The Latest Fiscal Blow That Could Reduce Foreign Investment in Spanish Real Estate

A recent law introducing new taxes on banks, energy companies, and large fortunes has unexpectedly altered the Wealth Tax in Spain. This change directly affects non-resident foreigners who own real estate in the country, according to experts consulted by Idealista/News. The modification has wide-ranging implications and could deter new foreign investments in the real estate sector. It may also lead to discriminatory situations between non-residents and residents and has generated interpretation doubts.

Despite the significance of the change, it was included as a provision in Law 38/2022, passed on December 27, which also introduced temporary taxes on the energy and financial sectors, as well as the Solidarity Tax, commonly known as the wealth tax. It went unnoticed.

The legislation, published in the Official State Gazette on December 27, 2022, and in effect from December 28, includes in the third final provision the modification of “section one of article 5 of Law 19/1991, of June 6, on Wealth Tax.” This change makes non-residents who own real estate in Spain directly or indirectly subject to this tax. By extension, it also affects the tax on large fortunes and will require patrimonies of over 3 million euros to pay up to 3.5%.

As stated in point b of the provision, “By real obligation, any other natural person for the goods and rights of which they are the holder when they are located, can be exercised or must be fulfilled in Spanish territory. For these purposes, the representative values of participation in the equity of any type of entity, not traded on organized markets, whose assets are constituted in at least 50%, directly or indirectly, by real estate located in Spanish territory will be considered to be located in Spanish territory. To calculate the assets, the net accounting values ​​of all accounted-for goods will be replaced by their respective market values ​​determined on the date of accrual of the tax. In the case of real estate, net accounting values ​​will be replaced by the values ​​that must serve as the taxable base for the tax in each case.”

Therefore, all non-residents who own real estate in Spain, directly or indirectly (through a company or any type of entity, resident or not), and whose assets are at least half real estate located in the domestic market, will be required to pay Wealth Tax (whose calendar coincides with that of Personal Income Tax). And, by extension, they will also be subject to the tax on large fortunes.

Implications for Foreign Investment in Spanish Real Estate

The modification of the Wealth Tax will have far-reaching implications for foreign investment in the Spanish real estate sector. It may discourage potential foreign investors from entering the market, given the new fiscal burden imposed on non-resident foreigners who own real estate in Spain. The change also has the potential to create a discriminatory environment between non-residents and residents, which could further impact investment.

The Spanish real estate market has long been a sought-after investment destination for foreigners due to its favorable climate, strategic location, and attractive real estate prices. However, this latest fiscal blow may tarnish its reputation and discourage future foreign investment. It remains to be seen how the real estate market will adapt to the new fiscal changes and what impact they will have on foreign investment in the future.