PURCHASING PROPERTY OWNED BY COMPANIES, HELPFUL NOTES
It is usually seen that expensive properties are owned by companies, companies that may have either purchased the property before or that have built it.
In the process of the property purchase it is sometimes suggested to the purchaser to purchase the company shares rather than the property itself. Purchasing a company has some benefits (i.e. confidentiality) but is it really convenient and tax efficient?
Let’s take a look to it from different angles:
TAXES ON THE PURCHASE
Ok, we start from the basics: if the property is new, the purchase price of the villa, not the shares, will be + VAT at 10%, otherwise will be subject to 8-9-10% Transfer Tax ( refer to this tax in Andalusia only, for other Spanish regions please email us) .
During many years, property purchasers have tried to pay the lower taxes possible when purchasing property in Spain. Property purchasers used the purchase of company shares to as a fact purchase a property owned by the company. The reality is that then and even today, the purchase of company shares is free of tax.
This way of purchasing property free of tax made the government pass laws to make difficult property purchases trough company shares and to obtain the expected taxation on the real estate investments. Exceptions were created to the purchase of company shares free of tax. with this purpose, the article 108 Law of Stock Markets (on his first version from 1988) set up a number of requirements to reduce to only a couple of scenarios the purchase of property through the acquisition of company shares free of tax.
This article 108 LMV was later modified several times, reducing more and more the possibility to purchase property through the acquisition of company shares free of tax. It was in 2015 when the Law of Stock Market was fully re-drafted. At this law article 314 TRLMV was drafted with the same purpose than the old article 108 but now it is drafted as, literally, an “anti – tax elusion” rule.
In essence, article 314 TRLMV says that when an individual is purchasing the shares of a company where more than 50% of its assets are property, this is understood as an attempt to elude the tax that would have become payable if the property was purchased directly. In this case, if the property is new, then the tax applicable would be 10% VAT. In another case will then be taxed at 8-9-10% through the Transfer tax.
Clearly, the Spanish legislation wants to avoid the purchase of property without paying either VAT or Transfer tax so if your decision is to purchase the company shares rather than the property, that is possible, but you would be required to pay the tax as explained before.
Conclusion: buying the shares can be done and as a consequence of that, the purchaser of the shares will become the instrumental owner of the property and its final beneficiary but our recommendation is to pay the same tax as if the property had been purchased directly in the name of the individuals.
There is another reason to bear in mind when purchasing property on the name of companies.
BENEFIT IN KIND USING THE COMPANY PROPERTY
When a property is purchased on the name of a company, should it be used by the company directors or company shareholders, the company has to declare an income equivalent to a lease on market value prices for the duration that the party related occupants used it.
In other words, the owners must rent it to themselves if they wish to legally use the property.
As a consequence of this, the owners pay the rent to the company and the company pay taxes on that rent.
The use of company’s property by individuals is a common objective for Spanish tax inspectors. For them it is not difficult to find out if the company property is being used. All they have to do is to check the utilities receipts what they can do online. If they find out that there is electricity and or water consumption and check the company tax not finding any rental income declared, the tax inspection becomes unavoidable and virtually impossible to end without paying a good amount of money in taxes plus fines.
Note that this matter is applicable not only to those cases when properties are purchased on the name of Spanish or resident companies. It is also applicable when properties are owned by foreign companies.
We believe that purchasing property directly in the name of individuals is a better option in Andalusia, we will explain why.
INHERITANCE TAX (applicable to Andalusia)
In relation with the inheritance tax, if the purchasers have heirs (say spouse and kids or a kids) and as long as each one of them do not inherit a share of a value above 1.000.000,00 € ,then this tax should not be of a big concern since the inheritance of a wealth below that figure is tax free.
It is true that a wealth above 700.000,00 € is subject to the payment of the wealth tax but if the property is owned by several individuals then it may not be a big deal of tax. Mortgages are a good tool to reduce the value of the wealth.
Let’s see a case study. Let’s consider a property with a purchase price of 3.000.000,00 €. The property will be purchased by a marriage and one descendant. So, the share of each of them would be 1.000.000,00 € (let’s say that there is not mortgage, otherwise the share value will be reduced on the amount of mortgage belonging to that share). The taxable base of the wealth tax will be on 1.000.000,00 € – 700.000,00 € = 300.000,00 € meaning a yearly tax to pay per head of…lets calculate it.
This is the table for the wealth tax in Andalusia.
So up to 167.129,45 € the tax is 401,11 €.
The rest of the amount until 334.2525,88 € is taxed at 0,36%.
Then 300.000,00 € – 167.129,45 € = 132.870,55 € at 0,36% = 478,33 €.
Conclusion: final tax to pay each year per property owner as Wealth Tax is 401,11 € + 478,33 € = 879,44 €.
TAXES ON THE POSSIBLE FUTURE CAPITAL GAINS
Finally, just mention that whilst a company will have to pay a 25% on the gain made when selling the property, non-resident individuals (and companies) will pay a 19%.
In both cases it will be allowed to use on the calculation of taxes to reduce the tax to pay all the costs and expenses had on the purchase and sale, including the taxes may them be VAT or transfer tax.
Our advice, generally speaking and subject to the study of each specific case, is that when possible it is usually better and easier to purchase in the name of individuals. Andalusia is making it very easy. Besides companies carry with them a good number of regular formalities. They need book keepings and accountants, keeping invoices, filing taxes and annual accounts, and in essence a number of duties that not always are required to make the property purchase more tax efficient.