On September 13th, 2022, the Directorate General for Taxation (“DGT”) has issued binding ruling number V1947-22, which affects individuals that are not tax resident in Spain and own real estate properties in Spain indirectly, i.e. through foreign entities. By means of this ruling, the DGT confirms that the holding of shares in non-resident entities, which directly or indirectly own real estate investments in Spain, does not generate taxation in Spain under the Spanish Wealth Tax (“WT”).
In the referred ruling, an individual tax resident in Germany who holds 100% of the shares in a German entity which, through other non-resident entities, owns a real estate property in Mallorca (i.e. the individual is the indirect owner of a real estate property in Spain). In this scenario, the DGT states that the individual is not subject to the WT, since he is not the (direct) owner of assets located in Spain.
This ruling is relevant as it provides further legal certainty for many non-residents who own real estate in Spain through foreign entities. In cases where the WT has been charged for similar reasons, the possibility of requesting a refund for unduly paid taxes and the corresponding interests should be analysed.
In the past, the DGT had ruled to the opposite, indicating that non-residents indirectly owning real estate in Spain had to pay WT in Spain, for example when the real estate represented more than 50% of the company’s assets. See, among others, rulings No. V0093-16 and V1995-20.
We considered that this interpretation had no legal support since, although some Double Tax Treaties (“DTT“) granted Spain the power to tax the ownership of real estate properties held by foreign entities, Spanish domestic legislation lacked the legal provision that allowed Spain to tax indirect ownership of real estate properties.
This opinion was also considered by the High Court of Justice (“HCJ“) of the Balearic Islands, which in its ruling of December 3rd, 2020 concluded that “an individual not resident in Spain, who is the owner of a non-resident entity, is not subject to the Spanish WT“.
Subsequently, in 2021, the DGT made a U-turn and came into line with the HCJ’s interpretation. Indeed, in ruling number V2070-21, the DGT stated that although the DTA “allows taxation in Spain, in accordance with its domestic legislation, of the part of the assets of the two applicants that were constituted by shares or participations in the said British company –given that the assets of this entity consist of at least 50 percent, directly or indirectly, of real estate located in Spain–, it would also be necessary for Spanish domestic legislation to tax the shares or participations that meet the aforementioned requirements“.
Finally, in its ruling issued on September 13th, 2022, the DGT reconfirms that individuals holding shares in foreign entities that directly or indirectly own real estate properties in Spain will not be taxed in Spain for the indirect ownership of the aforementioned assets.
Lastly, we recommend being cautious and analysing each case in detail, especially in those cases in which the direct or indirect owners of the real estate located in Spain are transparent (or semi-transparent or pass-through) foreign entities for tax purposes, such as trusts, German KGs or GmbH & Co KGs, among others.