There is a growing issue facing U.K. residents who own properties in Spain via international corporate structures. Recent reports have revealed that over 5,000 properties in Spain are owned by foreign investors, most of whom are U.K. residents. The majority of properties owned are valued at over 1 million euros ($1.1 million) and have been purchased through companies to avoid wealth taxes.
Thousands of properties are owned via double or triple international corporate structures which involve a Spanish company and a special purchase vehicle and, in many cases, a bare or discretionary trust also. Countries that do not have a double taxation convention with Spain are usually involved in the arrangements, or else territories in the outdated Spanish tax haven list, such as Jersey, Guernsey, Gibraltar, Isle of Man or the British Virgin Islands.
Owning properties in this way used to come with little to no problem. A post-Franco Spain was welcoming of foreign investment, believing this was helpful to the economy. However, the 2019 Annual Tax and Custom Plan showed that the Spanish tax authorities are now paying close attention to these international structures by conducting an unprecedented number of investigations on these properties.
Residential properties along the Costa del Sol are being targeted by the Spanish authorities at an alarming rate. With new tools at their disposal to help clamp down on these properties, it is only a matter of time before the taxman inspects them. This is particularly relevant for properties that were created pre-2018 and have not been assessed recently.
While tax advisers were highly recommending the corporate acquisition route, legislative compliance was not taken very seriously. As such, due diligence was often not carried out properly and the tax position not reviewed annually as required. This was in large part because the authorities had little interest in international investors at the time.
Nonresident income tax law came into force in 1998, meaning nonresidents had to pay tax on these properties. The introduction of this special tax meant hefty fines for many nonresident offshore companies which neglected to submit the nonresident tax return or failed to appoint a Spanish-based tax representative.
A page on this was published by the Spanish tax office in English, explaining clearly that solely “organizations that are resident in a country that has the consideration of tax havens which are proprietary or have real properties in Spain are subject to the income tax of nonresidents through a special tax that is earned the 31st December of every year and it will have to be deposited in the following month of January.”
The taxable base consists of the assessed value of the real estate assets, which is 3%. It is therefore unsurprising that people with properties valued at over 1 million euros sought advice on ways to reduce this 3% tax.
Owning a property through a Spanish company or a company that has been established in a double treaty jurisdiction also meant avoiding, not only the nonresident tax, but also wealth tax which is payable for those who own a property personally. Another major appeal was also avoiding tax concerned with the change of ownership, such as stamp duty, transfer and inheritance or gift tax.
The main issue in need of addressing by the local tax authorities was the inadequate legal and accounting administration of those properties in Spain—the corporate acquisitions were themselves not so much of a problem, but the lack of compliance thereafter raised red flags, and the Spanish tax authorities began looking into this.
The reality is that U.K. tax advisers rarely paid much attention to the tax or legal implications for their clients, as they assumed that the Spanish adviser was on top of these matters. The situation started to change when the benefit in kind position regarding how the ultimate beneficial owner was using the property became a serious concern following the case R v Dimsey and R v Allen  which addressed the position of a shadow director’s position in the U.K. in relation to the management and control of the companies owning these properties.
Another issue relates to the use of trusts, a legal arrangement not actually being recognized in Spain—to the surprise of many U.K. tax advisers. It meant that various checks had to be conducted where payments were due, though individuals were not correctly advised on this; for example, annual rental income had to be declared (or a benefit in kind equivalent); tax disbursements to shareholders needed to be paid (and documentation had to be kept regarding the shareholders’ loans); a Spanish transfer tax known as Impuesto de Transmisiones Patrimoniales (ITP) had to be paid on the sale of shares in an overseas company; the nonresident tax due when ownership is in a “safe haven” or else in a territory with no double tax treaty.
So, what new measures have come in to help achieve the Spanish tax authority’s objectives?
Firstly, legislation has been tightened up. In May 2018, EU Directive 2018/843 amended article 2.1 of Directive 2015/849 which meant that certain professional bodies were required by law to take responsibility for being fully compliant: “auditors, external accountants and tax advisors, and any other person that undertakes to provide, directly or by means of other persons to which that other person is related, material aid, assistance or advice on tax matters as principal business or professional activity.”
In its guidance paper to tackle tax evasion, the U.K. government made a clarification by stating that “relevant bodies should be criminally liable where they fail to prevent those who act for, or on their behalf from criminally facilitating tax evasion. The new offences will be committed where a relevant body fails to prevent an associated person criminally facilitating the evasion of tax, and this will be the case whether the tax evaded is owned in the UK or in a foreign country.”
Meanwhile, the European Commission amended its definition of tax fraud, renaming it “aggressive tax planning” to address the issue more accurately.
Measures by Spanish Tax Authorities
Other measures put in place by the Spanish tax authorities to clamp down on illicit financial gain through these properties include the following obligations for property owners:
- declaring any rent that is gained from a company-owned property, in case the authorities determine it at market value;
- directors of the companies need to submit proper accounts of the company in their annual Spanish tax returns (in compliance with company law);
- considering the tax on distributions to international shareholders;
- reviewing loans and capital structures and checking they comply with Spanish law;
- reviewing the position of trusts under Spanish and English law, as they are not recognized in Spain;
- checking whether VAT applies;
- for any shares of the foreign company which are sold, ensuring payment of transfer tax;
- if the property is being rented, checking that full compliance with new tourist accommodation rules is met.
Ultimate Beneficial Owner Register
Last year, following the EU Directives 2018/843 and 2018/849, Spanish tax authorities found one of their most powerful tools to tackle the issue, in the form of the Ultimate Beneficial Owner (UBO) register—a database which allows the tax authorities to sift through and find the UBO. Based on the UBO’s residence and the companies involved, special attention must be given to the U.K. tax as well as to other international developments. Through this database, authorities can ascertain whether the UBO is the “ultimate user of the property,” and in many cases this will not have been accounted for properly.
The Spanish company must declare the UBO, his or her residence, and any companies that are involved in the annual corporation tax returns, as well as details of any shareholder who owns over 25% of the share capital, which provides the tax inspectors with a complete view of the company. Where the UBO has not been declared (despite this being a legal requirement) the director of the company is liable for any wrongdoing, which in some cases can lead to criminal prosecution in Spain.
This register, which came into force a year ago in Spain, is making its way through all EU member states. In the last year, it has already identified over 122,000 shell companies, about 10% of which are property-owning companies, and these will be investigated—it is only a matter of time.
This issue affects most U.K. tax advisers (whose clients will be largely unaware of the potential threats they face for not complying with the new rules), who now have a legal responsibility to keep the tax authorities informed as to whether clients are compliant. These professional bodies are relied on more so than ever to keep the authorities fully informed and have a crucial role in helping prevent the financial system being misused for money laundering or terrorist financing.
Those individuals who are seen to be making an effort to comply with the new regulations will fare much better upon investigation. The authorities will be much harder on international investors who have neglected to seek any kind of advice to abide by the regulations and they will be considered an easy target for a hefty fine.
Leon Fernando Del Canto is an international tax barrister practicing from Normanton Chambers in London. He is a member of the Honourable Society of Lincoln’s Inn, The Worshipful Company of Tax Advisers, the Association of Taxation Technicians and the Madrid Bar.
The author may be contacted at: firstname.lastname@example.org
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