Mallorca Property BUYER'S GUIDE - Buying process in Spain
Which steps are necessary to buy a real estate property in Spain?
Therefore, a notary's function consists in ascertaining (give legal force) certain circumstances that affect the legal status of the parties concerned, the date and the declarations made by the parties. These items are reflected in the Public Deed, which is the document granted before a Notary that reflects the agreements reached between the parties.
Usually it is the buyer who has to cover the notary fees, as well as the costs concerning the inscription in the land register, both fixed by law on the basis of a percentage scale.
It should be noticed that public deeds are the only documents that have access to the Land Registry (official responsible in charge of recording every legal act or convention that concerns a real estate property).
Legal Advice in Spain In order to carry out the analysis of the legal status of the real estate property it is very advisable to hire a Spanish lawyer -who speaks of course the purchaser's language-. This analysis consists on a research work on the legality of the property as well as to advise the buyer on all the aspects of the operation. Lawyer's fees are usually between 1-2% of the purchase price of the property.
Usually, there is a period of time between the signature of the private agreement and the signature of the public deed; elapse of time during which, the lawyer shall verify the following aspects:
First of all, the lawyer has to check the situation of the real estate property in the Land Registry. This information is probably the most useful to sort out the most relevant circumstances of the legal status of the property.
Thus, it is essential to obtain detailed information from the Registry in order to verify, first of all, that the ownership of the property is registered in favor of the person who pretends to sell it.
Furthermore, it is necessary to verify whether there are any charges and/or encumbrances (seizures, mortgages, easements, usufructs, etc.).
Secondly, we shall also refer to the Cadaster (official organism under the auspices of the Spanish Treasury Department). The Cadaster provides the physical -not legal- data of the properties. Therefore, concerning acquisitions of rural or unconstructed properties, it is highly advisable to consult the Cadaster in order to verify the physical characteristics (as surface) of the property. This task may avoid subsequent legal actions in order to establish the legal reality (as laid down in the Land Registry) or the material reality (as laid down in the Cadaster of real estate). Its information is as well helpful to assess the possibilities to construct on rural real estate properties.
In addition we should not forget the Town Council in the whole acquiring process in order to find out if the property is subjected to disciplinary planning town procedures and also to get accurate information about the planning town conditions. The Town Council is also useful to know if there are any local debts pending on the property.
Taxation in Spain
We will now explain which are the main taxes connected with the above described transactions as well as the recently changes introduced by the Tax Reform 26/2009 of the General State Budget for 2010.
It is very important to point out that the Property Wealth Tax has been abolished since the 1st of January 2008.
a) First of all, there are certain taxes which have to be paid because of the simple fact of holding the ownership or any other real property rights over a real estate property placed in Spain.
We will now focus, mainly, on the Income Tax and the Real Estate Tax.
i) Property of non-resident companies
If a non-resident company owns a real estate property placed in Spain, and bought after 1996, an especial tax should be paid every year.
The rate in force is a 3% of the cadastral value of the property.
ii) Income Tax (“Impuesto sobre la renta”) for non-residents
The tax period coincides with the calendar year, form January 1 to December 31 and with regard to real estate property, the quote is payable the following year.
It is important to know that a non-resident seller is subject to 3% withholding, so that the buyer, regardless if he is resident or non-resident, is obliged to keep the 3% of the purchase price. This 3% withholding has to be paid directly to the Treasury. Such retention is to pay, on behalf of the seller, the tax that he should pay because of the possible capital gain arisen from the purchase. If the amount to be paid by the seller is less than the 3% withheld, the seller may request the reimbursement to the Tax Authority. The tax rate applicable to capital gains is currently 19%.
The obtained profit of the transmission of assets acquired before 31st December 1994, since January 1 2007, shall be divided, and so receive different treatment, in two parts: the part of the profit obtained since the acquisition of the property until the 19th January 2006 and the part of the profit obtained since the 20th January 2006 until the date of transmission.
Different coefficients shall be applicable to the profit obtained until the 19th January 2006. On the contrary, concerning the gain obtained since 20th of January 2006, the tax rate would be up to 19%.
iii) Real Estate Tax (“Impuesto de Bienes Inmuebles”)
The Real Estate Tax (IBI) is a tax that is paid yearly to the Town Hall where is placed the property. Each Town Hall has some freedom to set its own rates.
The tax basis is the cadastral value of each real estate property. Thus, the tax base will be lower as far as the real estate property is considered rural or if the land has not being yet constructed.
The taxable period coincides with the calendar year. Per Law, the owner of a real estate property on 1st January is the one who has to pay the IBI even when the real estate property is sold during the same year. iv)
iv) Other taxes or expenses arisen because of the ownership
Garbage collection tax. It shall be paid every year to the Town Hall because of the service of collecting garbage in urban areas.
Community's installments. These are expenses, which have to be paid to the Community of Owners for some services and maintenance of common areas, when the property is subjected to a community regime.
b) Now we focus on the taxes that must be paid, not because of the continued ownership, but for the transmission's act
We will now focus on the Tax on Property Transfers (with a brief mention of VAT).
v) Tax on Property Transfers (Impuesto de Transmisiones Patrimoniales)
The tax base is the real value (or market value) of the transferred property or that of the right which is constituted or assigned.
