When we are considering the best way to acquire a property in Spain, either through an individual or through a company, the first thing we have to do is PLANNING.
“Planning” is always essential to take any type of decision, especially when it comes to investments abroad, which is the case of acquiring real estate in Spain.
When asking ourselves the question of what is the best way to invest in Spain, either as an individual or as a company, we have to take into account our INTENTION , understood as the motivation that serves as the basis for proposing the purchase project in Spain.
In other words, what do we want to develop in Spain? What do we want to do with the property? . Is it about a sale of real estate in which we want to spend our type holidays and vacations? Is it about buying a property in which we want to change our residence and we come to live in Spain? Is it about a property in the that we have projected an investment project?, are we looking for profitability?, Or are we looking for a conjunction between profitability and vacation?.
When we receive queries from our clients regarding what is the best way to buy in Spain, our response is always very clear, we usually answer what you wish to do with your property in Spain?
Once we detect exactly what is the intention and motivation for acquiring the property in Spain, it is then that we can begin to analyze the best formulas to develop and execute the purchase project.
ANALYSIS OF DIFFERENT ACQUISITION FORMULAS IN SPAIN
At this point, we are going to analyze several questions regarding the acquisition and decision to purchase a property in Spain.
1.- ACQUISITION AS A PHYSICAL PERSON
“My intention is to buy a property to use it individually for myself and my family, without any intention of developing economic activity on the property.”
In this case, in most cases, our answer is quite clear, we usually recommend clients who wish to purchase a property for individual use, for their family, to do so through a natural person. Therefore, in 80% of the cases, those who wish to acquire real estate in Spain for leisure, the formula to use will be the natural person.
Therefore, we can conclude that, in the event that the reason or intention of the acquisition is individual use, in most cases the answer will be to use the natural person formula, although, conditioned to the availability of funds. It has already been proprietary or as a company.
However, at this point, we come across another question that is very important to ask, where are the necessary funds for the purchase of housing in Spain?
That is to say, the buyer wishes to acquire for leisure and enjoyment of his family, but does he have said funds? Are the funds in a company?
In the latter case, that is, in the event that the funds necessary for the acquisition are found in a company of the acquirer, then another option arises, which will be to study the possibilities for that company to pass the funds to the natural person, or, that the company participates in the purchase in Spain, either preferentially, shared together with the family.
That is, we can come up with formulas such as:
- Physical person who buys with the funds of a foreign company. In this case, the individual (normally the General Administrator of the company). needs to justify in Spain the way in whcih the funds of the company have been traspassed to him. Usually, this trespass is made through a “loan” contract from the company to the individual, or as “dividends” distribution on company’s profit, etc. In these cases, the Spanish system will require from the buyer to present the necessary documentation justifying the how the funds have passed from the company account to him.
- Foreign company buys 100% of the property in Spain, but assigns the total or partial use of it to its manager. In this formula, the “title” by which the Manager uses the property can be established using, for example, these types of formulas:
- In most cases, the Manager uses the house as a tenant, that is, renting the house for as long as he/she enjoys it through a rental contract.
- On other occasions, the transfer of use made by the company to the Manager may be compensation “in kind” of the professional remuneration of said Manager.
- Foreign company buys a part of the house, for example, the bare property, and the Manager or his family buys the “usufruct”. In this way, the Manager reserves the right to use and enjoy the property for life, being able to use it, enjoy it it, and even rent it, while the company holds the “bare ownership” of it without any right of use or enjoyment nor access to it.
In the event that you wish to use the company for the purchase, together with the family, we would need to register the company as a Non-Resident Company, without Establishment in Spain. Click here to see the different formulas of foreign companies in Spain.
