Selling a property in Spain by the non-resident: The 3% withholding tax
I n real estate transfers made in Spain by non-resident taxpayers, the purchaser of the real estate is obliged to pay a 3% withholding tax of the value of the property transferred. This payment is on account of seller’s non-resident income tax, as established in Article 14 of Royal Decree 1776/2004, of 30 July, approving the Regulations on Non-Resident Income Tax.
Thus, when a foreign person or entity owning real estate in Spain transfers it – regardless of whether the purchaser is a tax resident in Spain -, the purchaser must pay 3% of the purchase price on account of the increase in assets that the tax agency estimates that the transferor will obtain from the transfer of the property.
The purpose of this retention is to prevent the seller who is not resident in Spain from leaving the country once the property has been transferred without paying the increase in the value obtained from the sale of the property. The law even establishes that, if the withholding has not been paid, the property will be affected by the payment of the withholding through the registration of a tax condition (burden) in the Property Registry.
This withholding affects both the seller and the buyer since, if it is not done properly, the property will be ultimately responsible for the payment.
If the transfer of the property results in the seller not obtaining an increase in equity or the increase in equity obtained is less than 3% withheld, the seller will be entitled to claim the excess income to the Tax Office.
Let’s have a look at a couple of examples of how this withholding works in reality:
3% Withholding Tax – Real Case Example I
Mary and John, residents of the United Kingdom, are co-owners of an apartment in the Canary Islands bought in 2005 for 250.000.-€. In the year 2020, they decide to sell it for a price of 280.000.-€. The costs of the transfer for the sellers (notary and agency fees) is 5.000.-€.
Could Mary and John ask for the return of part of the 3% withholding tax paid?
The withholding tax to pay by the buyer of the property would be 3% of the total sales price 280,000.-€ x 3% = 8,400.-€
The capital gain experienced by John and Mary is 25,000.-€
|Expenses incurred in the sale||5,000.€|
Since the tax rate applicable to the capital gains of non-residents is 19% on the capital gain, we can conclude that Mary and John must pay 4,750.-€ as shown below
|25,000.-€ x 19% = 4,750.-€ as total tax due|
Following the above, we can conclude that Mary and John have paid more than they should have, therefore, they could claim from the Spanish tax office the difference between the amount withheld and the rate applicable to the effective capital gain
|Total withheld tax = 8,400.-€|
|Total tax due after calculations = 4,750.-€|
|Amount to be claimed to the tax office = 3,650.-€|
3% Withholding Tax – Real Case Example II
Pierre and Mathilde, tax residents in France, divorce while being co-owners of a property in Barcelona. In the divorce agreement approved by the general court of Paris, the spouses agree that Mathilde will keep the flat in Barcelona, so Pierre will transfer his 50% of the property to her.
Is Mathilde obliged to retain the 3% withholding tax as seen above?
The answer is yes.
Paradoxically, even though there is no monetary transaction between the spouses, as the requirements set out in Article 14 of the Non-Resident Income Tax regulations, are met, Mathilde will have to withhold the 3% as seen above due to Pierre’s condition of French taxpayer.
In these cases it is important and highly recommended that a legal expert assesses the situation to avoid unwanted surprises.
On a final note, it is important to emphasize that the same applies to the municipal capital gains tax Impuesto sobre el Incremento del Valor de los Terrenos de Naturaleza Urbana.
At Legaliaspain we proud ourselves of having successfully completed hundreds of transactions on behalf of our clients. If you are thinking of selling a property in Spain our solicitors and tax advisors will be glad to assist you along the process. Do not hesitate to contact us here or in the contact form for a free quotation of service.