The Spanish “Real Estate S.L.” – Once a good tip, now it is not!

The Topic

Until 2006 it was a hot tip, Mallorcan property with a Spanish S.L., Buyers and investors gave themselves, at lawyers and notaries, the handle in the hand, the tax savings model of the S.L. (Sociedad Limitada) for your dream property. The tax advantages of the asset-managing, by the way passive S.L. were actually convincing: While an active S.L. had to pay 30% or 35% corporate income tax on the profit from the sale of a property (asset deal), the profit of the asset-managing S.L., if it had owned the property for more than one year, was only subject to a corporate income tax of 15%. Also, a convincing advantage for the private holding of a Mallorca property by a non-resident: Up to the discrimination ruling of the EUGH had also the non-resident private person the sales profit from a real estate business with 35% to tax. A further tax advantage existed in the so-called share deal (not sale out of the company, but sale of the shares). With the share deal one could save the real estate transfer tax. According to the German-Spanish double taxation agreement at that time, Spain had no right of taxation for the profits from share deals in the case of share deals of Spanish companies, with German shareholders. However, it was a question of time how long the Spanish tax authorities or the Spanish legislator would tolerate such tax saving or avoidance models.

Tax changes from 2007

Due to a change in the law as of 01.01.2007, the shareholders of the asset-managing S.L. were faced with the choice of either taking over the property as private property or converting the non-active S.L. into an active one and continuing it while waiving the tax privileges. This was followed by other legal measures to plug the tax hole described above, such as the new regulation of the taxation of profits from the sale of shares of a real estate company, through an amendment to Article 108 of the Spanish Securities Act, and some changes in the German-Spanish double taxation agreement in 2011 and 2012. Fine-tuning of the legal measures then also resulted in the provision, that in real estate transactions, the accounts of the sender and recipient of the payments must be named in the notarial deed and that, overall, payment transactions between Germany and Spain are very transparent due to the “large information clause” in the German-Spanish DTA.

For those who continue to hold a property with a Spanish S.L., a decision of the Federal Fiscal Court of 12 June 2013 (Ref.: I R 109/10) brought great adversity. Standard case was usually the following: A Spanish S.L. held a Mallorca property as the only asset and made it available to the family of the shareholders / managers free of charge for holiday purposes. The German tax authorities saw in it a hidden profit distribution. In determining the benefits received as a hidden profit distribution, the BFH set a rent of 6% of the purchase price plus 10% profit surcharge. This led to a considerable additional payment of income tax.

Spanish S.L. – no longer recommended

The result can be summed up as follows: If someone holds a real estate with a Spanish S.L., 25% corporate income tax is due on the profit in case of sale. If a non-resident private person sells a property, the profit tax (income tax) rate is only 19%. In addition, the S.L. has considerably higher “maintenance costs” for balance sheets, tax consultants and commercial registers, while the private individual can only fill out a tax form himself or have it filled out by his Gestoria or tax consultant. The tax model “wealth managing S.L.” once a good tip, has become a” flop.” Just for the sake of integrity: A Spanish S.L. can make sense as a subsidiary of a German GmbH & Co KG. Such structuring models should be discussed with an experienced tax consultant with profound knowledge of Spanish and German tax law.