| CAPITAL GAINS TAX
When a property in Spain is sold, any gains may be subject to Spanish
Capital Gains Tax, The Royal Decree of 7th June 1996 enacted two different systems to
ascertain the taxable gain: 1. A system for properties bought before 1st January 1997; and
2. A system for properties bought on or after 1st January 1997. The taxable gain is the
difference between the purchase price and the selling price (reduced by any qualifying
expenses and taxes in connection with the purchase and/or sale) and reduced by a further
11.11% per year of ownership (to count after the second year of ownership). After the
property has been owned by the vendor for 10 years or more, any gains will be tax free.
When selling properties bought on or after 1st january 1997, the taxable gain is the
difference between the purchase price (reduced by any qualifying expenses and taxes in
connection with the purchase and/or sale) and reduced by a percentage to be published
every year in the Spanish Budget. In both cases, non-resident vendors will pay tax at the
rate of 35%. The Spanish Budget approved in December 1996, introduced some further changes
on this matter: From 1st January 1997 purchaseers who buy a property which belongs to a
person who is not resident in Spain and has owned the property for less than 10 years only
need to withhold 5% (instead of the previous 10%) of the purchase price and pay this to
the Tax Authorities in Spain on account of the vendor's capital gains tax liability.
However, if the vendor is a company non-resident in Spain, the purchaser will need to
withhold this 5% unless the company has owned the property for more than 20 years.
PURCHASE PRICE OF A PROPERTY
When a property is bought, the purchaser must pay tax as a percentage
of the price (normally 6% or 7% plus 0.5%). However, these percentages are paid on the
value of the property (which may not coincide with the price paid). The spanish Tax
Authorities have statutory powers to review the value of any property and to request the
appropriate additional payment of tax. The danger of declaring a low price is that
regardless of whether or not the purchaser actually paid the amount declared, if the price
as recorded in the title deed is more than 20% lower than the value of the property, as
assessed by the Tax Authorities, the difference between the price and the actual value
will be regarded as a gift. In which case, the purchaser will be liable to gift tax (at a
variable, quite high percentage) and the vendor will aslo become liable for Capital Gains
Tax at the rate of 35% on the difference between the price and the value as assessed by
the Tax authorities. The Tax Authorities decision can be challenged but this may entail
Court proceedings. Similar Law applies to properties inherited from a deceased and
therefore, care should be taken when stating the value of the properties subject of the
Spanish Deed of Acceptance and inheritance.
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