Calculation of tax when buying a house with a company in Spain

The process of buying a property through the acquisition of a company in Spain can be complex, particularly when it comes to understanding the tax implications.

The main issue revolves around whether the transaction is subject to VAT (Value Added Tax) or ITP (Impuesto sobre Transmisiones Patrimoniales y Actos Jurídicos Documentados – Transfer Tax), or if it is exempt from these taxes due to the nature of the transaction. This situation is further complicated by Spain’s Anti-Fraud Law, which aims to prevent tax evasion in property transactions carried out through the transfer of company shares.

Basic Concepts and Transactions

Direct Property Purchase:

– VAT Application:

If the property is new and the seller is a developer or company, VAT is usually applicable. This is often the case in the first transmission of the property.

– ITP Application:

If the property is second-hand or not linked to the seller’s business activities, the purchase is generally subject to ITP instead of VAT.

Acquisition of a Property owned by a company:

– When you buy a company that owns property, you are indirectly acquiring the property through the purchase of the company’s shares. This can sometimes allow the buyer to avoid direct property transfer taxes like VAT or ITP, depending on the specific circumstances of the transaction.

 The Anti-Fraud Law

The key legal framework governing this type of transaction is Article 314 of the Consolidated Text of the Securities Market Law (TRLMV), which contains anti-fraud provisions designed to prevent the misuse of corporate share transfers as a means to avoid paying VAT or ITP on property transactions.

– General Exemption: Normally, the transfer of shares is exempt from VAT and ITP.
– Anti-Fraud Rule: However, if the real intention behind the transfer of shares is to avoid paying VAT or ITP that would have been due if the property was sold directly, the transaction may still be subject to these taxes. This anti-fraud measure ensures that if a transaction is deemed to be structured primarily to evade taxes, the relevant taxes must be paid.

Specific Scenarios

 Scenario 1: No Intent to Evade Taxes

If the property is genuinely used in the company’s business activities (e.g., construction, rental, or property development), and the company is engaged in an ongoing economic activity, the transfer of shares is likely to be exempt from VAT and ITP.

Example: A company is involved in the development of multiple properties. During the course of its business, a buyer expresses interest in purchasing the company rather than just a single property. Since the company’s activities are clearly tied to economic activities and there is no intention to avoid tax, the transfer of shares may be exempt from VAT and ITP.

Scenario 2: Potential Tax Evasion

If a company is established solely for the purpose of constructing a single property, and the shares of the company are sold immediately after the construction to transfer ownership of the property to a buyer, this might be seen as an attempt to avoid paying VAT or ITP.

Example: A company is created to build one house with the intention of selling it to a specific buyer who appears as soon as construction begins. If the Tax Office views this as a strategy to avoid the taxes that would have been due on a direct property purchase, they may apply VAT or ITP to the transaction, even though it involves the transfer of shares.

How the Tax Authority Determines Intent

The Spanish Tax Authority will scrutinize the transaction to determine whether there was an intent to evade taxes. Key factors include:

– Business Activity: Is the company engaged in ongoing economic activities, or was it set up solely for the purpose of facilitating the sale of a single property?
– Timing and Structure: Did the creation of the company and the sale of its shares occur in a manner that suggests pre-planned tax avoidance?
– Use of Property: Is the property an active part of the company’s business operations, or is it merely held as an asset with no real business use?

Practical tips

Given the complexity of these transactions and the potential for different interpretations by the Tax Office, it’s crucial to proceed with caution:

Consult to experts:

Before engaging in any such transaction, it is advisable to seek expert legal and tax advice from professionals who are experienced in Spanish real estate and corporate law. They can provide guidance on structuring the transaction in a way that minimizes tax liabilities while complying with all applicable laws.

Documentation:

Ensure that all documentation clearly reflects the genuine business intentions and activities of the company. This includes maintaining thorough records of the company’s economic activities and the rationale behind the property purchase or sale.

Risk of Tax Audit:

Be aware that transactions involving the sale of company shares that include significant real estate assets are likely to attract the attention of the Tax Office, particularly if the real estate is not evidently tied to active business activities.

Tax Planning:

Strategic tax planning is essential. This might include considering the implications of the anti-fraud rules during the initial setup of the company and throughout the transaction process.

In summary, buying a house by acquiring 100% of a company’s shares that owns the property can be a tax-efficient strategy, but it is fraught with risks if the transaction is not carefully structured. The key determinant of whether the transaction will be subject to VAT or ITP lies in the intent behind the transaction. If the Spanish Tax Office determines that the primary purpose was to avoid paying the taxes that would have applied to a direct property sale, they will likely enforce these taxes.

Given the nuances involved, it is highly recommended to involve professionals who can ensure that the transaction is carried out in compliance with the law while minimizing the risk of being subject to additional taxes. This approach will help safeguard against potential issues with the Spanish Tax Authorities and ensure that the transaction proceeds smoothly.