Non-residents operating without a permanent establishment

  

Income obtained in Spain by non-residents without a permanent Spanish residency is subject to Non Residents Income Tax (“NRIT”). The amount of taxable income will continue to be determined according to Personal Income Tax (PIT) regulations; however, there will be a number of different tax rates from the 1st of January 2007.

 

The general tax rate for non-residents operating in Spain without a permanent residency will be 24% as opposed to the 25% which was previously levied; for dividends and interests it will be 18% (previously 15%) and capital gains tax (“CGT”) will be reduced from 35% to 18%.  The reduction in the CGT rate represents a significant reduction in the amount of tax paid i.e. 17% reduction. Thus it would make sense to defer selling your Spanish property until the new tax rates are introduced in 2007.  The reduction in the rate of CGT was brought about in order to balance the level of taxation charged to both residents and non-residents, according to the European Commission requirements.

 

New rule for capital gains derived from items acquired before 31st of December 1994

 

At present, Capital Gains from non-business assets acquired before the 31st of December 1994 obtained non-residents individuals without a permanent Spanish residency are subject to a special method of computation in the NRIT. The gain is calculated in accordance with the general rules of PIT, which can subsequently be reduced through the application of special percentages depending the length of time the asset has been held up to the 31st of December 1996, and the nature and type of the asset held. The percentages are 11.11% for each year exceeding 2 years for immovable property, 25% for each year exceeding 2 years for EU-quoted shares, and 14.28% for each year exceeding 2 years for all other assets (including foreign-quoted shares).

 

Consequently, Capital Gains derived from real estate acquired before the 31st of December 1986, EU quoted shares acquired before the 31st of December 1991 and all other assets acquired before 31st of December 1988, are totally exempt from NRIT.  The new development determines that the above rules will be applicable only to the gain arising until the 20th of January 2006. From this date onwards, the Capital Gain will be taxed (at 15% until 31 December 2006, and 18% from 1 January 2007) in proportion to the duration for which the asset has been held.

 

This means that the total or partial exemption of those Capital Gains generated until the 20th of January 2006 will be respected; however, Capital Gains generated from that date will be totally subject to taxation. It may therefore be important to analyze the merits of disposing or holding these assets before the end of 2006, considering both the obsolescence and the estimated appreciation of those assets in the future.

 

NRIT withholding tax on the sale of real estate located in Spain by non-residents operating in Spain

 

Anyone purchasing real estate which is located in Spain from a non-resident is currently obliged to withhold and pay to the Spanish Treasury 5% of the agreed purchase price. This payment is considered, in the case of the vendor, as an advance payment of part of his/her NRIT liability derived from the transaction. From 1 January 2007, the rate of this withholding tax will be reduced to 3% of the agreed purchase price.

 

 

Prepared By: Tom McGrath & Associates, 37 Upper Mount Street, Dublin 2

Phone: +353 1 661 0707; Fax: +353 1 611 4975; Email: info@tmsolicitors.ie Web: www.tmsolicitors.ie.