In both cases, that is, both in the event that the acquisition formula was chosen as a natural person, either totally or jointly with a non-resident company with no permanent establishment in Spain, the Income Tax would be taxed. the Income of Non-Resident Individuals (IRPFNR), with the specifications indicated below. Click here to know more about the Income Tax of Non-Resident Individuals
However, in the case of reaching the necessary funds for the acquisition of the property will be found in a company, we would have to study the possibilities of transferring said funds to the owners to act as a natural person, or, the possibilities of acquiring the real estate company in Spain, which may allow the individualized use of the owners.
In one case or another, as in the previous example, the election as a natural person, or as a legal person, would not imply much change for tax purposes, since both in one case and in the other they would be subject to the Income Tax for natural persons (IRPF), which, as we say, applies both to natural persons who own a property, as well as foreign companies non-residents in Spain.
2.- MIXED INTENTION – Leisure/personal enjoyment/profitability – Physical person?, buying in the name of a foreign company?
In this case, a buyer who wishes to acquire the property for private use, but also wishes to obtain some return on the property, normally through rent.
Many clients ask us, do I have to create a company in Spain to rent my property in Spain, or may I do it as Phisical/individuals?
In response we have to say that it is NOT necessary to create a company in Spain to rent your home. You can do this in many ways:
– As a Natural Person.- You may buy the property in your name and rent your property without any problems.
This rental activity will be subject to the Personal Income Tax, in its “resident” or “non-resident” modality, taking into account its status as tax resident in Spain, with a tax rate of 19% (for persons physical residents in the European Union) or 24% (for the rest).
Click here to know more about the Income Tax of Non-Resident Individuals
– As a Non-Resident Legal Company WITHOUT Permanent Establishment in Spain. If you wished to develop a moderate rental activity in Spain, you may register your company in Spain using this formula. In the event that you have a company already created in your country, you can buy through your company, provided that it is empowered in its statutes to carry out the rental activity.
This activity, and the income it generates, will be taxed in Spain through the Income Tax of Non-Resident Individuals, with a tax rate of 19% (for companies resident in the European Union) or 24% (for the rest).
This tax rate is lower than the Spanish Corporate Tax (25 %), and it has lower less running expenses, but, as opposite, it has lower possibilities to reduce taxes by expenses derived from the rental activity, as it is only allowed to reduce some concepts of expenses, and exclusively prorated to the time in which the property has been in activity.
Click here to know more about the Income Tax of Non-Resident Companies without permanent establishment
In the both precedent cases, you may opt to buy the property 100 % in the name of a natural person, or a non resident company, or buy it in conjunction with a determinate percentage on your name, and another percentage in the name of the company (or using another alternatives as buying yourselves the usufruct of the property, and the company to buy the bare ownership).
– As a Legal Entity not Resident in Spain WITH a Permanent Establishment. If case you wished to develop an intense rental business activity in Spain, within an investment program or project, and you needed a certain business structure in Spain, such as offices, employees, etc., you may register a “Branch” or ” Delegation” of your company in Spain. This company, although it has separate and individualized accounts for the activity it carries out in Spain, will belong to, and depend on, the parent company to which it is linked.
This business activity, as well as the income and expenses it generates, will be subject to Spanish Corporation Tax, with a tax rate of 25%. This tax is higher than the Non Income Tax, and it has higher running expenses (book keeper, tax advisers, etc), but it has wide possibilities of reduction on taxes with all the looses and expenses derived from the activity.
Click here to know more about Corporate Tax in Spain
– As a Spanish Legal Entity (SL or SA). Same as in the previous case. In the event that you wished to develop a solid and lasting business activity in Spain, and, as in the previous case, you wish to employ material and/or human resources (employees, etc.) in Spain, you may opt to set up an independent company in Spain, which may adopt the most common figures of SL (Limited Company), or SA (Sociedad Anónima). In this case, the company created will not act as a “branch” or “delegation” of your company, as it will be totally independent one.
Tax treatment will be exactly the same as in the previous case as incomes and expenses generated from the activity will be subjected to Spanish Corporation Tax, with a tax rate of 25%.
