Mallorca Real Estate: Taxes for Non-Residents
When buying, owning and selling a property in Mallorca, the local tax authorities will always participate. Tax authorities differ throughout the world in the way they operate: car & traffic taxes, value-added taxes, taxes on the owner-occupancy advantage – these are a few of the taxes that the Spanish tax authorities have come up with.
When buying property in Mallorca you must reckon with more than just the tax, there are other additional costs to consider, which account for about 1% to 2% of the purchase price: the fees of the Notary, the costs for the registration in the land register, the fees for the Gestoria, who will handle the necessary paperwork with the land registry and banks, and finally the costs of a lawyer, who maybe involved in the purchase process.
In recent years, the taxation of real estate in Spain was also quite confusing: Due to the crisis, e.g. the value-added tax and the real estate transfer tax on the purchase of real estate, were halved in certain periods in order to stimulate the real estate economy and to allow the banks to reduce the stock of forcibly managed properties. Some taxes have been raised (land transfer tax), others reduced (income tax).
The wealth tax was also suspended, then revived. In short: tax confusion! The legislative marathon was followed by a month-long legislative standstill, as Spain was not and is still unable to install an effective government. In order to provide a little overview, I will provide in this article an overview of all taxes that arise in connection with the purchase, possession and sale of Mallorca property of an EU non-resident as well as the current tax rates (as of January 1st, 2020).
I limit myself to the taxes of non-residents, i.e. people who stay in Spain for less than 183 days or who have closer personal and economic relationships with another state (centre of life interests) or who are habitually resident in another state (Definition of the Spanish-German double taxation agreement (DBA).
Taxes on the acquisition of real estate
- One-off taxes
Real estate transfer tax
The purchase of a property (not new) is subject to the real estate transfer tax (ITP). The individual local authorities are entitled to determine the amount of the land transfer tax. On the Balearic Islands, the following land transfer tax is payable on the purchase of a second-hand (not new) property:
the first 400.000 € of the purchase price are taxed with 8%
between 400,000.01 € and 600,000 € the real estate transfer tax is 9%.
the amount between € 600,000.01 and € 1,000,000 is taxed at a rate of 10 %
a purchase price over 1.000.000 € is taxed with 11,5%
Sample calculation with a purchase price of 800.000 €
up to 400,000 € Tax due is 8 % = 32,000 €
for the amount between € 400,000.01 and € 600,000 9% is due = € 18,000
on the amount of 600.000,01 € to 800.000 € it is 10 % = 20.000 €
Therefore, total tax due is 70,000 €
The tax is payable within 30 days of the transfer of ownership.
VAT Tax
While the purchase of a used property is subject to land transfer tax, VAT (IVA) is payable on the purchase of a property for initial occupation. The applicable tax rate depends on the type of property: For residential properties including garage parking spaces (max. 2 per residential unit), 10% IVA must be paid on the purchase price.
Notarisation or Stamp Duty
On the Balearic Islands, as from the 1st of January 2020 it will be 1.5 % instead of 1.2 %. The old tax rate will remain the same if the purchase of the first residential property is involved and its value is less than €200,000. The deadline for payment of the stamp duty is 1 month after signing the notarial deed. Stamp duty is also levied on mortgage orders, but due to a change in the law, it has been payable by the lender since 2018. Proof of payment of the stamp tax is a prerequisite for registration of the notarial deed in the land register.
Inheritance tax
If the real estate is not acquired by purchase, but e.g. by donation, inheritance tax is payable. In Germany, we have very high allowances with regard to the inheritance to close family circle, and this every ten years, so that the inheritance/ donation is a form of intelligent estate planning. Spanish tax law does not provide for such tax allowances, but taxes gifts between direct relatives in the ascending and descending line and between spouses and life partners at a uniform, moderate tax rate of 7%.
In order to avoid the accrual of inheritance tax in Spain, the inheritance should be made in Germany by making use of the tax-free amounts. Certain formalities should be observed. If a father wants to give money to his sons to buy a Spanish property, he should transfer the appropriate amounts in Germany to accounts of the children, so that these then transfer from their own account the payment amounts to Spain. If, on the other hand, the father would transfer the required purchase price to his own Spanish account and then only there provide the children with the money for the purchase price, inheritance tax could be incurred in Spain.
