BUYING A PROPERTY IN SPAIN THROUGH A SPANISH LIMITED COMPANY CAN SAVE YOU A LOT OF MONEY DEPENDING ON THE COST OF THE PROPERTY.

This guide has been elaborated by the legal and financial advisers of
Dr. Crespo & Partners, International Lawyers SRL,   an established and well-known firm.

 Can I buy a house in Mallorca  through a company?

Yes. Any company whose existence is recognised by its own law can operate in Spain acquiring properties. This is also the case with an English Limited Company, an Offshore Company of any offshore territory or the German GmBH, to give some examples.

You may also acquire the property through a Spanish company of limited liability (SL). In this case the company is set up before the purchase of the property. Of course, the company is constituted according to the convenience of each client. The foundation of a company in Spain is a right recognized in the Spanish Code of Commerce to all foreigners and this right is also extended to all foreign companies, who may also constitute Spanish companies.

The constitution of a Spanish company by foreign founders does not differ from that of Spanish founders. As a foreign investment in Spain the Spanish Notary who authorizes the constitution compliments a form for statistical and economic purposes. Only when the money comes from an offshore territory is a previous declaration required by the investor, which in practice does not suppose a problem.

Spain is considered to be the second country of the World with fewer barriers to the capital movement. Spain is a partner of the European Community and therefore the total freedom of movement of capitals proclaimed by the Maastricht Agreement is applicable.

How much does it cost to set up an -SL- company in Spain?

The standard total cost to set up a company is is 3,000€.

The first step to constitute a company is to select its name. We recommend not using common names, as it is likely that they are already being used. You will have to choose three different names by order of preference. We will inform the Central Mercantile Registry in Madrid of your proposed names, if the name does not exist the Registry will reserve it for your company.

The second step is to pay the capital into a Spanish bank account in the name of the company. The minimum capital for an SL is 3,005€. Afterwards it is possible to sign the company’s deeds and statutes and choose a director. A tax of 1% of the capital must be paid to the Tax Department Office.

The following step is to register the company before the appropriate Tax, Labour and Social Security authorities and consequently before other legal Offices. The company must also be registered with the Mercantile Registry. Only after the registration with the Mercantile Registry can shareholders sell their shares. However, before the registration of the company, the company can buy the property. In this case the company would have to ratify the purchase deeds after its registration.

Constitution deeds will be signed by founders and the director/s in their own name or by an attorney using power of attorney. In urgent cases deeds can be signed without power of attorney, however they are then subject to ratification. Powers of attorney and ratifications can be signed either in Spain or England but the company deeds must be signed in Spain.

The total expenses for all the procedures involved in constituting a company, including our fees and taxes, are 3,000€. If the capital of the company is higher than the 3,005€ minimum, the total cost will be slightly higher.

Who should constitute the company?

Any person over the age of 18 without legal restrictions may set up a company. Minors may also, but are subject to certain limitations and generally speaking there are problems when their parents also constitute the company. The company should be constituted by the same people who, without it, would have bought the property. The owner/s of the shares of the Spanish company will be indirect owner/s of the house that the company acquires each in proportion to the number of shares they have. Nevertheless, in some cases this rule can be altered. This could happen when you wish to anticipate the inheritance or benefit from somebody. It could also occur that the investor does not wish to have their name in public registries on account of debts with third persons. The company would then be in the name of someone else, with complete confidence. A company may also set up a Spanish company. This could be very useful if you are already operating through a limited company.

Must I sign a Spanish will if I buy through a company?

When a Spanish property is bought by a foreign national through a Spanish company, the investor is nonetheless owner of Spanish shares. Therefore, it is advisable that each holder of shares signs a Spanish will exclusively for assets in Spain.

I bought the house and put it in my name. Can I now constitute a company?

It is possible to handover the property to your company as capital. The only difference is, as mentioned before, the house constitutes the capital. The cost to set up the company is the same as in the previous case, except the AJD tax of 1% of the capital is applied to the value of the house and an additional fee must be paid to the Land Registry Office. In this assumption the company is constituted by the owners of the house, therefore holding in the company an identical proportion of shares as they did in respect to the house.

As a general norm, when is it convenient to acquire a property through a company?

With our long experience in this field, we would advise you to buy a property through a Spanish company when the following circumstances apply:
a) co-habiting couples; when at the death of one, the other becomes the beneficiary, or in general investments of vast amounts of money where the future inheritance tax would be very high.
b) an investment producing a high yearly rent when the owner has no intention to be resident in Spain
MANAGING THE COMPANY
Who can be director of the company?

