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Wealth Tax is not applicable to non-residents owning Spanish properties through foreign entities

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30 Jan 2021

The majority of recent Double Tax Treaties gives Spain the right to tax on the value of shares when a Spanish real estate property represents more than 50% of the total assets directly or indireclty. This is -for example- the case of the new Treaty between UK and Spain in force since 2014, substituting former 1976 Treaty.

The Spanish General Directorate of Taxation has declared in numerous occasions that non-residents owning more than 50% of the capital of the above-mentioned type of companies are subject to Wealth Tax if the treaty so allows. For example, a recent binding consultation on this matter is V1995-20 (17/06/2020) on a German citizen residing in Germany holding 51% of a German company that, in turn, holds 100% of a Spanish company with a Spanish property as sole asset. The German-Spain tax treaty gives Spain the right to tax on the value of shares of companies of which a Spanish property represents more than 50% of the total assets. In the first scenario set in the consultation, the Spanish company does not represent more than 50% of the assets held by the Germany company, and the conclusion is that the German does not have to pay Wealth Tax. In the second scenario where the Spanish company buys another property in Spain so the company represents more than 50% of the total assets in the German company, the conclusion is that in this case it is subject to Wealth Tax.

On 3 December 2020, however, the Contentious-Administrative Court of Balearic Islands has ruled that Wealth Tax is exclusively applicable to assets located or executable in Spain, and foreign companies are not included in the scope of the Act regulating this tax, despite of the right assigned by the tax treaties. Consequently, the German citizen of the above case would not be subject to Wealth Tax on the Spanish properties held through the corporate structure.

This is a relevant court ruling that will have a great impact on tax planning, and opens the door to potential tax claims for refund of inappropriate tax paid in the last 4 years.

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