In property transactions it is often possible to buy a property under a company name instead of a person’s name. This way the buyers create a limited company or a corporation, which will purchase the property. The buyers will own the property indirectly by owning shares in the company. In Spain this can lead to fiscal savings as well as extra expenses. As always each case should be analysed in detail in order to determine the most beneficial way to make the purchase. Below are some of the advantages and disadvantages.
Factors to consider
Traditionally, financial institutions are not very keen on lending to companies for property transactions. In case of mortgage default, the bank will be able to recover the money by repossessing the property. Additionally if the property is mortgaged by a person, the bank will have the possibility to claim the debtor’s personal assets. When the property is mortgaged by a company the bank will be able only to reclaim company assets. This is not very appealing to the bank if the only company asset is the property itself. Generally banks will lend companies up to 50% of the property valuation.
Expenses and company running costs
There are costs for setting up the company i.e. the initial company capital (3005.06€ for a limited company or 60,101.21€ for a “sociedad anonima” or corporation) and the administration fees when creating the company. Additionally the company will have to file accounts every year and name a fiscal representative in Spain if the company is offshore. These costs are smaller if the company is not actively trading, but can be higher if for example the company is trading by renting the property. If the company has Spanish nationality, the administrator will have to pay social security as self-employed (monthly cost of approximately 300€)
Running cost deduction and VAT deduction
The maintenance costs of the property will be deduced from the gains obtained if the property is rented, leading to a tax reduction. Additionally the company will be able to deduct VAT. If the property needs renovation or building works this is a great benefit. Moreover if the company is buying a newly built property (i.e. subjected to VAT) and the company embarks immediately in commercial activities the VAT on the purchase will be deductible.
For companies, the capital gains from the property sale will be taxed as normal income. The new Royal Decree 13/2010 is implementing a few changes in company taxation. In practice taxation will be 20% for company income less than 300.000€ and 30% thereafter. This is different from the capital gains tax applied to the sale from a physical person. If the person is non-resident in Spain the capital gains tax is flat rate of 19%, while for residents it is 19% for the first 6,000€ and 21% for the rest.
For companies it will be possible to lessen inheritance tax especially for non-residents in Spain, as the assets to be transferred will be company shares. The company shares can be as little as 3005.06€ for a limited company while the assets of the company are the properties it owns.
Selling the company shares
Be aware that if the Spanish company’s only assets are properties, then the value to be taxed will be the value of the properties, as opposed to the value of the shares if the shares are sold.
Non-resident’s tax for offshore companies will be 3% of the revised cadastral value, while non-resident’s tax for individuals will be 0.264% of the revised cadastral value.
It is possible to run searches via the land registry database to find the owners of any property. If the owner wishes to remain anonymous for any reason, a company can offer reasonable protection, as shareholder’s information is not publically available unless requested by a judge or the tax authorities. Of course the owner will not appoint himself as administrator of the company. In this case a search in the land registry database will show only the company name and its administrator.
When is it worth buying a property in Spain under a company name?
It is always necessary to examine each individual case; however we can say that it can be advantageous to buy a property through a company when either:
- There is a need to mitigate inheritance taxes, or taxes in the home country
- There is no need for a mortgage
- There are extensive building or renovation works to be done on the property
- There is need for relative anonymity
This article is purely informative and focused on tax planning rather than recommending tax fraud or money laundering which is illegal. The information provided should not be used as a substitute for specific legal advice.