The possible ways of administering a company are the following:

a) Sole director. In this case he/she carries out all the functions of administration and representation of the company.
b) Joint directors. There can be two or more. Any one can exercise the functions of administration and representation of the company.
c) Two directors in common. They must act jointly.
d) Administration through a Board of Directors, when the administration is in the hands of more than two people in common. The Statutes or the General Meeting, appoints the number of members of the Board, which must be at least three members and no more than twelve. Generally, a managing director is also elected.

A director can either be a partner or a non-partner. The director can also be another company. The company may also grant specific or general powers of attorney to third parties. Directors are named in the company constitution deed and the General Meeting can revoke them and name new administrators. It is possible to designate substitute directors in the case that the designated directors cease their duty. The law does not order a specific term for the duration of the administrator office, generally the appointment is indefinite.

In which cases is the monthly payment to the Social Security due by Directors of a company?

If the sole purpose of the company is to own property or administer assets belonging to the partners and not to make business then there is no requirement for the director to enrol in the national social security.

In other cases, when for example you are partner or director of a company, you will be obliged to enter the social security system as self-employed in the following cases:
a) if you carry out direction or management duties that imply exercising the position of director of the company;
b) or if you provide a regular service to the company, directly and personally.

In both cases it is necessary for you to have the effective control of the company in the purpose of the Law.

You may decide what quota you pay to the Social Security each month. From 2003 the minimum is 209. 61 € and the maximum is 750.51 €.

What benefits does the Social Security provide you with if you are registered as self-employed? In general, and subject to legal circumstances you will enjoy:

1.- Medical assistance for you and your family.
2.- Financial assistance due to temporary inability to work.
3.- Financial assistance due to maternity leave.
4.- Financial assistance due to total and permanent incapacity to work.
5.- Retirement pension.
6.- Financial assistance to your spouse in the case of your death and a monthly pension for him/her.
7.- Other family protection payments.
8.- Social services on your behalf.

What are the compulsory requirements of the limited companies?

Companies must keep the following records:
a) Daily journal
b) Inventory and balance sheet
c) Shareholders’ registry
d) Committee minutes
e) Register of contracts between sole shareholders and the company, in the case of an individual limited company.

Other records are needed for special cases. They must be registered in the Mercantile Registry, or later when the information is stored in computers. In the latter case, within four months since the accounting year ends.

Also, the following documents must be deposited in the Mercantile Registry:

a) Annual Financial Statement, including
-the balance sheet
-profit and loss account
-annual report
b) Management report (only for big companies)
c) Proposal of profit or loss application.

The director must present the accounts within 3 months from the end of the accounting year, and the Board must approve them within 6 months of the end of the accounting year.

Once approved, the accounts must be deposited in the Mercantile Registry within one month of approval along with a certification of the profit or loss application.

THE COMPANY AND TAXATION AT THE PURCHASE OF THE PROPERTY

How many taxes does the company pay in the acquisition of the property?

The taxes that are paid in the acquisition of the property are independent of the type of the buyer company. If the vendor is a business person or company and the object up for sale is a plot, 16% VAT of the price plus 1% of AJD (special tax) of the price will also have to be paid. If the property for sale is a new house the VAT will be 7% and the AJD 1% of the price; if it is a second-hand house, then the extra payment is usually only 7% ITP (tax on transmission between individuals).

If the vendor is not in business, the buying company would only have to pay 7% ITP of the price, whatever the property.

Aside from the purchase taxes there will be additional expenses: the Notary’s expenses for the transaction of the deeds; the expenses for the registration of the property in the Land Registry; Lawyer’s fees. Altogether these rarely amount to more than 1% of the price.

When can a company apply for a refund for the VAT paid on the purchase of a property?

When property is bought by a holding company or a company is made up for the mere enjoyment of property, the company cannot reclaim VAT on the property.
To deduct the VAT a company must have a business- effective activity and furthermore, this activity must accrue VAT as a pre-condition to later have the right to deduct the VAT. If the company sells the property before ten years, the deducted VAT must be returned to the Inland Revenue pro rata with the years the company has enjoyed the property.

THE COMPANY AND THE TAXATION OF ENJOYING THE PROPERTY
What is the taxation of a company for the mere enjoyment of a property?