It should also be noted that any appreciation in value in the past is taxable separately by the donor. If, for example, the father gives away a property worth € 700,000 to the son, which he himself once acquired for only € 400,000, the father has to pay profit tax of 19% to € 300,000 and the son has to pay inheritance / donation tax of 7% to € 700,000.
Inheritance tax
Inheritance tax is a permanent topic of discussion for Spanish-German properties. Let us remember: According to the national Spanish tax law, the inheritance tax of the non-resident for assets of 800.000 € or more was 34% linearly; in (rare) extreme cases it could rise up to 81%. This all looked much more pleasant for residents: The Spanish national tax law had granted the autonomous regions the right to reduce the inheritance tax for residents. The Autonomous Regions had made good use of this right, often reducing inheritance tax for close relatives to 1%, in fact abolishing it (abolition by trivialisation). With the decision of the European Court of Justice of 3rd September 2014, the Spanish legislator was called upon to treat residents and non-residents equally and also to eliminate differences between different Autonomous Regions. The hope that everyone would now only have to pay 1% inheritance tax was short-lived. For the Balearic Islands, a new inheritance tax table has been in force for residents and EU non-residents since 1 January 2016.
Inheritance Tax Rates in Mallorca 2020
Thus, the inheritance of close relatives up to € 700,000 are only subject to inheritance tax at 1%, from € 700,000 to € 1,000,000 at 8%, from € 1,000,000 to € 2,000,000 at 11%, from € 2,000,000 to € 3,000,000 at 15% and above € 3,000,000 at 20%.
Taxes on property
- Current annual taxes
Land Tax
Land tax (IBI) is levied on the value of rural and urban land on the basis of the cadastral value by the competent municipality and is paid annually. The taxable persons are the owner/s of the property, the person/s entitled to heritable building rights and the usufructuary. The amount of the property tax is set by the municipalities and varies throughout Spain between 0.4% and 1.1% for developed land and between 0.3% and 0.9% for undeveloped land. During the financial crisis, many municipalities had drastically increased the property tax.
In the Balearic Islands, the property tax is multiplied by the cadastral value by means of a certain factor and is related to the development. The exact values are available on request from the local council.
Income tax
- a) Income tax (IRPF) in case of self-use of the property
The Spanish tax authorities tax a non-resident who only uses the property for holiday purposes on the self-use advantage as fictitious rental income. The tax is 19% to 1.1% of the cadastral value.
Example calculation: cadastral value 380.000 €
1,1 % of 380.000 € = 4.180 €
of which 19 % = annual income tax 794,20 €
- b) Income tax on rentals
If the property is rented to a non-resident, the income tax of 19% on the rental income is payable for this period. However, various costs are deductible, e.g. interest on mortgage loans, community costs for a residential complex, property tax, maintenance costs, insurance, costs for utilities, depreciation = 3 % p.a. on the value of the building.
Net worth tax
By law, on 23.12.2008, wealth tax was “suspended” in Spain, with retroactive effect from 01.01.2008, so that from 2008 onwards no wealth tax was payable. Wealth tax was again enforced for the years 2011 to 2016. The tax rate for non-residents is between 0.2 % and 2.5 % (from net assets of € 10,695,996.06) for all goods located in Spain. What is the value to be applied to a property? The highest of the following values: the cadastral value, the acquisition value or the value established by the tax authorities.
There is an allowance of 700,000 €. For example, if a property has two owners (a married couple with 50% each), each of the owners is entitled to the allowance.
The tax rates for wealth tax can be found in the following spread sheet. The following spread sheet is a government recognised one, so that the tax debtor can choose if the tax rates there are lower than those of the respective Autonomous Community, which is the case for the Balearic Islands.
If a Spanish property belongs to a Spanish S.L. (to Germans), who are in Spain non-resident shareholders, then from 01.01.2013 (DBA) the value of the business share is subject to the Spanish wealth tax. Value is the book value shown in the balance sheet. If no audited balance sheet is available or if it is negative, the highest of the following three values must be applied: Nominal value of the participations, book value according to the last audited balance sheet, capitalisation at 20% of the average profit of the last three completed financial years.
