Many property purchasers when buying high value properties wonder whether it would be a good idea to set up a company to own the property and save tax. Is this the case or is it counterproductive to have the house in the name of a company?
In order to be able to answer these questions clearly, it is first necessary to understand the taxation of different taxes, especially Wealth Tax, which applies to both tax residents and non-residents. In addition, for non-residents it will be interesting to know the application of the IRNR, and finally to see how the company (Corporate Tax) is affected in the case of buying the property in the name of a company.
In Spain the wealth tax exempts the first 700,000 euros for each person, that is, if we buy the property between a married couple we will be exempt up to 1,400,000 euros, so many people put in these prices the limit to put the house in their personal name or in the name of a company. The truth is that this is not a compelling reason as we will see below.
The important thing to understand is that if we buy with a company, we are going to create a legal entity that will have its own personality and that the partners will hold, within their assets, the shares of the company. These shares have a value, which will correspond to the value of the company, or will be exempt if certain requirements are met.
Therefore, in order not to be taxed on the property, we must comply with the requirements for the exemption of the shares in Equity. In order for the exemption to apply, the following requirements must be met on 31 December of each financial year:
- The entity must carry out an economic activity and not have as its main activity the management of movable or immovable assets (in this sense, real estate that is not assigned to an economic activity will be understood to be excluded from the company).
- The shareholding in the company must be at least 5% individually or 20% jointly with the spouse, ascendants, descendants or collaterals of the second degree.
- That the taxpayer performs management functions (with proof of this by means of the corresponding contract).
- That for the management functions he/she receives a remuneration that represents more than 50% of his/her total income from work and economic activity.
In other words, if we set up a company to own the property, we only avoid paying wealth tax on the value of that property when we meet the requirements indicated here.
In such a way that, if we do not meet the requirements, the tax authorities will consider that the property is not assigned to the company or to an economic activity for tax purposes, so that its book value (the purchase price) will be taken as the value for the purposes of the shareholders’ equity in the same proportion as the shares in the company and will be taxed for that price in the wealth tax of the individual. This makes the creation of a company useless in this case if it is only to be the owner of the property.
If the company we have created carries out some kind of economic activity and the real estate is connected to it, then we can leave the real estate untaxed in the individual, provided that the above requirements of exercising management functions and being paid for it are also met.
For this purpose, the company must carry out some activity, the real estate must be used for this activity or be a merchandise/existence. In other words, I can be in the business of buying and selling real estate, the real estate being one of the properties I buy and sell, in which case it will be used for economic activity. And if I am in the business of renting them out, then in order for it to be considered an economic activity, the law requires me to have a full-time employee with an employment contract.
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The tax office is well aware of the common practice of putting a property in the name of a company in order to avoid paying wealth tax, so this is precisely what they are trying to find and declare as fraud.
Thus, the treatment given by the tax office to a property, which is the only property owned by a company and which is actually used for the partners of the company to live in, is as follows:
The tax authorities will understand that the property must be rented to the company’s shareholders, the company must charge rent to the shareholders for the use of this property as it is a hidden lease and, therefore, the company would be generating rental income that will have to be valued at market price. This income is recorded as such in the company’s balance sheet and the company will have to pay corporate tax at 25% on the profit that the company would obtain from renting out the property, which could compensate for certain expenses.
However, the tax authorities could also interpret that the remaining profit, as it is not in the company’s bank account because it has never been paid, would be directly in the shareholders’ accounts, so the operation would be the same as if dividends had been distributed, and therefore the corresponding withholding tax would have to be paid, so that in the end they would claim the company tax, the withholding tax, the interest from when it should have been paid and they could also open a penalty case against the company for not having paid the above amounts.
To all this, we must add that, the maintenance of a company is much more expensive annually than making a single annual declaration for the non-resident income tax, or for including the property in the IRPF (personal income tax).
Suppose on the other hand that a Non-Resident buys a house in his personal name in Andalusia to be his holiday home, costing one million euros. In this case the owner will have to make two annual tax returns (i) non-resident income tax, and (ii) wealth tax.
In the case of non-resident income tax, the amount to be paid will depend on the purchase value or cadastral value of the property, multiplied by 1.1 or 2%, and finally by 19% or 24%, depending on the tax residence of the owner, if he is from the European Union he will be taxed at 19%, while if he is from outside the European Union he will be taxed at 24%.
Let us suppose that the value of the property is one million euros, as we have said, and that 1.1% is applied because the cadastral value has been updated in the last ten years, being the cadastral value of 300,000 euros, in this case, if the owner were Russian (outside the European Union), the tax to be paid annually would be 792 euros. In other words, a property worth one million euros on the market could mean an annual tax of less than 800 euros.
In addition to this tax, in this example of a property worth one million euros, if it exceeds 700,000 euros, the owner will have to file a wealth tax return. However, as the first 700,000 euros are exempt, he will only have to pay for a wealth of 300,000 euros, which would mean a tax of approximately 733 euros for a property located in Andalusia. This tax could also be reduced in two cases:
- If the property was purchased with a mortgage, since the remaining value of the mortgage would reduce the declarant’s wealth.
- If the owners were two people, a married couple, who had bought 50/50, they would not have to pay wealth tax because the exemption of the 700,000 euros operates for each declarant individually.
As can be seen, the decision is not simple and will always depend on the case in question, so the recommendation is always to carry out a preliminary study analysing all possible cases before making the purchase and/or incorporation of a company when this incorporation is only for the purpose of being the owner of this property. It could be advisable when you intend to make real estate investments, that is to say, you buy to sell or rent and you intend to do it with more than one property, in these cases it could be good, but in any case it is always important to study the operation before carrying it out.
 Non-Resident Income Tax. In this article we only deal with the taxation of individuals who are Non-Residents for tax purposes in Spain. Although for Patrimony it will also be applicable to the tax resident.
 Of course the data are invented, the amounts should always be calculated for each property and each owner individually.