For small and medium companies, from 2007 the general rate on profits up to 120,000 euros is 25%. Profits above 120,000 euros will be taxed at 30%.

Negative tax will be compensated with the profits of the following 15 years.

What taxes do I have to pay annually if I put the property in my name? -Local rates (which you will also have to pay if you are the owner of a company and are non-resident in Spain) -Wealth Tax, rising from 0.2% of the price declared in your deeds, up to 167,129 €. (amounts above 167.129 € will be taxed at a higher) -Income Tax, normally 0.264% of the Local rates value.

What is the taxation of the shareholder of a sleeping company?

Individual shareholders, residents in Spain, will pay 18% Income tax on dividends. Resident corporate shareholders will enjoy a 100% deduction on the tax on dividends when their participation in the company is higher than 5% of the capital.
In the case of sale of shares, when the vendor is an individual the capital gain will be considered as the difference between the selling value- with legal limitations in the assessment of the value- and the cost of holding the shares. When the vendor of the shares is a corporation, the capital gain will be calculated according to the general rules of Corporation Tax.
Dividends paid to an individual or to companies domiciled in the UK are taxed at 10% when their participation is higher to 10% of the capital and 15% in the rest of cases.
Dividends paid to holding/parent companies (when the control is at least 25% of the capital of the Spanish company) is not taxed in Spain.
Dividends paid to individuals or companies domiciled in countries with a non-tax agreement with Spain are taxed at 18%.

How much does the company pay if it rents the property in Mallorca?

General tax. All expenses will be considered costs. Amongst others there are:
-paid interests for purchasing the property
-local taxes and surcharges
-doubtful income balances under specific legal circumstances
-personal services
-expenses to repair and conserve the property
-balance sheet property depreciation.

How much taxation do I pay if I own the rented property and I am non-resident in Spain? 24% of the income (Note that 24% of the income will normally be higher than 25% of the profit)

When is the corporation tax paid? When must corporate tax be paid?

The corporate income tax return must be presented within 25 days of the termination of a period of 6 months from the end of the tax year.
The tax year will be the company accounting period. It cannot be extended to more than 12 months.
The company must make a partial payment within the first 20 days of April, October and December based on a percentage of the tax paid the previous year.

TAXATION AT THE TRANSFER OF THE PROPERTY – MALLORCA

How much does the company pay when selling the property?

General Tax. These are calculated according to the general rules.

How much do I pay if I own the property and am non-resident in Spain? 18% of the gains. The buyer will retain 3% of the buying price and pay it to the Spanish Tax Department on account of your Capital Gains Tax.

How much does the shareholder pay when selling his/her shares?

a) If an individual is resident in Spain, 18% of profits.
b) If a company is resident in Spain, the general rate.
c) If shareholders are non-resident individuals or corporation in Spain but resident in the UK and paying taxes
there, the profit from the sale of the shares is not taxable in Spain according to the Convention signed between the United Kingdom and Spain to avoid double taxation. In this case there is no retention for tax purposes for the purchaser of the shares.

Company and inheritance tax.

Following the decease of the holder of Spanish shares, the beneficiary must declare and pay inheritance tax on the Spanish assets that he/she acquired from him/her. If the tax is not paid in the period of four and a half years from the death, there is no duty to pay, unless the Tax Administration has opened a file for infringement or other legal causes arise. If the property is in the name of the individual – and not in the company’s name – this is registered in the Land Registry. It then becomes impossible to sell the property of the deceased without first transferring his/her part to the beneficiaries. On the contrary, if the property is in the name of the company, then the company is holder of the property and the director’s or the shareholder’s death does not affect the sale of the property. The company can always sell the property. In practice very rarely does a non-resident in Spain have to pay inheritance tax when receiving a share of a Spanish company via Succession Law. However, when this does happen, the tax to pay is lower than when one receives the property directly.

Nevertheless, Inheritance tax can be more beneficial if the property is acquired directly and the deceased was resident in Spain and the house had been his/her abode; although in this case, the beneficiaries (spouse and children) have an obligation to keep the house for excessively long periods. They cannot sell it during this time unless they pay the applicable tax plus the interest.

When the beneficiaries are neither the spouse or the children of the deceased, the acquisition through a company is always advisable, as inheritance tax between strangers is extremely high.

If both, the deceased and beneficiary, are domiciled in certain regions of Spain, they can enjoy some important allowances according to the applicable law.

 

Read also:

Non residents income Tax Guide