As a buyer of Spanish residential property, you may often hear the term “company-owned property” and, particularly in the case of older and larger homes, it will be something that may well come up in the course of your home-hunting. This article sets out some basic history, evolution, and present day considerations relative to this issue.
In the ‘70s and ‘80s and even the ‘90s, it was common to hear of Spanish properties that were registered in the names of offshore holding companies and the companies, rather than the properties themselves, were offered for sale. In the early years, many of these companies were domiciled in Panama; later on, Gibraltar based companies became very popular as they were closer to home.
The advantages in the eyes of the owner were clear: when selling the property, he could offer for sale the shares of his holding company, instead of selling the property from the company. This could be accomplished without having to issue any Spanish public documents which recorded the sale, since the public title deeds of the property were already issued in the name of the company. Upon purchasing the company shares, and hence the property held within, the buyer accepted the unrealized capital gains tax liability which would only have to be paid in the case of selling on the property outside the company structure, since the original book value of the company asset would remain unaltered. In those days, this type of transaction was very common and it was relatively easy to continue to sell the company on to yet another buyer simply because the seller paid no taxes thanks to the Spanish Tax Office not having any information on the transfer of assets, even though the tax was due.
For the buyers the system appeared easy: it avoided transfer taxes and if at any future point they wanted to sell, they could offer the new buyer the same company package. This worked until the Spanish Tax Authorities “saw the light” and changed the tax laws, making the sale of companies owning properties much more difficult. The most recent of these laws have been several Tax fraud prevention laws passed in 2006, 2010 and 2012, the abolition in 2007 of the special tax advantages of patrimonial or holding companies.
But changes started coming a lot earlier: in 1991, the Spanish Tax Office introduced a 5% annual “penalty”, based on the cadastral value, in the form of a "special tax" on any property owned in the name of a company domiciled in “tax haven” countries. This was later dropped to 3%. In order to avoid this penalty, the company owners, on recommendation from their Spanish lawyers, instructed their company administrators to set up a Spanish company, capitalized by the property, and whose shares were, in turn, owned by the off-shore company. This was a legal way to avoid the special tax. A few company owners made the wise decision to simply liquidate the company, with the title of the property then reverting directly to the company shareholder personally.
Since the '90's and especially since the year 2000, the Spanish Tax Office has taken a view that drug and mafia rings, and money laundering activities could potentially lie behind off-shore companies (“Why else use a tax haven company?”, they reasoned) when, in reality, most of these companies were formed by reputable lawyers on behalf of their normal, tax paying foreign clients simply as a convenient way to purchase and hold property, and also for inheritance tax planning, in the Anglo-Saxon manner of investing.
With effect in 2003, the Spanish Tax Office gave new fiscal treatment to “Patrimonial or Holding Companies”, that is, Spanish companies holding mainly real estate. This treatment was especially useful for those owners whose companies met certain conditions, one of which was to have “no commercial activity”, amongst others. The capital gains tax, upon the sale of a property owned by patrimonial companies meeting the necessary criteria was only 15%. Spaniards themselves were quick to start to use these companies since a capital gain for individuals at the time was taxed at penal rates. These companies were also ideally suited for foreigners to legally avoid the penal 35% non-resident capital gains tax on the sale of property, and consequently a strong motivation for non-residents to buy properties with Spanish companies owned directly by themselves rather than through a foreign holding company.
As indicated earlier, in 2007 the Holding Company special tax treatment was abolished and anyone selling property out of the company after that had to pay the 35% company tax in force at the time, or had a certain period of time in which to liquidate the company. However, in compensation, a capital gains tax of 18% was finally introduced for non-resident owners who sold properties owned in their own names. This is now set at a 19% for EU residents (and 24% for rest of non-residents in Spain). This long overdue "normalization" of taxes for non-residents hastened the disappearance of the infamous "B money” (cash) in property transactions.
As a consequence of the above, those still owning properties within a company structure have gradually become cornered over time. The advice to buyers today from almost all lawyers is not to buy within a company structure, except under certain specific conditions and especially, not to buy someone else’s company where the property has a low book asset value, as you would be taking on this “unrealized Capital Gains Tax” as mentioned before. Most people today prefer to buy a property in their own name or, at least, with their own newly formed company and a present-day, full tax base for the cost of the property.
The result of this evolution is that sellers of properties which are still owned by companies often end up having no option but to sell the property out of the company and pay penal taxes as a result.
Those who still own their properties through off shore companies, either directly or through a Spanish subsidiary company, or a Spanish company where they own the shares personally, may not be totally out of luck. There are a few lawyers and accountants who are highly specialized in European community tax law who, after analysis of one’s current ownership structure, nationality of the company, place of one’s own fiscal residency etc., might be able to suggest a change in domicile of the Spanish or mother company to another country, ie, a change of nationality of the company, or other company adjustments which could result in a substantial reduction in the capital gains tax, all in a totally transparent and legal manner.
It should be noted that to be safe, these changes must be put in place even before the decision to sell has been taken. Should the Tax Office make a connection between the company changes and a sale taking place shortly afterwards, and conclude that the sole reason for the changes was to avoid taxes, the Tax Office could end up challenging this and trying to nullify the tax advantages claimed.
a) Disadvantages in buying a Spanish Company
1. When the shares of a holding company are bought, the purchaser also takes on an unrealized tax which must be paid once the property is sold from the company, as indicated above. For example: In 2012 the shares of a Spanish company are bought for a price of €1,000,000. The property had originally been bought by the company in 1997 for €400,000, plus title deed costs, which is also the share capital of the company, including any shareholder loans. The property has also been depreciated on the company books in accordance with the Spanish Tax Code to, let us say, €300,000. The property is then re-sold outside the company, in 2016 for €1,400,000. According to today’s corporate tax rates, 25% would be payable on the difference between the original, depreciated book value of the property (with indexation) and the price received plus taxes on the dividends if/when the funds are taken out of the company. In the end, tax is being paid on part of a profit which the seller has not made, amounting to nothing less than financial ruin.
