Changes in the Property Transfer and Wealth Taxes
By Armin Gutschick & Anja Sämann-Gutschick
Beginning on January 1, 2023, the real estate transfer tax (“ITP” - Impuesto sobre Transmisiones Patrimoniales) on the Balearic Islands has increased. This is a central government tax, but it is levied by the autonomous regions. The new real estate transfer tax begins at 8%, but increases progressively up to 13% as the sale prices rise. Prices up to €400,000 pay 8%; from €400,000 to €600,000 9%; from €600,000 to €1,000,000 10%; from €1,000,001 to €2,000,000 12% and from €2,000,001 13%.
The tax is calculated on a cumulative basis, so for a real estate sale of 2.5 million, the buyer would pay a total transfer tax of €275,000 as follows: €400,000 at 8% (€32,000), the next €200,000 at 9% (€18,000), the further €400,000 at 10% (€40,000), the following €1 million at 12% (€120,000) and the remaining €500,000 at 13% (€65,000). In this example, the average tax for the entire transaction comes to 11%.
There has also been a significant change in the wealth tax for residents and non-residents of Spain. The new law (38/2022) contains two important innovations. It makes an adjustment to the existing Spanish wealth tax, and it also introduces a new temporary “solidarity tax” on wealth. Since the law came into force at the end of 2022, all assets existing as of December 31, 2022 will be subject to the new tax, and any resulting tax will have to be paid by June 30, 2023.
Up until now, shareholders of foreign companies that own real estate assets in Spain have not been subject to a wealth tax, as this was not previously provided for in Spanish tax legislation. This has been changed by the new law. There is now a wealth tax on foreign companies, but only if the applicable double taxation agreement (DTA) gives Spain the power to tax citizens of that country. For example, the German DTA gives Spain the authority to apply a wealth tax to non-residents who own shares or participations in a German company that has at least 50% of its assets directly or indirectly comprised of Spanish real estate. On the other hand, the Swiss and Austrian DTAs do not grant such a power.
The existing wealth taxes are administered by Spain’s autonomous regions, but the new solidarity wealth tax is paid to the Spanish central government. It applies to all assets in Spain and is charged at these rates: from €3 million to €5.34 million at 1.7%; €5.34 million to €10.69 million at 2.1%; over €10.69 million at 3.5%. As you can see, the non-taxable allowance for the solidarity wealth tax is €3 million, which is much higher than the allowance of €700,000 applied in the autonomous regions. Both taxes are congruent as they tax wealth, but the amount paid to a regional wealth tax can be deducted from the amount owed to national solidarity wealth tax. So if the amount you pay to the regional wealth tax is equal or greater than the amount due to the national wealth tax, then you pay nothing to the national tax.
Since the wealth tax on the Balearic Islands is higher than the solidarity wealth tax of the Spanish central government, there is little change for residents of the Balearics. For example, with a tax base of €10.90 million, the wealth tax payable in the Balearic Islands is €258,832 (2.90%). The national wealth tax on that amount is only €224,490 (2.1%), so no additional taxes have to be paid because the solidarity tax is lower than the regional wealth tax. In some other autonomous regions of Spain the wealth tax is a lower rate than the solidarity wealth tax, so taxpayers have to pay the difference.
Apparently, the central government felt that some autonomous regions were being overly lax about wealth taxation. Madrid has no wealth tax and Andalusia has generous deductions that make their wealth tax minimal. With this temporarily introduced solidarity tax, the central government is taking in money that some autonomous regions are voluntarily forgoing by not taxing enough. The new solidarity wealth tax is initially authorized for two years (2022 and 2023). However, this does not mean much based on the history of the wealth tax, which after a few years of interruption has been extended annually for over a decade.