Investment Guide for Spain
The Real Estate Property Purchase Procedure Preceding procedures Once you have chosen the best property for your needs, it is advisable that you do some advance checking up regarding its legal situation, verifying the legal status of deeds by means of a query at the Property Registry, by taking a look at the records to ascertain that the Seller is entitled to transfer the property and make sure there are no liens or other types of claims on it. Meanwhile, and in order to ensure that the Owner does not sell the property you want to someone else, it is advisable to reserve it. FIRST.- Reserving the property As a first step, you should formalise your offer to purchase the property, and once the basic conditions (price and property) have been negotiated with the Seller, generally a Commitment or an Option Contract is drafted, and then ratified by the payment of a deposit by the Buyer. A deposit (of generally between 3,000 and 10,000 Euros) is normally requested if you are purchasing from a Promoter and up to approximately 10% of the sales price if the property is not being sold for the first time, to have the property taken off the market and be formally reserved. At this time a Commitment Contract is signed between Seller and Buyer and the deposit made. The contract commits and ensures both parties that the property will be available until the purchase deed has been granted. Said contract reciprocally obligates both Parties to sell and purchase and the Buyer risks losing their deposit if they do not fulfil the contract and the Seller risks having to return double the amount of the deposit if they are the party to breach the contract. The time lapsing between the payment of the deposit and the delivery of the property can vary by one or two months, in the case of a resale. When we are dealing with an as yet unbuilt property, so-called Off Plan Development, the Public Deed of the property must be granted and signed within a maximum period of 18 to 24 months from the original date of purchase. SECOND.- Private Sales Contract. Once the property has been confirmed to be properly registered and free of liens and encumbrances, the private sales contract can be signed. Different from the Commitment Contract, the private sales contract must include details of the agreement such as the payment method, date of delivery of the property, penalties in the event of breach by any of the parties, etc. Normally, upon signature of the private sales contract, the Buyer delivers an amount of money towards the purchase, which is not considered a part of the deposit but a down-payment to be deducted from the total price. This amount shall not be reimbursed if the Buyer were to want to withdraw from the contract.
THIRD.- Granting of the Public Purchase Deed As has been stipulated in the private sales contract, a date shall be set for the delivery of the property on which both parties, the Buyer and the Seller (or their legal representatives) - shall meet before the Notary Public for the purpose of granting and signing the public purchase deed, which should mention the fact that the property is free of all encumbrances and liens, mortgages, tenants or occupants; as well as the price. Notaries are civil servant legal professionals, who guarantee compliance with the Law of contracts signed before them, as well as ensuring that the consent of contracting parties is fully informed and freely granted. Furthermore, the Notary must advise the parties of the tax aspects which affect the agreement that has been made. Granting a Public Sales Deed implies the delivery of the property by the Seller and the payment of the complete price by the Buyer, the total of which shall have been reduced by the amounts already paid previous to the signature of the Deed and the difference shall be paid directly to the Notary. FOURTH.- Final Title Deed and Land Registry. Once the Public Purchase Deed has been formalised, and acting for the Owners of the property, the Notary shall present the ownership deeds to the corresponding Land or Property Registry, where the record shall be inserted in the Property Record Book, although the new Owner must present an application for recording the purchase, including proof of payment of the corresponding taxes. Once this has been done, Ownership of the property acquired will be recorded and become official. Normally, registration takes less than a month to be completed. FIFTH.- Utilities contracts. The Owner of the property is who should apply for supply of utilities such as water, electricity, telephone, etc. For this purpose, an account must be opened in a bank that operates in Spain, so that standing orders may be set up to cover the invoices of the utilities. SIXTH.- Taxation. There are several taxes applicable to the purchase of a home. The following is a summary of the main taxable matters related to the purchase and ownership of real estate property. Value Added Tax (Impuesto sobre el Valor A単adido IVA) With regards to the purchase of real estate property, the applicable IVA is 7% when dealing with a new property or one to be occupied for the first time. Exceptionally, an IVA of 16% is applied when dealing with a plot, commercial premises, a garage
or a swimming-pool, in other words, when it is not a dwelling, if the above are not being sold together with the property. On the Canary Islands IVA does not exist and IGIC (Canarian Indirect General Tax) is the tax applied, at a rate of 5%. If instalments are paid, then each payment will carry the proportional tax for the amount paid. This tax is covered by the Buyer in each payment made to the Promoter and in the final payment when she/he completes payment of the full price. The Buyer must then settle payment of the tax with the Tax Authorities. Property Transfer Tax (Impuesto de Transmisiones Patrimoniales - ITP) The taxation rate is 6% of the price stated on the Purchase Deed and is only paid where IVA is not applicable or when the Seller is exempted from paying IVA for any reason. The purchase of Real Estate is always taxed by either IVA or ITP and are mutually incompatible. The application of IVA or in its case, of ITP, will in the end depend on the Seller and the type of property transferred. Municipal Value Added Tax (Impuesto Municipal sobre el incremento de valor de los terrenos de naturaleza urbana - PlusvalĂas) This is a local tax that is placed on the increase in value of a plot of land between two ownership transfers. The increase on the value of the land is not calculated yearly, only when a transfer of ownership takes place. By Law, the payment of this tax corresponds to the Seller in any transfer of property where there is compensation. Should the transfer have been made with no monetary value, for example a donation, the Buyer shall cover the amount due in tax. The increase in value of the land is determined by each Town Council and as a general rule varies between 2% and 3.7% of the value of the land per year since the last change of ownership. Rural land is exempted from this rule if their Cadastral or Rateable Value is very low. Property Rates (Impuesto sobre Bienes Inmuebles - IBI). IBI is paid yearly by all Owners of real estate. It increases annually according to each Town Council, by 0.4 and 1.1% of the Cadastral or Rateable Value of the property. Each Town Council sets the exact percentage every year. Stamp Duty (Actos JurĂdicos Documentados). This tax is applied only to Deeds subject to payment of the IVA and comes to 0.5% of the price stated in the Deed. The tax applicable to mortgages is also a Stamp Tax and comes to 1% of the value of the mortgage. Income Tax (Impuesto sobre las Rentas) Should the Seller be a non-resident of Spain, the Tax Authorities will withhold 5% of the deeded purchase price as a down-payment against the tax on income obtained in the sale of a property and the Buyer will deposit that amount directly into the Public Treasury. This amount may be used by the Public Treasury to offset possible tax debts that the Seller might have with the Tax Authorities. To recover said amount, the Seller must file his corresponding income tax report. The capital increase is calculated as follows:
