Fitzwilliam

The Spanish Tax Agency is sending letters to residents and non-resident companies alike, which it believes may hold Spanish residential property.

The letters are ostensibly about the property ownership and structure, including asking for several details in relation with the aim to identify the identity of the occupiers of such properties. Their main intention is to claim all taxes which should have been paid in the previous 4 years for the mere fact of enjoying the properties. These taxes will depend on who´s the occupier (a company director, a shareholder, a third party…).

Ignoring the letters may lead to further questions or a formal tax inspection. We recommend that recipients of such letters seek professional advice in how to respond.

We also recommend that owners of such companies who have not taken Spanish tax advice on them in the past years consider doing so now, even if they have not received one of these letters.  Tax relating to Spanish property has been changing rapidly, on an annual basis, in recent years. 

Without advice, the owners of such properties, or companies holding them, risk incurring Spanish tax liabilities of which they were not aware.

When selling a real estate property for substantial value it´s common to negotiate a deferred payment.

This is extremely convenient when selling real estate property to a professional investor. Let´s think about a plot of land, even if an old construction is already built on it. The Buyer would have seek for a split payment so that second or third payments are paid by using returns on their investment. This becomes extremely popular in attractive areas with lot of potential, such as Marbella, Majorca or Alicante.

One of the most recurrent questions from our clients are:

What happens if the Buyer fails to pay?

In most contractual disputes, where one party is in breach of its obligations under the contract, the “innocent” party will wish to claim damages for the loss it has suffered as a result of the “guilty” party’s breach. However, the clear priority from a Vendor´s point of view would be to terminate the contract as a whole so as to re-sell the property.

It is important to distinguish between rescission and termination of a contract for breach. Rescission is a very specific remedy which may be available in cases of misrepresentation, duress or mistake.

However, non-payment to a non-breaching party would entitle the latter to terminate the contract, which is separate to, and distinct from, any rights to rescind the contract.

When does a right to terminate the contract arise?

A right to terminate a contract is a contractual remedy. As such, this would only arise out of the express terms of the contract. A properly draft contract for the sale and purchase of property will usually incorporate an specific clause allowing termination upon breach of the payment clause.

Normally, termination would be subject to Court approval. However, this is exactly what the Vendor must avoid by all means: going to Court in Spain. It’s well known that going to Court in Spain is expensive, sometimes inefficient and it may take years until a ruling is issued.

Out-of-Court Termination

Although sometimes disregarded, the Registrar at the Land Registry is entitled – if certain requirements apply – to revert the transaction and to put the property in the Vendor´s name in just a few weeks. This means an immediate termination with full effects avoiding Courts.

This specific procedure must be carefully applied by the Vendor´s advisors who shall act promptly and with sufficient determination before the matter goes to Court.

Why this matters

Delays on completion are common in property transactions. Under the Spanish legislation time is not of the essence in a contract, unless specified. Proper drafting can provide the Vendor with an express right of termination, so long as it follows the relevant legal procedure and gives the defaulting party a valid notice to complete.

In a rising market, sellers should be aware of the risks of delaying payment, where an opportunistic Buyer could seize the chance to retain the property and delay payment beyond the agreed date.

The legal principles underlying a contract termination might seem simple, but often misunderstood. This is just one of the many reasons why both Sellers and Buyers must be aware of their need of a proper legal advice in advance so as to understand the proposed transaction and its foreseeable implications.

The Spanish residential market is boosting. Certain areas such as the Costa del Sol are experiencing a real boom in terms of conveyancing and rentals alike. Then, why not invest in both?

When buying a property in the south of Spain (Andalucia), the buyer must pay ITP-AJD (equivalent to SDLT). How much tax you pay highly depends on the value on the purchase price, though this ranges from 8% to 10%. This means that, if buying a property in Marbella for EUR 750,000 an extra EUR 75,000 shall be ready for paying ITP-AJD upfront (i.e. you will eventually pay EUR 825,000 when purchasing and of of course your gain will be taxed again when selling).

However, during the financial crisis new regulations were brought in to tackle the residential market recession, among others a tax loophole reducing ITP-AJD to just 2%.

Loophole: 2% of the selling price (instead of 8%-10%)

Requirements: The buyer must be a property investment company and the property must be sold within 5 years

Plain, simple and a true attractive proposal. Time is key for real estate investors and the 5 years period seems the perfect timing for renting the property.

Let´s imagine that you intend to purchase the EUR 750,000 in Marbella East.

Price (deductible as a real estate professional): EUR 750,000

Taxes : EUR 15,000

Rental Income: EUR 120,000 (EUR 25,000 p/year)

Selling price after 5 years: EUR 900,000

Net after-tax-gain: EUR 230,000

For further information about the issues raised in this blog, please contact any member of our real estate team.