It is undeniable that BREXIT is deeply changing trade relations between EU countries and the UK, and in tax matters this change is not far behind.
Today we would like to report on a specific case of change in taxation in Spain that may affect certain structures of British companies and partners with real estate property located in Spain.
For some years now, the Spanish Tax Agency has maintained the criteria of imputing real estate income at market value to non-resident companies with a property in Spain, when the non-resident shareholders and/or administrators use the property for private purposes. In other words, due to the mere availability of the property, the non-resident entity will have to pay taxes on this imputed income.
In order to justify this taxation, the Directorate General for Taxation, on its the binding consultations, first refers to the Double Taxation Agreements to determine whether this income can be taxed by the Spanish government. Thus, in the case of the Double Taxation Agreement between Spain and the UK, we see in Article 6 that the Spanish State may tax income derived from the direct use of immovable property located in Spain, when the ownership of shares directly or indirectly entitles the owner of such shares the right to enjoy the immovable property.
Consequently, income derived from the use of the property may be subject to taxation in Spain, as is also regulated internally in Article 13.1.g) of the Non-Resident Income Tax Law, where the following, among others, are considered income obtained in Spanish territory: “g) Income derived, directly or indirectly, from real estate located in Spanish territory”.
With regards to the valuation of this income, since shareholders and/or directors are related parties with respect to the non-resident company, all transactions carried out between these related entities will be valued at their market value. Market value shall be understood as the value that would have been agreed by independent parties under conditions that respect the arm’s length principle.
Therefore, in accordance with the above, the non-resident company will obtain taxable presumptive income in Spain from the use of the property by the shareholders and/or directors.
This taxation, until 2020, was 19% for British entities as an EU member state with full deduction of expenses related to the property. After BREXIT, the United Kingdom no longer belongs to the European Union, and therefore, with effect from 01st January 2021, the taxation rate will be 24% on this presumed income due to the fact of having the property located in Spain, with NO deduction of expenses.
Therefore, British entities, after the BREXIT, have been seriously harmed in terms of taxation in this case by seeing their taxation increased by 5 percentage points, and the impossibility to deduct any expense. At MDG Advisors, we offer our services to check and analyse the new situation of British entities that are affected by this fact. Please contact us if you are in this situation so that we can assist you as soon as possible.