From the purchase price, the previous purchase price, the expenses connected with the purchase, improvement or extension costs as well as brokerage fees, get deducted. A 35% wealth tax is paid on the net profit,
Financing You can finance the purchase of a property by applying for a mortgage at a Spanish banking institution. Spanish banks generally finance up to 100% depending on the guarantees that are offered to them, at interest rates based on the Euribor. The expenses associated with a mortgage are generally set at 1% of the amount of the loan. Fees and expenses to keep in mind when purchasing property. In most cases, your bank or financial institution will take care of all expenses related with the purchase, through an agency called a Gestoría. The Seller pays their own Value Added Tax (Plusvalía), as is regulated by the appropriate Laws: Notary Public: Stipulated by Law at between 400 € - 900€ Property Registry: Approx. 200 € - 450€ Property Transfer Tax: 7% of the purchase price CANARIAN INVESTMENT RESERVE FUND (RESERVA PARA INVERSIONES EN CANARIAS or RIC). Article 27 of Law 19/1994, of July 6, for the Modification of the Canary Islands Economic and Fiscal Regime (Régimen Económico Fiscal de Canarias), establishes the so-called Investment Reserve Fund in the Canary Islands (Reserva para Inversiones en Canarias). According to said article, the taxable party liable for Corporate Tax shall be entitled to a reduction in their taxable base for the amounts that, with regards to their operations on the Canary Islands, they devote from their profits to the Investment Reserve Fund, and in no event can the tax base be negative. The contributions to the RIC must be made against undistributed profits limited to up to 90%. The amounts devoted to the RIC must be materialised within a three-year period, starting from the accrual date of the corresponding tax in the tax year that the money was provided. Materialization shall be in one of the following investments:
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Initial investments consisting of the acquisition of new property elements for fixed, tangible or intangible assets as a consequence of: The creation or enlargement of business premises. Diversification of activities on the premises to manufacture new products. A substantial transformation to the production process of the premises. Investments in land, whether built-upon or not, as long as no previous benefits have been obtained from the RIC Tax Regime. Investments in commercial areas and tourism activities regulated by Law 7/1995, of April 6, regarding the Organization of Tourism on the Canary Islands, when these are devoted to the renovation of a tourist establishment located in a declining tourist enclave. The elements of fixed intangible assets when these mean the use of intellectual or industrial property. The creation of jobs directly related to the investments mentioned in the previous section, when they are produced during the first six months of operation of the investment. The acquisition of tangible or intangible fixed assets that cannot be considered initial investment, the acquisition of assets that contribute to the improvement and protection of the environment on the Canary Islands, as well as certain Research and Development expenses that are regulated by Law. The subscription of: Stock or shares in capital issued by companies that carry out their activities on the Canary Islands, as a consequence of their incorporation or share capital increase. Stock or shares in capital issued by companies operating within the Canarian Special Economic Zone (Zona Especial Canaria) as a consequence of their incorporation or share capital increase, as long as said issue or increase is more than 750,000â‚Ź. Stock or shares in capital or in the assets issued by the corporations and risk capital funds regulated in Law 25/2005, of November 24, regulating venture capital entities and their managing companies, and in investment funds regulated by Law 35/2003, of November 4, regarding collective investment institutions, as a consequence of their incorporation or share capital increase, as long as the venture capital entities and coowned investment funds invest an equal amount in the acquired shares or representative stock in the corporate capital referred to in the two previous points and comply with the requirements established therein, issued upon incorporation or share capital increase. Canarian Autonomous Community, Municipal Governments of the Canary Islands or their public companies or Autonomous Administrations' negotiable public debt instruments as long as they are devoted to financing investments in infrastructure and equipment or improvement and protection of the environment on the Canary Islands, and limited to 50% of the amount assigned in each tax year. Negotiable instruments issued by public administrations for the construction or management of infrastructure or equipment of public interest for public administration on the Canary Islands, when the
financing obtained from said issue is devoted exclusively to said construction or management, and limited to 50% of the amounts assigned in the tax year. Negotiable instruments issued by bodies that will proceed with construction or operation of infrastructure and equipment of public interest to public administrations on the Canary Islands, once the corresponding administrative concession or enabling administrative instruments, has been obtained, when the financing obtained from said issue is devoted exclusively to said construction or operation, limited to 50% of the assigned amounts in each tax year and subject to the terms foreseen by Law. Issue of the corresponding negotiable instruments shall be subject to prior administrative authorisation by the administration competent to grant the corresponding enabling administrative instrument. The assets in which the investment is materialised must be located on or delivered within the Canary Islands, used here, be taxable and necessary for the development of the activities carried out by the tax-payer.
