THE European Commission has ordered Spain to end what it calls ‘discriminatory’ tax rules targeting foreign property owners, warning Madrid it could be dragged before Europe’s top court if it fails to comply.
The body says Spain’s tax system breaches EU law by unfairly penalising non-resident homeowners, particularly those who use their Spanish properties as holiday or second homes.
If the issue ends up in the Court of Justice of the European Union, Spain could face financial penalties.
READ MORE: Brits and foreigners are still hoovering up property in Spain – here’s where they are buying
Lawyers argue that any such ruling against Spain could open the door to retrospective claims, with Madrid being forced to reimburse foreign property owners for overpaid taxes.
Such a punishment could affect tens of thousands of expats and second-home owners from the UK, Germany, the Netherlands and Scandinavia.
As part of its October 2025 Infringement Package, the Commission has formally launched proceedings against Spain over two key areas of concern – the way it taxes notional rental income and how it handles capital gains when assets are sold in instalments.
Non-residents who own a home in Spain have to pay tax every year as if they were earning rent from it, even when it sits empty.
The amount is based on two percent of the property’s official rateable value – known in Spain as the cadastral value. Spaniards who live in their own homes don’t pay this tax at all.
The Commission argues this unequal treatment violates Article 63 of the Treaty on the Functioning of the European Union (TFEU), which guarantees the free movement of capital within the bloc.
By forcing non-residents to pay more, Brussels says, Spain creates an unjustified barrier to cross-border investment.
The case also targets how Spain taxes capital gains.
When Spanish residents sell property or other assets and agree to be paid in instalments, they are allowed to defer their tax payments – paying progressively as the money arrives.
Non-residents, however, must pay the full amount immediately at the time of sale, even if the payment is spread over years.
The Commission says that difference gives residents a cash-flow advantage and leaves non-residents at a financial disadvantage, again breaching EU law.
Spain has had years of warnings. The Commission first raised the issue in December 2021 with a formal letter, followed by a detailed ‘reasoned opinion’ in May 2024.
In both cases, Spanish authorities defended their system as compliant with EU law, claiming the distinctions are based on residency and administrative practicality rather than discrimination.
But Brussels disagrees, saying the government’s replies have been ‘insufficient’ and that it will now refer the matter to the Court of Justice of the European Union if Spain does not amend its tax code.
The dispute echoes earlier legal battles in which Spain was forced to change discriminatory inheritance and wealth tax rules after losing at the European court.
The dispute comes as Spain faces growing tension between regional governments keen to curb speculative foreign buying and Brussels’ push to uphold equal treatment across the single market.
Madrid has two months to respond to the Commission’s latest warning.
If it refuses to change course, the long-running battle over Spain’s property tax regime will move to Europe’s highest court – with thousands of expat homeowners watching closely.
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