Buying through a company in Spain: does it make sense???

Thinking about buying a property through your limited company?

The purchase of a home through a property company is a completely legal practice in Spain even for non-residents. Particularly in the Costa del Sol area, a “Company-owned property” is a concept very often heard during the course of the property hunting process (#buyingthroughcompany #realestateadvice #lawyermarbella)

Before making this decision you must look at the advantages and disadvantages, and seek professional guidance before taking action.

In the past, many properties were acquired through or subsequently incorporated into Spanish Limited Liability Company. The advantages in the eyes of the owner of the company were clear: tax mitigation, the possibility to conceal ownership and asset preservation. Furthermore, the tax treatment to “Patrimonial or Holding Companies”, that is, Spanish companies holding mainly real estate with no commercial activity whatsoever, was far more advantageous than that given to individuals owning real estate assets. As a result of it, and until the end of 2006, many companies were incorporated exclusively for the purpose of acquiring a property in Spain. Most of these tax advantages were nevertheless abolished on 1 January 2007. This new scenario, with tax rates applicable to the difference between the original book value of the property and the selling price received plus the saving income taxes levied on the dividends if/when the funds are taken out of the company, has become a clear deterrent for many potential buyers.

It is also worth mentioning here that Spanish Limited Companies cannot avoid paying taxes by simply arguing that no profits are generated when exclusively the company owners are those using the property. On the contrary, the Spanish Tax Office has declared this practice as a taxable one insofar as it is assumed that a company must necessarily have the purpose of generating profits. Hence, the company has the obligation to charge a rent at a fair market rental value, to the administrators and company owners’ and relatives who use the property. The rent yield is considered an income and the company must pay a 25% tax on it, although the running expenses of the property can be deducted. As opposed to it, if the property becomes the primary residence of an individual, its use will not entail any type of taxable personal income to such individual.

When buying through a corporate structure, the company administration costs are also a relevant aspect to bear in mind. Depending on the structure chosen, this can range from several hundred euros a year for basic bookkeeping services to raking up dozens of thousands on more complex structures.

On top of that, the vast array of new obligations imposed on lawyers, notaries or even banks following the enactment of the Spanish laws on Anti-Money Laundering should be considered too. Although it is true that the ownership status of the property or shares cannot yet be determined by a simple query in the Land Registry, the law changes enacted in 2010 have cornered those willing to conceal ownership. Nowadays, it is mandatory to disclose and clearly identify the ‘ultimate beneficiary’ or, in cases of several beneficial owners, to identify those holding (directly or indirectly) more than 25% of the company shares.

Notwithstanding the above, there are still advantages that might push investors to seek incorporating structures when acquiring real state in Spain. This becomes indeed an interested alternative for special properties worth a considerable sum of money. Also for investors for whom asset preservation is a goal in itself insofar as holding companies assets become effectively locked-up and cannot be easily disposed of (think of a divorce settlement for instance). Furthermore, individuals with assets spread out in different countries and willing to simplify management and their estate situation, might find that this ownership model speeds up management in matters such as renting to third parties or even hiring employees. And not to be forgotten, is that all repairs, installation replacements and renewals are fully tax deductible for property holding companies, which is not the case with properties owned personally.

From a tax point of view, amidst the possible tax benefits of selling the shares of a company and not a home, it should be mentioned that to date, companies are exempt from paying the newly (and provisionally) re-instated wealth tax. This tax has been reintroduced in Spain and affects both residents and non-residents with assets exceeding €700,000. Initially its application was to be limited to the years 2011 and 2012, but the period of validity has been extended until now. This advantage must be however weighed with the consideration that the wealth tax also applies to the shareholders of companies.

It has been traditionally argued as well that a property holding company involves more options when it comes to planning for Inheritance Tax (ISD/IHT). This assumption is however somehow misleading in view of the Spanish Tax Office interpretation to consider the assets of a company without a genuine economic activity and merely holding real estate, subject to Succession Tax. In addition, the changes introduced by new government of Andalucia to practically eliminate this tax in the region, make it debatable now on whether corporate structures are effectively able to mitigate income or inheritance tax as efficiently as in the previous decades.

All arguments considered, it can be concluded that the answer to how property investors’ can balance out the pros and cons of buying a property through a company largely depends on their individual circumstances and future intentions. The bottom line here is that there are no magical one-size-fits-all schemes as personal needs differ widely from one another and even evolve in time. Care forward planning is key from the outset of the acquisition process and it is essential to count on sound expert advice. As independent lawyer, and with an extensive international background as legal advisor, Patricia Gonzalez Galvez from GG Abogados, provides expert advice tailored to each client’s particular needs. Covering the Costa del Sol area, and specialized in property conveyancing, GG Abogados combines the flexibility an affordability of a young firm with excellence and a sound understanding of its overseas clients’ demands. GG Abogados provides services in English and French and rely on a team of accountant and economist partners to create value by providing results.

[1] The material set out herein is for information purposes only and does not constitute legal or professional advice. No responsibility will be accepted for loss caused directly or indirectly as a result of acting in reliance upon information contained herein.