2. Company administration costs: These can be between €2,500 and €4,000 a year. It doesn’t sound like much but multiply it by the 15 or so years the property might be owned and it turns into real money. Plus the naming of administrators, book-keeping, annual tax forms to sign and file, etc.
3. It is clear that when we talk about buying a company we refer to a company which has had no commercial activity whatsoever, whose only purpose is to own and perhaps rent out a property, and to pay the running expenses of that property: a holding company. These companies will obviously have a history. This is not normally a problem, but the company must have a professional audit and it must pass all the normal tests and due diligence. Otherwise, if there are any obligations undertaken by the company which have not been disclosed, there will be unpleasant surprises. Fortunately, most company owners leave all control in the hands of a professional company administrator who keeps the books and can give warrants and representations as to the good health of the company. When buying a company owned property, caution should be exercised to make sure it is owned by a visible and solvent seller, and letters of responsibility should be obtained both from the administrators of the company and the real owner, in addition of course to a good audit. The problem arises when there is a seller who has Powers of Attorney himself, and it is difficult to find out who he is and what he does and the use he might have made of the POA. This situation should be avoided.
4. The use of a company home by the company owner has already been declared as a taxable item by the Spanish Tax Office. So, what many the owners do is to rent the property from the company, at a fair market rental value, and from the rent received the company can pay the running expenses of the property, with the intention of reducing the profit gained and hence the corresponding taxes to be paid. This rental value you are paying might be challenged by the Tax Office as not to be a market value rent.
b) Advantages in buying a Spanish Company
After reading the above, most people will say: “how can there be any advantages?” Well, there are, but a buyer must fit certain criteria.
1. The large estate, the very important asset: A lot of people have assets spread out in different countries all over the world and want to simplify management and their estate situation, as well as not appearing publically as an owner for reasons of discretion. There is nothing illegal about owning a Spanish company with a Trust, or any other foreign company, tax haven or not, provided there is transparency with respect to full identification of the beneficial owner, as well as a declaration made of the legitimate, tax paid source of funds used for the purchase. When several people are beneficial owners of a purchasing company, identification is not required for those who own (directly or indirectly) less than 25% of the company.
So, if the property of interest is in an already existing company structure, if the purchase price is elevated, the buyer may not really care about the issue of unrealized capital gains as he is may be thinking he will never sell it (and under certain, special circumstances he might also save the transfer tax). In the mind of many of this type of investors, even if they do decide to sell in the future, their mind set is that their advisors will solve that problem when the time comes, and who knows, maybe he will meet someone like himself who will buy his company. But here we are talking about the more expensive properties and the wealthiest buyers.
2. If the shares of a Spanish company are bought by two or more individuals with no one person owning more than half of the company, and more than 50% of the company assets are comprised of real estate, or if the company is actively trading, the so-called transfer tax on re-sale properties can be legally avoided. The transfer tax in Andalucía was revised on April 2021 and has been set to a flat rate of 7% effective from 28th April 2021 to 31st December 2021, if not prologued after that.
3. Companies are exempt from paying the newly (and provisionally) re-instated wealth tax (but not, however, the shareholders of companies). For those owning properties in their own names, this tax is based on a sliding scale according to the value of the property, from 0.2% (up to €167,129) up to 2.5% (over €10,695,996).
Needless to say, the exemption of companies from the patrimonial or wealth tax can always be modified by the Tax Office at any time in the future, although most experts do not consider this likely.
4. One person’s problem can often be another’s gain. Property owners today trying to sell along a company structure have a problem: buyers no longer want to take on the company’s tax obligations which would fall due if and when they, in turn, decide to sell the asset outside the company. But if the value of the share capital is not ridiculously low, as in the case mentioned above, we have sometimes witnessed savvy buyers (with their savvy agent to guide them!) who first of all do a deal with the seller to buy a property out of his company, at an agreed price. Then as a second step, with a base price established, he can sit down with the seller, calculate the taxes the seller has to pay (company tax, and dividends tax if the money is taken out of the company) and compare it with the simple capital gains tax of 23% that the seller would have to pay if he were to sell the shares of the company (21% for the first 50.000.-€). The buyer might then consider taking on the company (especially if he has no intention of ever selling), and splitting the savings with the seller.
5. Some buyer clients are masters in company transformations, mergers, or outright company acquisitions by other companies he may own. This type of buyer has the experience and mechanisms at his disposal to dilute, in time, a low capital value of a company he purchases.
To summarize: what one could do 20, 30 or 40 years ago with respect to tax issues is no longer possible with the current tax legislation in force. Nowadays, most people will have no interest in purchasing property within a holding company because:
• by owning it in their individual names, all they have to pay when they sell their property is the personal capital gains tax at 19% (if not resident in Spain).
• In some cases, it might be worthwhile considering purchasing a property with a non-resident company where the capital gains tax is also fixed at 19% for a company domiciled in the EU.
Compare that to having to pay the company tax at 25% and the dividend tax on top of that when they liquidate the company: in the majority of cases, it will simply not make financial sense. But there are indeed exceptions to this, as outlined above, and a buyer’s particular circumstances can make a company purchase preferable for him.
Panorama always recommends to anyone seriously interested in further advice relative to buying or selling a company which owns property that they consult with a reputable lawyer specialized in this type of transaction.
Article and statements relative to taxes reviewed by Cruz-Conde & Asociados