Taxation on Property Rental in Spain
Since Brexit was finalised on 1 Jan 2021, many British property owners have become concerned about their tax status in Spain. The British will now be treated in the same way as all other 3rd countries, namely all non-EU countries. Whilst the new tax status is probably unknown to British owners, the tax treatment is not new to 3rd country property owners in Spain.
Spanish taxation for property rental is a Federal tax, which is set by the Federal Government in Madrid. Some Regional governments may have additional taxes, but for the purposes of this article we are covering the Federal Taxation in general, and Andalucia in particular. For local taxation in other Autonomous Regions you need to contact your local government or experts.
Currently in Andalucia, there is no additional taxation for either Vacation Rental or Long Term rental. However, for Vacation Rentals, owners need to obtain a licence for the property, and also register their guests with the authorities within 24 hours of arrival (Guardia Civil or Policia Nacional depending on the Town Hall). Click here to read more on this.
NOTE: The information below is subject to change as the annual Federal budget can add, reduce, or change any of the points below, so please check that these rules are still valid before making any decisions. This information is correct as of Jan 2021.
Why taxation is important?
If you are purchasing a property in Spain as an investment, or a holiday home that you hope will pay for its own costs, then you need to consider the tax status.
Your rental income is subject to Spanish tax, even if you are not resident in Spain. Additionally, your income is treated differently if you are an EU Tax Resident, vs a non-EU Tax Resident (3rd country). For the purpose of this taxation, tax residents of Iceland and Norway are treated as EU Tax Residents, whilst the Swiss and British are treated as non-EU residents.
Portals and Property Management Companies are obliged by law to report all rental income to the Hacienda (Spanish tax authority), so it is no good trying to hide your income.
This of course has a significant impact on your net income from your property, so you need to take that into consideration before making a purchase. Your net income is ultimately defined by the amount of outgoings as well as the tax you pay.
EU or Non-EU Tax Resident Owners
There are 2 categories of owners, namely EU Tax residents or non-EU tax residents. It is important to distinguish that the definition of EU or non-EU is not related to the nationality of the owner, but what country is considered as their Tax Domicile.
For example, if you are a British Citizen, but live, work, and pay your taxes in the Netherlands, you are considered as an EU-Tax Resident, even though the UK is no longer part of the EU. Of course the reverse also applies, so if you are a Spanish Citizen, but live, work, and pay your taxes in the UK, you are considered as a non-EU tax resident.
Deductions
EU Tax Residents can deduct their expenses such as Community Fees, IBI, Basura, Internet, Utilities, and any repairs or replacements.
These costs can be deducted on pro-rota basis, based on the number of weeks you have rented your property. So if you let your property for 12 weeks out of 52 weeks of the year, you can deduct 12/52 of all your expenses. This means the more weeks you rent your property, the more deductions you are allowed.
Property Management fees and Commissions can be fully deducted from income.
Non-EU Tax Residents cannot make deductions for any of the above.
Tax Allowance
Spanish Tax Residents are allowed a certain income per year from their property, before they have to pay any tax. This can vary from one tax year to another, and can change with the annual Federal budget.
This is currently not being applied to EU Tax Residents, hence it is being challenged in the European Court of Justice. Spain may be forced to offer this to all EU Tax Residents. However, until the outcome of this case is known, and unless you are a Spanish Tax Resident, you are not entitled to any tax free income.
Non-EU Tax Residents do not enjoy this benefit, so do not get a tax free allowance. This is not a subject of the action at the ECJ, so irrespective of the outcome of the case, this situation will not change.
Depreciation
EU Tax Residents can depreciate the property, based on the cadastral value on an annual basis. Currently this is set at 2% per annum.
Non-EU Tax Residents cannot depreciate their property for tax purposes.
Tax Rate
The tax deductions are based on the net rental income, which means after deductions for expenses allowed for Tax Residents of the EU (including Iceland and Norway).
Currently the rate for EU Tax Residents (including Norway & Iceland) is 19%.
Tax residents of all other countries are taxed at 24% of Gross income, as they are not allowed to make any deductions.
Submission
All property owners who have an income from their properties must submit their income declaration on Quarterly basis.
Both EU and non-EU Tax Residents must submit their final tax declaration by 10 January each year, when they can make any deductions that they may be entitled to.
Spanish Tax Payers, must submit their final income tax submission by June of each year as part of their personal income tax submission.
Summary
Your tax residency has a profound impact on your net annual income. In essence EU Tax Residents (and Spanish tax payers), pay income tax on “Net Income”, whilst non-EU Tax Residents pay tax on “Gross Income”.
It is very important that you get advice from tax experts before making a commitment to purchase a property, or decide to rent it. Contact us, and we will be delighted to offer you specific advice via our tax experts.