Taxation of real estate investments for future sale or lease

The purchase and development of real estate in Spain is very common, and people from many different backgrounds carry out this activity. Unfortunately, errors are also very common and, sometimes, very difficult to solve.

Appropriate tax planning requires establishing beforehand which type of investment is going to be made, particularly in relation to the intended operation (i.e. reselling or leasing) and whether minor or major works, if any, will be carried out, which is often the case with offices and hotels. The aim in any case should be to avoid the more contentious points regarding the deductibility of VAT and expenses.

If the property is to be resold, it will need to be determined whether this should be done directly or indirectly, through a company. This is because the operation will be subject to one tax or another depending on the case, with very different results. As an example, it should be noted that the acquisition of equity stakes in a company composed of real estate in Spain will normally be subject to non-recoverable Property Transfer Tax regardless of whether the buyer is a resident of Spain or not.

In the case of foreign investors, double taxation agreements should be studied in detail, as the most recent agreements signed by Spain require that any capital gains arising from the sale of equity stakes in companies owning real estate in Spain must be taxed in this country.

When investing in real estate for commercial exploitation, it is recommended that these are acquired through a Spanish company, and not directly from abroad, as then the foreign investor would be deemed to have a permanent establishment in Spain and, as such, the tax burden would be the same as if it were a company, but with the disadvantages of unlimited liability and the risk of obtaining tax residence in Spain. Additionally, Spanish VAT refunds, where applicable, are quicker when applying through a Spanish company, as their accounts are more reliable, and this makes expense deductibility easier.

Finally, when purchasing real estate for renovation and use as rental accommodation for tourists – very common in Barcelona – this rental income is not subject to VAT – unless services similar to those of a hotel are offered, which is not very common. This income may also be subject to a tourist tax, depending on the region.

Alternative ways of financing this activity should also be examined. It is most common to do so with a loan, although this can cause issues in the solvency of the company. As a loan is not share capital, an excess of credit in combination with a particularly low share capital would force the director of the company to wind it up. A shareholder loan (“crédito participativo”) – which in trade law is considered as equity – can also be useful, although not so much if the company is later sold but not the real estate owned by it.