Investing in Spanish real estate, if adequately structured, can benefit from special schemes offered by Spanish Tax Laws, that may significantly reduce the standard Corporate income taxation rate of 25%.
Despite COVID 19 may have affected the real estate market, the privileged Spanish climate and life style still make this country as one of the most attractive places in the world where to spend summer holidays or even telework throughout the whole year with nice views to the sea. Given that we may consider the current context of a transitory nature, it is the right moment to check how to carry on your next real estate property investment in Spain.
What is a REIT – Real estate investment trust?
When it comes to significant investments, quoted companies having a minimum share capital of 5 million can elect to be subject to the beneficial so – called “Sociedades Cotizadas de Inversión Inmobiliarias – SOCIMIS”, Real estate investment trust.
Let us learn a bit more about it.
How REITs work
✔ Spanish real estate investment companies can benefit from an advantageous tax scheme of being taxed at the Corporate income tax rate of 0% subject to the following requirements:
- At least 80% of their investments must consist of real estate for lease; land to promote and then lease; or, portfolio investments in other entities having the social purpose of a REIT. In both cases, the property lease or the investment shares must be kept for at least three years.
- At least 80% of their income must derive from property real estate lease to entities not forming part of the group or from their portfolio investments in the form of dividends. The remaining 20% income can be freely chosen.
Tax advantages of REITs
✔ As they are not subject to Corporate income tax, tax losses carried forward cannot be set off against profits and they cannot benefit from any double taxation tax relief or any tax investment credit either.
✔ Non qualifying income is subject to the standard 25% Corporate income tax rate.
✔ A special 19% rate applies on dividends paid to shareholders having a minimum 5% of the REITs share capital when such dividends are tax – exempt or taxed at a rate lower than 10%, at the shareholder’s level. It must be noted that these entities are obliged to distribute dividends on 80% of the profits deriving from their qualifying rental income and on 50% of the profits deriving from disposal of the real estate properties and portfolio investments used in their special social purpose.
✔ An adequate planning of the shareholding structure may result in the REIT becoming a real flow through entity of the profits generated towards its non resident shareholders which, if subject to a minimum 10% tax in their respective countries, may benefit from the Parent subsidiary Directive (if the requirements for it are met) or from reduced Treaty rates while the REIT would also avoid the 19% special tax.
Spanish Real Estate Investment Companies Corporate income tax scheme
Investing in Spanish real estate, when it comes to significant investments, can be channelled through the so – called “Sociedades Cotizadas de Inversión Inmobiliarias – SOCIMIs” scheme, that permits benefiting from a 0% Corporate income tax rate as opposed to the standard 25% rate of taxation.
An alternative advantageous scheme is also available, at the taxpayer’s election, for ordinary companies dedicated to the rental of home dwellings that can ultimately be taxed at a reduced 3.75% Corporate income tax.
Let us learn a bit more about it.
✔ This is a special scheme that applies to companies mainly engaged in the rental of properties located in Spain, to satisfy the permanent home needs of the lessees. These are ordinary companies that elect for this special scheme, which has to be kept during the year of election and for an indefinite time period up until the taxpayer decides to deregister from it.
✔ The company must be offering for rental a minimum number of eight properties located in the Spanish territory, either purchased or built up by the company. The minimum length of the rental must be of three years.
✔ The rental activity must be carried out through appropriate human and material resources and is compatible with other activities. It is required, however, that the following thresholds are observed:
- Income benefiting from the tax relief must be of, at least, 55% of the total fiscal year income.
- Alternatively, at least 55% of the company’s assets, according to their accounting value at year end, must be capable of generating the income which may be benefiting from the tax relief. This can be the case that, in a given year, the income benefiting from the tax relief does not reach the previous threshold but the company’s assets are formed by home dwellings offered to rent or rented.
✔ Qualifying rental income can benefit from an 85% tax relief. This implies that, for companies subject to the standard 25% Corporate income tax rate, the effective rate is of 3.75%. The rest of non qualifying income as well as any capital gains are taxed at the ordinary 25% rate.
✔ The taxpayer must keep a separate accounting for each property with the appropriate break down of the net income attributable to it. An adequate accounting is, therefore, of essence for the application of this scheme as the absence of such a disclosure may imply its loss.
Summary and examples of taxation
We have gone through different Spanish vehicles that permit investing in Spanish real estate in a tax efficient manner. The type of vehicle will mainly depend on the size and purpose of the investment. While a SOCIMI is used in bigger investments dedicated to the rental of properties, smaller investments may take advantage of a more simplified vehicle when the rented properties aim to satisfy the permanent home needs of the lessees.
These are general guidelines and, in our experience, each project will require a taylor – made solution, that foresees the ongoing Corporate income taxation of the vehicle, on the dividend flow as well as on potential gains derived upon exit by a foreign investor.
✔ Under the SOCIMI scheme, qualifying income is subject to a 0% Corporate income tax rate. If the shareholder is taxed at a minimum 10% rate, dividends paid out to foreign investors shall not be subject to the special 19% Corporate income tax while, at the same time, they may benefit from the reduced Double Taxation Agreement (DTA) rate depending on the State of tax residency of the direct shareholder. However, if the sharehoder owning at least 5% is tax exempt or taxed at a rate lower than 10% on the dividends, then these are subject to Spanish Corporate income tax at a 19% rate.
✔ Under the simplified vehicle scheme, qualfying income is subject to a 3.75% Corporate income tax rate. On profit repatriation, a foreign investor may benefit from the reduced treaty rates resulting from the applicable DTA depending on its tax residence country as well as from the Parent / Subsidiary Directive which would permit a profit repatriation with no additional withholding tax.
✔ Accordingly, a simple example on the dividend flow on a best case scenario could be based on the following assumptions:
|Net profit before taxes||100,000||100,000|
|Corporate income tax||3,750||0**|
|Net profit after taxes||96,250||100,000|
|Dividend distribution treaty rate (est. 10%)||NA*||10,000|
|0% Parent / Subsidiary Directive rate||0.||NA|
|Net income foreign Treaty shareholder||96,250||90,000|
*The reduced Treaty rate does nt apply when the Parent / Subsidiary Directe is applicable.
** Minimum 10% rate on dividends in the State of tax residency when the sahreholder participates in a minimum 5%.
✔ In the event of a direct investment by a non resident shareholder in the Spanish vehicle, the following chart summarises the main tax consequences upon exit:
|SIMPLIFIED VEHICLE||Quoted SOCIMI|
|DTA shareholder||Taxation will depend on DTA provisions*.||The gain is tax – exempt if the non- resident sharehoder owns less than 5%. If equal to or higher than 5%, taxation will depend on DTA provisions*.|
|Non DTA shareholder||The gain is taxable in Spain at a 19% rate.|
* The gain is generally taxable in Spain if the underlying assets mainly consist of Spanish real estate. In such a case, the DTA does not usually limit the rate of taxation, which according to Spanish regulations, is 19%.
Publicado el 02-2021 por PBS