4.1 Main types of investor

These may be: non-resident individuals, foreign companies and foreign governments or government-owned companies (subject to restrictions). Aliens with residence in Spain may freely invest in real estate, but this investment would not be a foreign investment.

4.2 Real Estate Investment System

4.2.1 General Rules
Provided, in general terms, that the investment is made in freely convertible currency foreign investment in real estate in Spain is free. The investor simply transfers the money, buys the property in question and subsequently should declare his investment to the Foreign Investments Register so that the rights attached to the foreign investment (mainly, transfer of rental and sale proceeds of the investment) may be given effect to. If the investment is in itself an entrepreneurial activity it is considered a direct investment and thus subject to the rules on direct investments (see 3.4.1).

4.2.2 Exceptions
Investments in real estate are not free and require the prior "verification" of the Spanish authorities in the following cases:
a) if the actual investment exceeds 500,000,000 pesetas;
b) if, irrespective of the actual amount, the investment comes from countries and territories which by regulation are deemed to be tax havens (see list in footnote 44).

For verification purposes the investment project must be submitted in advance to the Foreign Investment Authority. The comments made in paragraph 3.4.1 above apply.

4.2.3 Rights attached to foreign investments
These are:
a) Repatriation of the proceeds of the sale provided all legal and tax obligations and regulatory requirements have been duly met, and
b) Remittance of rents abroad: there is no limit subject to fulfilment of the relevant tax obligations.

The transfer of the proceeds of sale of real estate and of rental income is free and requires no prior verification.

4.2.4 Other highlights

a) Business activity (the so called entrepreneurial activity) in the real estate field is regarded and treated as a direct investment and thus subject to the requirements established for this type of investment.

b) Foreign investments in certain restricted areas (namely coastal areas) further require a military permit for national security reasons. This requirement does not apply to nationals (individuals) or companies of EC countries. In the case of companies, whether Spanish or foreign, a military permit will be required if more than 50% of the company's share capital belongs to non-EC nationals (whether individuals or companies) or if, being less, the non-EC partners exert a decisive influence in the company's management.

c) Domestic loans to non-residents for the purchase of property secured by mortgages on the acquired property are available and require no prior approval of the Foreign Investment Authority. Spanish banks have been authorised on a general basis to give loans under certain conditions. Repayment of such loans is to be made with foreign currency, though rental income deriving from the property may also be applied to repayment.

4.3 Taxation

4.3.1 Taxes on purchase VAT or Capital Transfer Tax (CTT)

a) Plots of land: 6% CTT (between non businessmen); 16% VAT (otherwise); Rural non-buildable land is exempt from VAT but is liable to CTT (6%)

b) New property. housing : 7% VAT; business premises: 16% VAT; parking lots: 7% VAT if attached to a dwelling and sold together; 16% VAT in any other case. Under certain circumstances the transfer of shares of companies owning property may be subject to CTT at the rate of 6%.

c) Second hand property. plots of land (rural or non-buildable land) and buildings attached thereto: 6% CTT, since sales are exempt from VAT; empty plots of land: 16% VAT (if seller is an entrepreneur) 6% CTT (if between non-businessmen). Rural non-buildable land: 6% CTT; housing: 6% CTT; business premises: 6% CTT

In a), b) and c) the tax is borne by the buyer. Impuesto sobre el Incremento de Valor de los Terrenos de Naturaleza Urbana (Urban Plots Capital Gains Tax).

This tax is in force since January 1st 1990 and replaces the so called Municipal Capital Gains Tax (Impuesto Municipal sobre el Incremento del Valor de los Terrenos, commonly known as Arbitrio de Plusvalia). It applies to both individuals and companies dealing in urban plots (excluding rural land).

The taxable base is a percentage of the official value (valor catastral) of the plot of land at the time of the sale. The percentage (i.e., the annual increase in value of the plot of land) is fixed for five year periods by the relevant city council within margins authorised by the law. The applicable percentage at the time the land is sold is multiplied by the number of years the property has been in the possession of seller. The resulting total percentage is applied to the official value of the plot of land. The resulting amount is taxed at rates varying between 16% and 30% depending on the population of the relevant city. Example: the plot of land is sold after 7 years, the percentage agreed by the city council for the second 5 year period is 2%, the land's official value is 100 million pesetas; hence the taxable base would be 14% of 100 million pesetas or 14 million pesetas and the tax payable somewhere between 2,240,000 pesetas and 4,200,000 pesetas. Individuals are allowed to deduct the 75% of the tax paid from their own personal income tax.