Update January 2024
In both the 2023 national elections and the elections in the autonomous regions, the conservative PP ran on the promise to abolish the wealth tax if it won the elections. In the national state, vote-buying and promises of an amnesty law kept the left-wing Sánchez government in power. In some autonomous regions, however, the conservatives won. Nevertheless, the conservative regional governments have/had the option of changing the wealth tax for their autonomous region because, although it is a state tax, the revenue belongs to the autonomous regional authorities. Conservative-governed autonomous regions have thus also “bonified” the wealth tax “at 100% or another rate”, i.e. effectively abolished it. Sánchez countered this by introducing the wealth tax (nobly titled “solidarity tax”), which came into force on 28.12.2022. This tax on the rich serves the left’s goal of promoting wealth distribution from the top to the bottom. The wealth tax only applies from an amount of 3 million euros and only applies if the assets are not already taxed through wealth tax. So – quite obviously an attack on the autonomous regions that have abolished or want to abolish the wealth tax. A particularly bitter pill and “double punishment”: the revenue from the wealth tax is due to the national state, unlike the wealth tax, where the revenue goes to the autonomous regions.
Marga Prohens, the new, conservative Prime Minister of the Balearic Islands, has now cleverly countered this by having it decided in the budget law that the exemption amount for wealth tax has been raised from €700,000 to €1,000,000, while the previous wealth tax remains in place for assets over €3 million. In this way, it killed two birds with one stone: in fact, the wealth tax was largely abolished and taxes for assets over €3 million will continue to remain on the Balearic Islands rather than on the mainland. The new law will apply for the first time to the wealth tax for 2024 (for which the reference date for assets is 31.12.2024).
Some newspapers write that Prohens has abolished the wealth tax. According to the above, this is not correct. However, even larger assets can be tax-exempt if all the structuring options are utilized. For example, if a married couple with two children (e.g. each with a 25% share) buys a property for 12 million euros, each co-owner has a share worth 3 million euros and therefore does not have to pay wealth tax.
Taxes on a sale
- One-off taxes
Income tax on the capital gain
The profit from the sale of a Spanish property owned by a non-resident is taxable in Spain. The profit from the property sale is calculated from the difference between the purchase price (plus ancillary purchase costs at that time – IVA, land transfer tax, notary and registration costs, value increasing expenses – modernisation and renovation costs, accumulated depreciation, brokerage fees) and the sales proceeds. A 19% tax is payable on the profit thus calculated. In this context, it should be noted that in Spain – unlike in Germany – there is no speculation period, i.e. the profit is always taxed at the same rate of 19 %, regardless of whether the purchase was made 5, 10 or 20 years ago
It can often be read that the profit made in Spain is also subject to taxation in Germany, but then the tax paid in Spain must be counted. This is only partially true. As a rule, the sales profit in Germany is not taxable, namely always if the Spain property was only used for own residential purposes. This is always the case if the property in Spain was used exclusively in the period between acquisition and sale or in the year of the sale and in the previous two years exclusively for residential purposes. Apartments are also used for your own use, even if they were only used for a few weeks a year, but were only available to the owner for the rest of the period. You should keep this topic in mind when buying a vacation property – also – for the purpose of vacation rental. If you sell the property in Spain after a holding period of 10 years, the sales process is definitely not taxable in Germany.
The 3 % Withholding Tax
With regard to the income tax payable by the seller on the capital gain, there is a special provision in Spain that the buyer must withhold 3 % of the notarised purchase price and pay it to the tax office within one month as an a-conto payment on the seller’s profit tax. In this way, the Spanish tax authorities secure a part of the expected profit tax. The non-resident seller must submit a tax return for the sale of the property within 4 months of the sale, in which he or she can then deduct the 3% as a payment already made on the final tax liability
Capital gains tax (Plusvalia)
In addition to the profit tax, the seller has to pay the so-called value-added tax (Plusvalia), which is levied by the local authorities. It taxes the (fictitious) increase in value of the land – not the buildings – since the last notarisation process. To calculate this, one needs the cadastral value of the land, the duration of ownership and the calculation factor of the respective municipality. Plusvalia’s tax liability is payable to the tax office within 30 days by way of self-assessment.
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