This tax is payable the day on which the concrete act is realized, that is to say, at the time of granting the public deed. It shall be paid within 30 working days from the date of the public deed. The debtor of this tax is the beneficiary of the transmission. In a purchase, this beneficiary would be the buyer and so, the subject obliged to pay this Tax. The subject obliged to the payment is also obliged to present by his or herself -without any requirement from the Tax Authorities- the official form that shows the fulfillment of the payment within the period above mentioned.
Regarding real estate property, the Spanish Tax Law fixes a rate of 6% but the Autonomic Governments are entitle to increase this rate. In Balearic Islands, for instance, the rate has been fixed as a 7%.
The tax rate for movable assets is 4%.
This Tax should just be paid if:
•The seller is an individual (not a company) and such property belongs to his personal patrimony.
•Whoever is the seller, the buyer performs activities which shall not entitle him to deduct the charged VAT.
- The coordination between the VAT and the Tax on Property’s transfers.
It is convenient to insist on the existing coordination between the VAT and the Tax on Property’s transfers.
Transactions subjected to VAT are not subjected to ITP (Tax on Property’s transfers). Both taxes exclude each other. VAT is applicable to the corporation transactions while ITP is a tax for non-corporate transactions.
We may emphasize now on some cases which are always subjected to VAT (and so, they are also subjected to the Tax named AJD, which tax any public deed if this legal instrument is not taxed by the ITP):
•If the seller is a businessman or a professional.
•If the sale is the first transaction over a flat or an apartment made by a developer, and this construction has never been used or, if it has been used during a two year period maximum.
•If the sale is the first transaction over a flat or an apartment made by a developer, and the buyer is the person already using such real estate property -in this case, never mind how long has the buyer been using the object-.
Another relevant tax amendment that has been introduced by the Act 26/2009, with effect from 1st July 2010, is the increase of the VAT. The common tax rate has been increased from 16 % up to 18 % and the reduced rate from 7 % up to 8 %.
vi) Tax on the Value Increase of Urban Lands. (“Plusvalía municipal”)
If an urban real estate property is purchased, there is a tax paid because of the increase of the land’s value (cadastral value) between the date of acquisition and the date of selling the property. Not to be confused with capital gains tax that has to be paid by the seller because of the profit arisen from the purchase.
By law, “plusvalia” is paid by the seller. However, it may be subjected to negotiation between the parties involved in the transaction. The payment of this tax is not periodically, but limited to the moment of the purchase.
Payment of such tax shall be made within a period of 30 days since the date of the transmission.
This tax is exclusively managed by the town councils and every Town Hall estates the amount to pay because they are entitled to choose between a scale
- Economical aspects:
Regarding the financial aspect that involves every purchase of a real estate property, it is convenient to mention the different financing systems. Usually this leads to an adequate collateral security which levies the real estate object of the acquisition.
- Self-financing. Foreign investments.
The current Spanish legal system concerning transactions, collections, payments and bank transfers with foreign countries demands certain requirements and formalities:
•As a general principle, the obligation to use the banking system.
•The residents are obliged to declare the collections, payments or bank transfers they execute or receive from foreign countries.
•The bank is entitled to demand ex post information related with the transactions executed by residents with a foreign country.
•It is important to stress that nowadays the mean of payment has to be shown to the Notary at the moment of granting the purchase public deed and that all the receipts of the payment shall be attached per copy to the public deed.
- External financing. Mortgages.
Because of the high importance of mortgages in the market, we shall now refer to the figure of the mortgage.
In merits of the mortgage, a real estate property is directly affected to the accomplishment of a payment obligation.
The functioning of the mortgage is quite simple and therefore its diffusion is widely. We are talking about a real estate right which has effect adverse everybody and whose effectiveness and origin depends on the inscription in the Land Registry. Such guaranty permits the Bank to proceed against the property. This means the Bank may request its sale by public sale and with its revenue, recover the debt. It is important to notice that the debt will be first recovered with the price obtained in the public sale for the property, but in case the debt should be higher, the debt would remain. In such cases, the debtor will continue being responsible for the credit with his other goods.
- NIE (foreigner identification number):
While in Spain is not obligatory to hold any kind of residence authorization to buy a real estate property, it is absolutely necessary to obtain a NIE (foreigner identification number). In other case, it is not possible to grant before the Notary any public deed or pay the taxes arisen from the acquisition. The NIE can be held before the Police Station.
In order to obtain the NIE, the interested person shall apply for it, personally or by a representative, duly empowered. Also a notarized copy of the passport or identity card will be necessary. Once the form has been presented before the Authorities, the procedure usually takes one month.
- Legal advice:
Laws change continuously and personal circumstances may substantially change in any particular case. The information here provided contains general basis, so therefore is highly convenient to contact a lawyer or a tax consultant. Our agency would be glad to recommend you remarkable and recognized professionals of both fields.
The above given information is just a general guideline and therefore could be subjected to defective interpretations, defaults or changes. Hence, its absolute precision cannot be guaranteed.
buyers-guide from FABREGAT PERULLES SALES
http://www.fabregat-perulles-sales.com/