Therefore, as explained above, and by way of conclusion, the acquisition of a house as a natural person in Spain is perfectly possible for development of rental activities and the profitability of real estate, on a small scale.
As we see above, when the motivation to acquire a property in Spain is to destine the property for private use, and also to get some returns, then, the buyer might opt to buy as Physical person, or to use any of the above formulas of company’s structure.
However, as in the previous example, in case of reaching the necessary funds for the acquisition of the property will be found in a company, it will be necessary to study the possibilities of transferring said funds to the owners to act as a natural person, or to study the eventual possibilities of acquiring the real estate in Spain in the name of the company in a manner which may allow the individualized use of the owners (for example, to acquire the property in the name of the company, and then, renting it out to the family).
We may also opt to buy in the name of a foreign company when funds available for the acquisition of the property are in a foreign company, and/or the intention is to make an investment in Spain, or a business or professional activity, at a low scale. In other words, acquiring a property, or two, in which it is intended to carry out a certain rental activity, without this implying a large investment nor a high business structure, nor to employ significant human and material resources, so in a small-scale activity.
As it is a small-scale activity, our recommendation would be:
- To buy 100 % in the name of the buyer as Physical Person
- To buy 100 % in the name of the foreign company registered in Spain as a non-resident company without Permanent Establishment
- To opt to a mixed acquisition Physical person/Foreign company
In these cases, the owner will be submitted to Spanish Income Tax for No Residents (IRPFNR), with a moderate and low administrative and management expenses in maintaining the company.
3.- DEVELOPMENT OF LARGE-SCALE BUSINESS ACTIVITY
In these cases, we are talking about a clear intention on the part of a company to establish itself in Spain to carry out a firm and lasting business activity, which requires, in addition to the acquisition of materials, and the hiring of human resources, employees, offices, cars, etc., that will be necessary to carry out this activity.
In these cases, we cannot opt for a Physical person, nor to a Foreign Company without Permanent Establishment in Span. The reason of that is because the same employ of an employee in Spain, or the acquisition of an office in Spain to develop the business activity will be automatically considered as “Permanent Establishment” in Spain. So, it will require of more complex corporate structure to develop such activity.
So, we will need then to use one of the following Corporate structures:
– “Branch office”. The registration of a foreign company in Spain with a permanent establishment will be like a branch, or delegation, of the foreign company that will be the parent company.
This company will have a separate accounting from the parent company, but it will always be considered as a branch or delegation of the foreign mother company on which it depends. There will therefore be a dependency from the Spanish company with respect to the foreign one.
– “Independent Spanish company”. Setting up of a Spanish company (the most used forms are the limited company – SL, or the joint-stock company -SA). In these cases, we would be talking about a totally independent company, created expressly to carry out the business or professional activity for which it has been set up, and for which the acquisition of a certain real estate asset in Spain is required, either to have it in performance, or either to use it as a commercial or office space by the company.
In both cases, we would be talking about two business figures, which would NO longer be subject to the Income Tax of Non-Resident Individuals (IRPF), but would be subject to the Spanish Corporation Tax (IS), which will entail an increase in the expenses of management, when hiring accountants, tax specialists, etc. (that they will need to present accounting books, quarterly VAT and corporate tax returns, etc). In addition, in these cases, a series of regulations will have to be followed and a series of requirements regulated in Spain with respect to Social Security, Seciruty and Accident Prevention, etc., from the Spanish employees who are eventually employed in the exercise of the profession/ activity on behalf of the company, etc.
Click here to know more about Corporate Tax in Spain
CONCLUSION – With which, what is the best way to buy in Spain? Is it better to buy a property in Spain through a natural person? Or is it better to do it through a legal person?
This article then serves to help understand the different formulas to be applied depending on the essential variables in all types of investment that are, as we say, the intention or motivation that drives the project, as well as financing, understood as the place where the necessary funds are found to undertake the investment.