CORPORATE MODELS THAT EXIST IN SPAIN. The sale or acquisition of real estate by any other means, may also be carried out through one of the different corporate types regulated by Spanish Law. The following is a brief description of the most common corporate models: 1ÂŞ.- Limited Responsibility Company (Sociedad de Responsabilidad Limitada o S.R.L.-) With a minimum of three thousand six Euros worth of capital that must be divided into equity interest but not stock, the S.R.L. enjoys its own legal personality and the partners are not personally responsible for corporate debts. Incorporating an S.R.L. Starts upon granting a Public Incorporation Deed (a Memorandum of Association in Britain) before a Notary Public. Said Deed contains the company agreements reached by the subscribers and Articles of Association on which the operation of the company shall be based. In order to grant said Deed, first a certificate from the Central Company Registry (Registro Mercantil Central) must be obtained, verifying the availability of the name chosen by the partners and with said certificate a bank account may be opened in the company name and the corresponding initial outlay of share capital deposited into it by the subscribers, the amounts corresponding to the participation that each subscriber shall have in the corporation. Once the share capital has been deposited to the corporate bank account, the corresponding certificate from the bank shall be requested. Once the Public Incorporation Deed has been granted, including the Articles of Association or By-Laws, this, the negative certificate verifying the availability of the company name issued by the Central Company Registry and the bank certificate issued showing that the share capital has been deposited to the account, must within a two month period, be presented to the corresponding local Company Registry for recording. The local Companies House will record the incorporation and announce it in the Official Bulletin of the Company Registry (BoletĂn Oficial del
Registro Mercantil), from which moment the company shall acquire its legal personality to all effects. During the lapse of time between the presentation of the Deed at the Companies House until completion of the procedure to record the company's incorporation, a fiscal identification number (código de identificación fiscal or CIF) may be applied for, including registering the company with the Tax Authorities and for the Economic Activities tax, the VAT or IGIC (should the company be located on the Canary Islands), as well as registering the company for National Health Insurance and opening the account for payments of contributions. The S.L. may be managed by a sole Administrator, Joint or co-Administrators or by a Board of Administrators or Directors with a minimum of three and a maximum of twelve members. 2º.- Public Limited Company (Sociedad Anónima o S.A.-) With a minimum share capital of sixty thousand Euros divided into shares and made up of the contributions of the subscribers, the partners are not personally liable for corporate debts. The share capital must be fully subscribed and and least one quarter of it outlaid at the time of incorporation. As with the S.R.L., an S.A. must be incorporated by means of a Public Deed that shall be recorded at the Company Registry corresponding to the location of the corporate registered office. The S.A. may be managed by a sole Administrator, Joint or co-Administrators or by a Board of Administrators or Directors. An S.A. may be founded by several subscribers or a single one, in which case the corporate name must be followed by the letters S.A.U., sociedad anónima unipersonal (Single Shareholder Public Limited Company). The S.A. Must be registered for the Economic Activities Tax, the VAT or IGIC (if located on the Canary Islands) in addition to being registered for National Health Insurance and opening the account for payments of contributions.
© 2009 Planificaciones Mundiales S.L. The information contained herein is general in nature and is not intended to convey specific personal or corporate data or circumstances. No matter how hard we try to share information that is exact and current, we cannot guarantee that no changes will be introduced in the future or at the time when access is required. For that reason, this information should not be considered to be professional or expert counsel. For an exact and detailed study of your case, we recommend that the details pertaining to it be studied exhaustively to obtain the pertinent professional advice.