Spanish Taxes
Capital Gains Tax
Spanish Taxes: Capital Gains Tax
The Spanish Government may need to restructure taxation laws for non-residents if found to be in breach of the EC Treaty.
The European Commission referred the Government to the Court of Justice following allegations of discrimination regarding Capital Gains Tax (CGT).
As the law in Spain currently stands, non-residents are liable to pay a tax rate of 19% on profits from the sale of a house, not 35%. This is deemed prejudicial because residents can benefit from exemptions and deductions, resulting in a maximum effective tax rate of around 15% under certain conditions.
The Capital Gains Tax law may contravene the EC Treaty because EU member states have agreed to four fundamental principles: the free movement of goods, persons, services, and capital. If Spain encourages investors to bring money into the country but heavily taxes them when they withdraw it, it may not be complying with the principle of free movement of capital. Additionally, if it discriminates against non-residents who are EU members, it could be violating the principle of free movement of persons.
A ruling is expected to find that Spain is in breach of the EC Treaty. A precedent for this was set in the Fokus case. On 23rd November 2004, the EFTA (European Free Trade Association) Court ruled that the Norwegian tax credit system was discriminatory and contrary to the “free movement of capital” rule. While Norway has appealed this ruling to its Supreme Court, it has led to discussions about potential tax law changes in several European countries, including Spain.
Until the law changes, the bullet points below indicate whether you may be exempt from CGT or eligible for a reduction.
Exemptions:
Residents over 65 who have lived in their property for three years.
Rollover Relief: If the resident invests all the proceeds from the sale into another primary residence (the property must have been lived in for three years). If only a portion is reinvested, the remainder is liable for CGT.
Property purchased before 31st December 1986 is exempt for both residents and non-residents.
Pensioners who use the “Inherit From Yourself” scheme, which allows them to live in their property for the rest of their lives while accessing some of its equity.
Reductions:
Non-residents can apply for reductions but are not exempt from CGT.
Property purchased after 1994 may apply for an inflation factor to reduce the amount of CGT paid.
All official expenses incurred in acquiring the property (e.g., notary fees) can be offset against CGT.
Applying for residency may allow individuals to be liable for a maximum of 15%.