Property owning companies: Don’t trust the bar stool experts!

by

Those of you who have lived in Spain for many years will probably have been regaled in the past with tales of how people had managed to escape tax liabilities by buying their properties through ‘holding companies’.

In fact such ‘bar stool experts’ offering dubious advice still exist—although it is highly doubtful that they are in fact legal experts. It is more likely some unnamed distant relative or ‘friend’ (multi-millionaire, rich as Bill Gates don’t-cha-know) is the one to have taken advantage of a ‘loophole’ that enables him to successfully and legally avoid paying substantial sums in taxes.

Or still worse, the bar stool experts just happen to know someone who specialises in setting up such schemes—often offshore.

These people must be ignored and under no circumstances should you permit them to buy you a drink. As is so often the case – if it sounds too good to be true—it is.

According to these people anyone owning a property in Spain was a fool to have it registered in their own name as they could avoid inheritance tax and quite possibly capital gains by owning the property through a company. How? Well, according to the plausible theory, your beneficiaries will inherit shares in the company on your sad demise. The property itself will remain registered in the company’s name and so not change hands, therefore incurring no tax liability. Similarly, if you want to sell the property then you simply sell the company. As the property remains in the ownership of the company, no capital gain is due yet again. Clever huh?

Unfortunately the taxman is no fool and has wised up to abusive practices a long time ago. What is for sure is that creating a holding company as a vehicle for avoiding inheritance and capital gains taxes for Spanish residents or non-residents may not work under new laws and regulations.

So should you even consider setting up a holding company? Perhaps, as there can be real advantages in terms of taxes payable as the tax treatment of companies is not the same as individuals. The option of using a Spanish company compared to foreign company can present benefits and disadvantages. The deduction of expenses where rental income is concerned is very different in the case of individuals and companies. When held in a corporate structure it may be possible to obtain an IVA rebate and claim back running costs against any tax liability.

There are other reasons why holding companies could be set up, particularly when it comes to payment of dividends from international subsidiaries. Indeed, Spain is increasingly seen as an attractive location for such a company from an international perspective, due to the setting up of more and more double taxation treaties.

What is certain is that owners of existing property holding companies should review their corporate structure (and that of their subsidiaries) as recent legislation, jurisprudence and doctrinal changes may have rendered old tax structures obsolete.

The whole area of corporate structures for holding companies is, as you will no doubt have guessed, a very complicated one and specialist legal advice should be sought. There is no one-answer-fits-all solution and if you get it wrong not only can it prove expensive in taxes and fines, but it can be a criminal offence with jail terms applicable. That free drink from a bar stool expert could turn out to be very expensive indeed!

For expert legal advice on whether or not holding companies are appropriate for you, please contact us at Spence Clarke for a consultation. We have 30 years experience advising expatriates in Spain on all aspects of taxation, company law and accounting.

Spence Clarke specialises in the provision of Spanish tax, accounts, law and labour services, mainly to foreigners with interests in Spain. Our cross-border knowledge helps clients adapt to the Spanish system with the minimum of doubt and disruption. If you have any questions about this article or any other matter contact us, with no obligation, to see how we can help you.