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New taxes on non-Spanish-tax-resident individuals who indirectly hold Spanish real estate

The Spanish Government recently published a proposal to tax non-Spanish-tax-resident individuals who hold Spanish real estate through one or multiple non-Spanish-resident entities under Spain’s Net Wealth Tax (NWT). The proposal also calls for a Solidarity Wealth Tax for High-Net-Worth Individuals (Solidarity Tax).

Government’s proposal

Under the proposal, non-Spanish-tax-resident individuals would be subject to the NWT when they hold shares in any unlisted entity where “at least 50% of its assets are directly or indirectly made up of real estate located in Spain”. The proposal would supersede current domestic regulations and the most recent position of the Spanish tax authorities and various Spanish courts, which traditionally required non-resident individuals to pay NWT only if they directly owned real estate.

The Government also proposes to introduce the Solidarity Tax as a top-up tax on the NWT (which is a regional tax) to be calculated and applied at the central-State level.

The Solidarity Tax will be levied on non-Spanish-tax-resident individuals with a net wealth in Spain – including stakes in non-resident entities holding Spanish real estate – of at least EUR 3 million.

The Solidarity Tax would be complementary to the NWT, with the NWT paid being creditable against the amount owed under the Solidarity Tax.

Entry into force

The Government will likely have sufficient parliamentary support for the proposed measures to go through Parliament and be passed before the end of 2022. The new measures would enter into force the day after they are published in the Spanish Official Gazette (Boletín Oficial del Estado).

If the law is published before the end of 2022, both the NWT and the Solidarity Tax would apply to indirect holdings of Spanish real estate held on 31 December 2022, provided that capital can be taxed under any applicable tax treaty.

Under the regulations as currently worded, both taxes would have to be paid in June or July of the following year. In this regard, non-Spanish-tax-resident individuals subject to NWT or Solidarity Tax would have to appoint a representative to deal with the Spanish tax authorities before the end of the tax payment period. 

Clarity of the new tax measures

The interpretation of the new measures could potentially be unclear in several respects.

First, the proposal does not specify a new location-based rule identifying the regional law applicable to non-Spanish-tax-resident entities. Domestic regulations generally allow non-Spanish-tax-resident individuals to apply the regional tax regulations of the Spanish autonomous regions where the majority of the assets and rights they own in Spain (based on value) is located. Our initial understanding is that this general rule should also apply to individuals holding Spanish real estate through non-Spanish-tax-resident entities, but as currently worded, the legislation is not entirely clear. Therefore, our interpretation is that the proposed reform would not result in additional NWT or Solidary Tax for non-Spanish-tax-resident individuals who indirectly own real estate located in autonomous regions such as Madrid and Andalusia, where full NWT relief exists, unless the individual’s Spanish assets in Spain exceed EUR 3 million and, therefore, the Solidarity Tax applies.

Second, under the proposal, the value of the non-Spanish-tax-resident entity’s assets should be calculated by replacing the net book value of the Spanish real-estate assets with the highest of (i) the cadastral value, (ii) the value determined or verified by the Spanish tax authorities and (iii) the consideration paid when the real estate asset was acquired. The net book value of the remaining non-Spanish real-estate assets or rights must be replaced by their market value as at 31 December. However, this approach is inconsistent with the domestic NWT rules for the valuation of specific assets and rights (that do not depend on their market value) and may potentially lead to disputes with the tax authorities.

Third, once it is determined that a non-Spanish-tax-resident entity holds a majority of Spanish real-estate assets, the NWT and Solidary Tax will not be assessed on the value of the underlying Spanish real estate, but rather on the value of the shares (or equivalent instruments) held by the non-Spanish-tax-resident individual. Therefore, the value of the shares must be determined. Unfortunately, there is little guidance on how the value of such shares should be calculated. In principle, it would be reasonable to assume that the general NWT valuation rules applicable to ownership of shares in companies should apply. Under those rules, the entity’s value should be calculated using the higher of (i) the nominal value and (ii) the theoretical value of the shares, and not the underlying assets’ market value, which is likely to be higher than (i) or (ii). It seems likely that the Government did not intend for this to be the result.

Fourth and finally, in terms of the value of the shares in the non-Spanish-tax-resident entity holding a majority of Spanish real-estate assets, it is unclear whether the value of all the shares should be taken into account, or only the shares that proportionally correspond to the indirectly held Spanish real estate. Although this would seemingly be unfair, how the rule is worded to suggests that NWT and Solidary Tax would be due on the value of all of the shares issued by the non-Spanish-tax-resident entity.

Tags

uriamenendez, spanish tax, hnwis, real estate

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