After the financial crisis of 2009, Andalucía and other autonomous regions in Spain introduced reduced taxes on property purchases in an effort to revive their real estate sectors.
Royal Decree Law 1/2009 and 8/2010 put into effect a 2% reduction in Property Transfer Tax, conditional to fulfilling certain requirements and as long as the property purchased is sold within a period of five years. In other words, this is a measure designed specifically to attract investors.
What are the conditions for the tax reduction?
For the 2% tax rate to apply, the property transaction has to form part of a business activity, so that the Real Estate Agent’s Chart of Account (Plan General De Contabilidad Del Sector Inmobiliario) can be applied to it.
Secondly, the property acquired should be incorporated into the current assets of the company. In other words, the property has to be put up for sale and be sold within five years of its purchase. Additionally, the purchase should be subject to Property Transfer Tax. In this way, purchases subject to VAT are excluded.
From a formal point of view, we can see how important it is to expressly mention the previous requirements in the public title deed and the registration in the corresponding section of the CNAE (National Classification of Economic Activities). If you qualify for it, the tax must be settled at the reduced rate of 2% within thirty business days after the granting of the deed. This implies a considerable saving in the purchase of the property.
However, in the event of non-compliance with one of the aforementioned requirements, the difference between the applicable rate and the reduced rate paid at the purchase shall be settled.
Impact of the tax reduction
The effect of this law, beyond the scenario in which it has been established and approved, incentivises and promotes investment in real estate. It also eases the heavy burden of purchase costs, and needless to say, stimulates property market activity.
The incentive can make property investments exceptionally attractive. Indeed, if a company manages to purchase and sell its property or properties within two years, it can, in addition to the reduced rate of 2% property transfer tax, have a tax base set at 15% instead of 25% for Corporate Tax (if the company is owned by one or various individual shareholders).
Quite apart from the lifestyle appeal of the Costa del Sol, therefore, the Andalusian regional government is taking steps to also make property purchases and investment in this region financially appealing by reducing the cost of buying, developing and selling. In doing so it stimulates capital inflows and economic activity, and this has to be commended as it is beneficial to economic development and job creation.
Written by Santiago de la Cruz (DLC Lawyers)