ONE of the most frequently asked questions we hear at Terra Meridiana (apart from the old winter favourite: ‘Why isn’t it sunny today?’) is: “When is it advisable to own property through a company, rather than as an individual?”
To get the best possible answer, we talked to Álvaro Villar Núñez, tax and legal partner at UHY Fay & Co. The company has been in business for 30 years in Marbella, employs 185 advisors, auditors, and lawyers in eleven locations nationwide, and provides accounting, legal, and tax services to all kinds and sizes of client.
The simple answer, Álvaro smiles, is it depends on what the client wants.
Traditionally, British clients, especially well-heeled ones, favoured companies to acquire property in Spain, whereas Spanish clients preferred to retain assets in their own names. Part of this had to do with different rules applying to non-resident and resident individuals and companies alike, but as Álvaro notes, today, there’s no real difference between either, in most cases, and little advantage to be gained.
Three considerations are most often cited as considerations for buying a property through a company in Spain: privacy, tax mitigation, and succession.
The first, Álvaro says, is no longer worth considering — “Opacity is disappearing,” he points out – as the advent of anti-money-laundering and anti-terrorism-financing legislation in 2010 means notaries now need to confirm the identity of every individual behind even the most private of companies.
The second factor – paying as little tax as possible while complying with the law – is much of a muchness, as what one saves in one place, another almost inevitably takes. For resident sellers, capital gains tax can be avoided by reinvesting 100% of any proceeds made from the sale of a primary residence within two years. If all proceeds are not reinvested, however, you can be liable for tax on the difference, depending on your status and when the profit was made.
Spanish companies – 98% of which are private limited companies (sociedades limitadas, or S.L), Álvaro says – pay a flat tax rate of 30% on non-reinvested capital gains. Resident individuals pay income tax (Renta) on earnings in any given fiscal year. If a property is bought and sold in a 12-month period, and proceeds not reinvested, that could mean up to 56% tax in Andalusia and Catalunya. If earnings are spread over various years, and not reinvested, tax used to be charged at 21%. Since 2012, a sliding scale of up to 27% has applied.
For non-resident sellers, who logically do not maintain their principal residence in Spain, international double-taxation treaties mean you may not pay that much tax here – charged at a flat 21% on individual or company capital gains – on any profits made, but you will likely end up paying more where you are tax domiciled.
The final consideration, succession, is one where owning property through an S.L. can limit exposure to tax. For most individuals resident in Spain, the average inheritance tax levied is 15%, although larger estates and less beneficiaries may push the rate up. For companies, beneficiaries who fulfil all the legal requirements can be up to 99% exempt from taxation, allowing companies to continue using property for business purposes.
In Álvaro’s opinion, the most compelling case to use a company to own property in Spain is when the asset, or assets, in question are of significant size and, de facto, function as a company would do on an everyday basis. For example, large estates that have full-time employees, earn rental income, or incur sizeable outgoings, are all legitimate examples of economic activity and could write costs off against earnings to reduce tax on profit.
In short, every client should decide what suits their interests best, but bigger clients with larger portfolios may be better advised to consider owning property through a company. That’s not to say those with more modest budgets and less going on cannot explore corporate ownership, too. In any event, the use of an expert tax advisor is highly advisable when considering the best way forward, Álvaro adds. And, for UHY Fay & Co., he insists, “There’s no such thing as a small client.”