As a consequence, non-resident individuals are subject to Wealth Tax (subject to a safe harbour de minimis EUR 700,000 exemption) for the direct holding of Spanish real estate assets. However, historically it was unclear whether or not real estate assets held indirectly through a non-resident entity were subject to Wealth Tax. On 3 December 2020, the High Court of Justice of the Balearic Islands considered that no Wealth Tax obligations would arise for non-residents with an indirect holding of Spanish real estate assets. More recently, on 13 September 2022, the Spanish Tax Authorities accepted this position in tax ruling V1947-22.

New measures

In the context of the tax campaign initiated by the Socialist/communist coalition against the banking and energy sectors and high net-wealth individuals, the Spanish government reacted to this tax ruling by amending the Wealth Tax Law to subject to tax real estate assets held indirectly by non-resident individuals.

The amendment approved by the Government will subject to Wealth Tax a holding of shares when at least 50% of the total assets of the company consists, directly or indirectly, of Spanish real estate assets. For these purposes, the value of the real estate assets would not be the book value reported for accounting purposes by the company, but the value arising from specific Wealth Tax rules for real estate assets. This value would be the higher of the acquisition value, the cadastral value or other value assessed by the tax authorities for tax purposes. For properties acquired from 2022, the reference value should also be considered (an administrative value that relates to market value and is updated from time to time).

It should be noted that the effective rate of taxation will still depend on the scope of Wealth Tax relief provided by any relevant double tax treaty available to the non-resident individual. Broadly, four different scenarios can be identified:

A. Tax residents in jurisdictions with no double tax treaty signed with Spain will be subject to Wealth Tax according to the Spanish domestic rules.

B. Tax residents in jurisdictions with a tax treaty signed with Spain but not regulating Wealth Tax reliefs, are subject to Wealth Tax according to Spanish domestic rules.

C. Tax residents in jurisdictions with a tax treaty signed with Spain regulating Wealth Tax relief under the so-called standard rule, will only be subject to Wealth Tax in respect of direct holdings of Spanish real estate assets.

D. Tax residents in jurisdictions with a tax treaty signed with Spain regulating Wealth Tax under the reinforced clause (extended to shares of property rich entities) will be subject to Wealth Tax for direct and indirect holdings of Spanish real estate assets.

As a result of the approved modifications, tax residents in situations A, B and D may become subject to Wealth Tax in Spain on indirect holdings of Spanish real estate assets. Jurisdictions in this position include the UK, the US, Germany, France and Mexico. It should be noted that the amendment does not include a reference to the real estate assets being used for a business activity. As a result, not only passive holding entities (with second or vacation residences) will be impacted, but also potentially any other non-resident investors in the Spanish real estate market.

It should be noted that the Wealth Tax amendments will not directly impact those non-residents with direct or indirect holdings of real estate assets located in Madrid and Andalucía (as these regions operate a full exemption from Wealth Tax). However, it seems that the new Temporary Solidarity Tax on high net-worth individuals (which has been approved to complement at central State level the Wealth Tax) may be applicable in those cases (see article on the new solidarity tax).

Comment

The amendment approved to the Wealth Tax Law have been included in the same Bill which incorporated the new tax on windfall profits of the banking and energy sectors and the new Solidarity Tax for high net-worth individuals. There are significant doubts about its legality under the Spanish Constitution as inter alia there are strong arguments to claim a breach of the provisions included in the Spanish Supreme Law regarding the approval process for substantive modifications of taxes.

In any event, non-resident individuals should carefully review their existing holding structure for Spanish real estate assets to anticipate, and where possible mitigate, the impact of the changes to Wealth Tax, or ultimately to be aware of possible procedures for making protective claims that may arise as a result of these new developments.

Further, the potential impact of the new Solidarity Tax for non-resident high net-worth individuals indirectly holding real estate property in Spain should be carefully considered on a case-by-case basis.