Important Change in Spanish Tax Law for Non Resident Property Owners

From 1 January 2010, EU residents (whether individuals or companies) who rent their Spanish properties will pay 24% tax on the net rental income, instead of 24% tax on the gross rental income.

On 1 March 2010 the Spanish Government approved Law 2/2010, which includes a substantial change in the taxation of European Union (EU) persons and companies who are non resident in Spain and rent out their properties in Spain.

Until now, non residents (persons or companies) renting their Spanish properties have been subject to 24% tax on the gross rental income, with no deductions being available whatsoever, e.g. running costs of the property, depreciation or loan interest. Compared to tax residents who are able to deduct these costs, this represented a substantial and discriminatory tax disadvantage for non residents.

From 1 January 2010, EU residents who rent their Spanish properties will pay 24% tax on the net rental income. EU residents (persons or companies) will now be able to deduct from rental income all justified and necessary property costs (depreciation, local rates, community fees, maintenance costs, insurance costs, etc) and also interest on loans for the purchase or improvement of the property. The only condition is that deductible costs must be directly related to the generation of rental income of the property. As with Spanish residents, deduction is limited to the period that a property is rented and so costs are pro rated according to the number of rental days in a calendar year.

The deemed rental income assessed on all second Spanish home owners is not affected by this new rule and no deductions apply. In the case that a second home is actually rented then the deemed rental income assessment is on the number of days the property is not rented.

This change in tax law was demanded by the EU Commission which decided that Spain had discriminatory tax rules compared to those applicable to tax residents. The tax situation for non EU citizens or companies renting properties is not affected by the new law and they remain taxable at 24% on their gross rental income.

We are investigating the possibility of reclaiming tax paid for previous years.