If you are interested in purchasing a property in Spain to use as a primary or secondary residence, it is best to go the traditional route and complete the transaction as a private individual. However, if you are buying a property for investment purposes, there are many advantages of buying property in Spain through a company.
Spanish property purchase via a non-Spanish company
Although there are many tax advantages of buying property in Spain through a company, this is not true of foreign entities. Purchasing a Spanish property via a US or UK company is a complex process. Moreover, it can erode many of the tax advantages that arise when purchasing a property via a Spanish company. Thus, we strongly advise creating a Spanish company, dedicated to your Spanish property purchase(s), to buy property in Madrid.
Advantages of buying property in Spain through a Spanish company
No Property Transfer Tax
When you purchase a property in Spain, you typically have to pay closing costs that can be up to 15% of the property value. A big line item on second hand properties is the Property Transfer Tax (ITP). Depending upon the Autonomous Community in which the property is located, this can run from 6%-10% of the property value. In Madrid, the ITP is 6%. However, this only applies to sales between individuals. If you purchase a property via a Spanish company, you don’t have to pay this tax. This represents a substantial savings.
Many fees can be deducted
If you purchase your property via a Spanish company, and use it to generate rental income, you can deduct property related expenses from the company’s taxable income. These include (but are not limited to):
- Property management fees
- Maintenance costs
- Repair costs
- If the property incurs a loss (ex: rental income does not cover expenses) the company can offset this loss against other taxable income
Tax advantages for rental properties
If you own multiple rental properties, you can qualify for up to a 100% deduction on rental income. To qualify for this, the company must own a minimum of eight properties, all of which must have long-term rental contracts. Furthermore, the annual rent on each property must be less than 15,000 euros.
No need to pay the Non-Residence Income Tax
If you are not a Spanish resident and own properties in Spain, you will need to pay the Non-Resident Income Tax. This typically amounts to 1.1% of the property’s book value. If the property is owned by a Spanish company, this tax does not apply.
Anonymity
If you purchase a Spanish property via a company, the company becomes the legal owner of the property; the company’s details are those recorded in the public property registers. Thus the information pertaining to the company’s shareholder(s) and director(s) does not need to be publicly disclosed. As you will see below, we recommend purchasing Spanish property via a Spanish limited liability company (SL). You can choose any name for this entity, provided it is not already taken.
Disadvantages of buying property in Spain through a company
Buying a property in Spain, via a Spanish company, is most beneficial if you are planning on using the property to generate rental income. Unlike US and UK companies that often own property as part of larger asset portfolios, Spanish companies allow property ownership only if this property is carrying out genuine economic activity (generating rental income). Thus if you are buying a property for a primary or secondary residence, it is much easier to go the traditional route.
It is important to keep in mind that if you purchase a property via a Spanish company, all rental income becomes company income. Technically you will not be the property owner but the primary shareholder. Therefore, to personally benefit from company income it must be declared as a dividend distributed by the company.
Income charged at a corporate tax rate of 25%
One of the requirements of using a Spanish company to purchase property in Spain is that you must charge a market rate rent. This income is taxed at the corporate tax rate of 25%. For many investors, a 25% tax rate is relatively low.
It’s important to note that if you do decide to live in the property, you must charge yourself (the shareholder) a market rate rent and pay the 25% corporate tax rate on this rent. This is another reason that if you plan to use the property as a primary or secondary residence, it is best to purchase the property as an individual, rather than via a Spanish company.
You must pay VAT on rental income
All rent charged by the company must include Spanish VAT, which is 21%. This can be passed on to the tenant, but does involve additional paperwork on the part of the company.
Rental income is technically dividend income
As mentioned above, if you purchase a Spanish property via a company, you will not directly receive rental income. You, the shareholder, will receive it in the form of a dividend, which may be subject to withholding tax, depending on your personal circumstances.
Potential difficulty selling the property
If you decide to sell the property, it will be structured differently than a traditional home sale. You will be selling the shares in the company, which might be a harder sell if you are not dealing with a sophisticated investor.
Yearly filings
If you purchase a property via a Spanish company, you will be responsible for filing annual tax returns and company accounts.
Increased legal and accounting fees
As you will need to file annual tax returns and company accounts, you will need to hire an accountant. Moreover, you will need to hire a lawyer to set up your company. Both of these will incur additional fees.
Types of Spanish companies
There are more than 10 types of Spanish corporate structures. The most widely used type is the Sociedad Limitada (SL). This is what most people use to purchase properties in Spain, and is what we recommend. Because it is a limited liability structure, shareholder/partner liabilities are limited to the capital contribution made by each shareholder/partner.
Another advantage is that an SL requires only one shareholder, so it is an excellent structure if you don’t want any business partners.
The minimum investment required to create an SL is 3,000€, which must be 100% subscribed and paid upfront when the company is created. This investment can be made through cash or money in a bank account. However, it can also me made via assets that will be used for the business activity.
To create an SL, you follow these steps:
- Create the statues and articles of incorporation; sign them before a notary.
- Register the company in the Commercial Registry.
- Apply for a business tax identification number (CIF).
- Register with social security, for all employees, and the IAE, if applicable.
Madrid Estate provides a full range of services to our clients. Don’t hesitate to CONTACT US if you need help finding a lawyer to set up your Spanish SL, or if you need any other help investing in Madrid real estate. We are at your service.
Conclusion
If you are purchasing a Spanish property to use as a primary or secondary residence, we recommend you purchase the property as a private individual. However, if you are purchasing a property to earn rental income, we recommend purchasing it via a Spanish company to save on taxes. This is particularly true if you are purchasing eight properties or more, as there are big tax advantages to purchasing the properties via a Spanish limited liability company.
