Tax advice: Expatriates with properties in Spain discriminatory measures
Taxation for the rental of real estate in Spain includes a series of differences between community and non-community lessors. This can lead to notable differences between non-resident landlords and resident individuals. It should be noted that the latter can deduct expenses and apply a 60% reduction in net income before applying the progressive rate of their Individual Income Tax (PIT).
At first, non-residents in Spain who rent real estate in this country will be subject to Non-Resident Income Tax (IRNR). In this way, art. 24.6 of the LIRNR (Royal Legislative Decree 5/2004, of March 5th) establishes that expatriates from the EU will pay taxes on net income and will apply a tax rate of 19%. Despite this, art. 24.1 of this regulation dictates that expatriate residents must pay taxes on the full amount of the rents. Furthermore, art. 25.1 a) establishes that taxpayers must apply a rate of 24%.
It is necessary to take into account the differences in the tax treatment of Spain between non-resident community landlords and individuals subject to personal income tax:
- Community Non-Resident Landlords: they pay taxes on the gross, without deducting any expenses and they are required to pay 24%, instead of 19%.
- Resident Landlords subject to personal income tax: they are required to declare each quarter, instead of a single annual declaration, and they are not allowed to apply a 60% reduction on the positive net return, established in the personal income tax for residents who rent homes for permanent use.
Therefore, the IRNR regulations that require high taxation for non-EU residents with real estate in Spain compared to non-EU residents, violates EU law and art. 63 TFEU. Consequently, there is a restriction on the free movement of capital and an inequality in the tax advice of both taxpayers.
Faced with this tax discrimination, the Spanish tax adviser could face it with the following arguments:
- The jurisprudence of the Court of Justice of the EU rejects in several judgments the restrictions on the free movement of capital beyond the strictly community sphere.
- The judgment of the CJEU of 3/9/2014, condemns Spain for discriminating with the ISD against non-residents.
- The Binding Tax Consultations allow non-community members to apply the same ISD rules as community rules, not applying those that discriminate against them.
- The European Commission initiates an infringement procedure against Spain for not allowing non-residents to reduce 60% of the net return obtained with the rental of housing.
- The Preliminary Draft Law on Flexibility Measures and Promotion of the Housing Rental Market provided for the equalization of non-residents to residents regarding the taxation of leases.
- The Supreme Court Rulings of 11/13/2019 and 11/14/2019 reject discrimination in the Non-Resident Income Tax of Investment Funds not resident in the EU in relation to dividends derived from their investments in Spain.
- The Supreme Court directly applies EU law and considers that such discrimination by the IRNR violates the free movement of capital, that the difference in tax treatment of US funds that have a regulatory framework equivalent to that of the EU is not justified.
Finally, taxpayers are recommended to file Form 210, which pays 24% on gross rent. After that, you can request the rectification of these self-assessments with the accreditation of the cats. They will also be able to request the tax on the net return to 19% as the community ones, although the Treasury may reject these requests and a legal battle may have to be started.
B Law & Tax
International Tax & Legal Advisors.