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Recent changes to special CIT regimes applicable to Spanish real estate investments

Various legal developments that recently entered into force in Spain impact two special tax regimes widely used by international real estate investors.

Law 11/2021 of 9 July 2021 on measures to prevent and combat tax fraud amends the SOCIMI (Spanish REIT) special tax regime, establishing a new corporate-income-tax rate of 15% on SOCIMIs’ non-distributed profits. Generally, SOCIMIs’ profits are taxed at a 0% Corporate Income Tax (CIT) rate, but are subject to a mandatory dividend-distribution policy pursuant to which they must distribute (i) at least 50% of profits realised on the transfer of properties and shares (provided that the remaining 50% is reinvested), (ii) 100% of profits from dividends earned, and (iii) at least 80% of all other profits (mainly, rental income). SOCIMIs are nevertheless entitled to distribute the full amount of profits obtained in a specific tax year, in which case the new 15% CIT on non-distributed profits would not apply. This measure entered into force for tax periods starting as from 1 January 2021.

Also, the General State Budget Law for 2022 (Law 22/2021 of 28 December 2021), which entered into force for tax periods starting on or after 1 January 2022, amended the special tax regime applicable to entities dedicated to leasing residential properties (commonly known as the “EDAV regime”, which has been highly popular in recent years among investors pursuing build-to-rent strategies given its indirect taxation and CIT benefits). Pursuant to the new rules, the CIT relief under this special tax regime has been limited to 40% (previously 85%). In practice, entities will therefore be subject to CIT at an effective rate of 15% on profits resulting from leasing operations (still below the general 25% rate), instead of the previous 3.75% effective tax rate.

The amendment to the EDAV regime does not include specific measures to further mitigate the double taxation impact on EDAV shareholders subject to Spanish CIT on the dividends received. Such shareholders will continue to benefit from the participation exemption, but only on 50% of the dividends. Therefore, the overall profits of these entities will be subject to tax (taking into consideration the tax due at the level of the company and its shareholders, provided they are Spanish resident companies) at an effective rate of approximately 26%, as opposed to the previous 16% rate.  

Despite these changes, the EDAV regime remains highly efficient, taking into account other tax benefits, such as the value added tax benefits available (4% rate on first acquisitions of residential properties – normally, non-recoverable – versus the standard 10%). Besides, for non-Spanish resident investors who may earn Spanish source dividends exempt from Spanish dividend withholding tax (such as EU resident companies, if certain requirements are met), the single layer 15% CIT effective tax rate on Spanish rental income earned by the EDAV is extremely competitive.

Tags

uriamenendez, spanish tax, reit

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