Many countries in the world operate a system of taxation on capital gains, known as CGT or capital gains tax. In the Netherlands, for example, tax is levied on the profit made on the sale shares in one’s own private limited company or B.V. (the so-called ‘substantial shareholding gain’). In Ireland and the United Kingdom all kinds of capital gains are subject to tax. In Poland and Cyprus, among other countries, everyone is liable to pay tax on the capital gain realised when selling immovable property.
This is also true for Spain. For residents of Spain, capital gains tax is payable on gains from the sale of all kinds of objects, such as securities, passenger vehicles, paintings and immovable property. This tax is levied at various rates. While the progressive rate ranges from 15 to 45%, there is also a fixed lower rate of 15%. The lower rate applies if the person liable for the tax has owned the object for at least one year. The progressive rate applies where an object is sold within one year.
For non-residents, including for a European citizen who owns a second home in Spain but who is tax-resident elsewhere in the EU, the rate is 35%. This capital gains tax, however, only applies to non-residents on the gain made from selling immovable property. When a property is sold, the notary is obliged to withhold 5% of the sale proceeds from the immovable property as an advance payment on the capital gains tax the seller is liable to pay in Spain. The seller is required to submit a taxdeclaration, and the withheld 5% will be set off against the final settlement. The Spanish tax authorities will repay any amount that has been overpaid on request.
The striking thing about this 35% capital gains tax is that it only applies to non-residents. As has been stated, the lower rate of 15% applies to Spanish residents after one year of ownership. As a consequence, Spanish residents are therefore treated differently from non-residents. A Spanish resident who sells a property within one year will pay a rate starting from 15%, while a non-resident must always pay 35%. In most cases the application of the progressive 15-45% rate on the surplus will work out less than the fixed 35% rate, while the fixed lower rate of 15% is in any case lower than the 35% rate for non-residents. Where the person who is not resident in Spain is a national of another Member State of the European Union, this difference in treatment results in a breach of the rules of the European Treaty, which therefore creates discrimination, since the European Treaty guarantees freedom of establishment of persons and freedom of movement of capital within the European Union. The European Court of Justice, moreover, determined in the Gerritse case (C-234/01), that a Member State is only permitted to levy a fixed tax rate on non-residents, if that rate is equal to or lower than the rate that applies to residents.
On 14 July 2005 the European Commission has asked the Spanish government to put an end to the illegal discrimination against non-residents by modifying the current Spanish taxation system to comply with European non-discrimination rules. Because the Spanish government has still not acted on this request from Brussels, the European Commission decided on 16 January 2006 to start proceedings in the European Court of Justice against Spain to force it to remove this on-going discrimination.
If you are required to pay more than 15% capital gains tax when you sell your Spanish second property, then it is certainly worth taking the trouble to file an objection against the tax demand. An example calculation will make the situation clearer. Imagine you bought an apartment in the 1990s for €150,000 (at the time about 25,000,000 Pesetas). You can now sell the apartment for €500,000. Your profit is €350,000, which is a realistic rise in value on the Costa del Sol in this period of about 10 years. The notary is required to retain €25,000 on the sale and you will, according to the Spanish tax office, in the end have to pay 35% or €122,500 in tax on the profit. After deducting the previously withheld 5% there still remains a demand for €97,500. According to European Committee and the EU- rules you are entitled to a rate of 15%, which is €52,500, so the tax demand should only be for €27,500, or €70,000 less!
There is a very good chance that you will be successful and regain the overpayment from the Spanish tax office (with interest!!). Still it is advisable to have expert tax guidance. You are therefore encouraged to consult your adviser or the author of this article.
Piet-Hein Crena Uiterwijk, accountant and international tax consultant, linked to t-AXIS Taxadvisers
email: phcu@tiscali.nl
