Read this article to learn about the tax on rental income in Spain, and the difference in taxation rates for residents and non-residents.
The Madrid real estate market
The Spanish real estate market continues to attract a large number of foreign investors. Real estate investment in Spain grew by more than 50% in 2018. Madrid leads the charge: real estate investment in the capital grew 38% in 2018, reaching 1,825 million euros.
It is not just Spaniards investing in Spanish real estate. 20% of recent Spanish property purchases were done by foreigners. Some of these were people permanently emigrating to Spain. However, many of them took advantage of the fact that Madrid and Barcelona have some of the highest rental yields in Europe. Although investing in Spanish rental property is often a very profitable venture, investors have to take into account the tax on rental income in Spain. It is different for non-residents and varies by one’s nationality.
The tax on rental income in Spain for Spanish residents
The tax on rental income in Spain for Spanish residents is 19%. Furthermore, they can deduct expenses related to maintaining the property.
The tax on rental income in Spain for residents of other countries
Non-residents are subject to the Non-resident Income Tax (IRNR). This varies, depending upon the property owner’s country of residence. (being able to tax 19% with the possibility of deducting expenses and 24%).
First, it is necessary to refer to the Double Taxation Agreement signed between Spain and his or her country of residence. The OECD Convention model establishes that real estate income from a property located in Spain must be taxed in Spain, regardless of the taxpayer’s tax residence. Once we know that under the Convention income can be taxed in Spain, we will have to turn to Article 13.1.(g) LIRNR, which states that income derived directly or indirectly in Spanish territory or from rights related to them will be taxed in Spain. Additionally, this income would not be exempt since it is not included in article 14 LINR, and therefore, in short, it will have to be taxed in Spain.
The tax rate itself varies, depending on whether the person is a tax resident of the European Union (EU) or of the European Economic Area (EEA), or if they reside in a non-EU/EEA country.
Taxation for EU/EEA residents
The tax on rental income in Spain for residents of EU/EEA countries is 19%. Additionally, they can deduct expenses inherent to renting. These include expenses for maintaining and repairing of the rental property, household insurance premiums, third party service providers, community fees, etc. These expenses can greatly decrease the actual tax rate.
Example of tax deductions
Assume you have a rental property that generates an annual rental income of €15,000. If the community expenses are €2,000 per annum and repair and improvement costs amount to €1,600 per annum, the tax on your rental income in Spain will be calculated as:
Total rental income: 15,000
Deductible expenses: 3,600
Tax base: 11,400 (15,000 – 3,600)
Tax rate: 19%
Tax due: 2,166€ (11,400 * 0.19)
Taxation for non EU/EEA residents
If the non-resident resides outside the EU or EEA, their IRNR tax rate will be 24%. Moreover, they are not allowed to deduct any expenses related to property maintenance or management.
Using the same example as above, a person who has an annual rental income of €15,000, and expenses of €3,600, will pay the following tax on their rental income in Spain:
Total rental income: 15,000
Deductible expenses: 0
Tax base: 15,000
Tax rate: 24%
Tax due: 3,600€ (15,000 * 0.24)
As seen in the above example, taxation varies greatly (almost a 1,500€ difference) depending on the country in which the taxpayer resides.
Did you you know that there are other ways for non EU/EEA residents to reduce their tax on rental income in Spain? Property purchases in excess of 500,000€ are eligible for a Spanish Golden Visa. Alternatively, if you set up a Spanish company and purchase your Investment property through this, you can save up to 50% on taxes. Contact us today to learn more about both of these options.