Generally, the tax payer is the seller. In practice the former tax -the Municipal Capital Gains Tax- was often paid by the buyer as a result of agreement between the parties. In addition the tax was in fact secured by the property with the tax authorities having a charge over such. It was thus advisable to find out in advance the tax liability before committing to buy for it could be a significant sum. The property is no longer charged and the only tax payer vis-a-vis the city council is the seller. However, in practice the tax is still frequently borne by the buyer.

4.3.2 Taxes on ownership
Basically there are two: Immovable Property Tax (Impuesto sobre Bienes Inmuebles). This tax is also in force since January 1st 1990 and replaces the so called Contribucion Territorial Urbana (Urban Property Tax), the Contribucion Territorial Roestica y Pecuaria (Rural Property Tax) and the Impuesto Municipal sobre Solares (Plots of Land Municipal Tax). The ownership of immovable property (generally land and buildings) gives rise to this tax.

The tax is assessed on the official value (valor catastral) of property which cannot exceed market value. For the fiscal year 1995, the official value of urban and rural land fixed for the fiscal year 1994 has been increased by 3.5%. The tax is payable annually. The tax rate is 0.3% in the case of rural property and 0.4% in the case of urban property although the relevant city council may vary these rates within certain limits. Individuals are allowed to fully deduct the tax paid from their own personal income tax. Wealth tax
Applied each year according to an increasing scale on all types of property (including, therefore, real estate). Non-residents pay on property located in Spain only. Residents pay wealth tax on their property located in Spain and elsewhere. Companies are not liable to wealth tax for any property they may have.

For fiscal 1996 the following rules(48) should be considered:

(i) Residents must only have to file the relevant return if the taxable base under Wealth Tax is more than 17,000,000 pesetas. The first 17,000,000 pesetas are exempt. These rules do not apply to non-residents who must file the return and pay the tax irrespective of the actual values of the properties. However, securities generating income which is not deemed to be Spanish source income will be exempt from Wealth Tax.

(ii) The brackets, expressed in pesetas, are:
0 to 26,780,000: 0.20%
26,780,000 to 53,560,000: 0.30%
53,560,000 to 107,120,000: 0.50%
107,120,000 to 214,240,000: 0.90%
214,240,000 to 428,480,000: 1.30%
428,480,000 to 856,960,000: 1.70%
856,960,000 to 1,713,920,000: 2.10%
More than 1,713,920,000: 2.50%

(iii) Non-residents are also required to appoint representatives for Wealth Tax purposes in Spain(49). The appointment must be notified to the Tax Department within two months following the date of the appointment. Non-compliance with these obligations may result in fines being imposed ranging from 25,000 to 2,000,000 pesetas.

4.3.3 Taxes on rental income Indirect taxation on rental income
Business premises: 16% VAT
Housing: CTT (stamp tax) which is paid via the officially approved lease contract form. Direct taxation on rental income

a) Non resident companies : a flat 25% withholding tax on gross rent (no reduced treaty rate to avoid double taxation available).
b) Non resident individuals : a flat 25% withholding tax on gross rent (no reduced treaty rate to avoid double taxation available).

4.3.4 Capital gains tax
a) Non-resident individuals: As from the fiscal year 1988 it is a flat 35% withholding tax on the difference between the acquisition cost (made up of the price, expenses and taxes paid at purchase and the market value (as assessed by the Revenue Service or the sale price if it equals or exceeds the market value). The capital gain is reduced according to the time that the property was held by the seller (for details see Section below).

b) Non-resident companies: 35% withholding tax on the difference between the acquisition cost (as determined pursuant to current regulations) and the market value (the sale price stated in the conveyance deed will be accepted if it equals or exceeds the market value).

4.3.5 Special corporate tax
There is a special corporate tax on non-resident entities owning, or holding real rights over, immovable property in Spain(50). The rate has been fixed at 5% to be levied annually on the "valor catastral" (official value of property), but as of 1st January 1996 it amounts to 3% (pursuant to the provisions set forth in Law 43/1995). The tax will be due at December 31st of each year and payable within the following month of January. The 3% tax will be an expense deductible when determining the taxable base for corporate income tax purposes. As the Law came into force on January 1st. 1992, the tax was payable for the first time on January 1993.

(48) Law 19/1991 of June 6th, published on June 7th 1991, and Law 41/1994, of December 30.
(49) Non-residents having interests in Spain at the time were given until December 31st. 1991 to make such appointments (First Transitory Provision of Law 19/1991).
(50) The tax was approved by Law 18/1991 of 6 June, published on 7 June 1991.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstance.

For further information contact Mr. Jorge Angell, L. C. Rodrigo Abogados, Madrid (Spain) Fax:010 341 576 6716, or enter text search 'L.C. Rodrigo Abogados' and 'Business Monitor'.