Spain's 100% property tax for foreigners weakened by new court ruling

Spain's Audiencia Nacional has ruled that by it's discriminatory and contrary to the EU's law on the free movement of capital to not give the same fiscal rights to second home owners in Spain simply because they mainly reside in a non-EU country.

The ruling was based on the appeal of the non-resident property owner who lives in the United States.

Currently if you own a property in Spain which you rent out, but you mainly live outside the European Union, you cannot subtract expenses from any rental income you make, while those who do live in Spain or another EU country can.

This means you can’t offset expenses like your IBI property tax, repairs to the home, replacement of broken furniture, bills etc. As a result, you will have to pay the full amount of non-resident tax or IRNR – which is 24 percent on the entire rental income you make.

READ ALSO: What is Spain’s IBI tax and how do I pay it?

EU residents on the other hand are allowed to deduct these expenses from their rental income and only have to pay a total of 19 percent IRNR.

Spain's Central Economic-Administrative Court (TEAC) ruling admitted that when it comes to taxpayers residing in another EU Member State or the European Economic Area (EEA) with which there is an effective exchange of tax information, the law expressly states that they may deduct the expenses provided for in the Personal Income Tax Law.

The TEAC argues that the law does not address residents of countries outside the EU or EEA and therefore concludes that it should not apply to US residents.

However, Spain's National High Court ruled that Article 24.1 of the IRNR only establishes the limitation of the non-application of multiplying percentages or reductions, but does not actually deny the deductibility of expenses related to obtaining rental income.

READ ALSO: What you need to know about Spain's IRNR non-resident tax

It added that “the Convention to Avoid Double Taxation between Spain and the United States establishes that no citizen of one of the contracting States shall be discriminated against negatively or see their right to have the tax advantages that citizens of the others may enjoy applied to them”.

The ruling will likely be appealed and transferred to Spain's Supreme Court by the State Attorney's Office.

Crucially, the ruling sets a precedent for Spain’s proposal to introduce a 100 percent property tax for buyers who don't live in the EU, which is one of Sánchez's measures to help solve the housing crisis.

FACT CHECK: Yes, Spain's 100 percent tax doubles property price

The Spanish government want to apply a 100 percent to the taxable base of the property ie. the value of the property. This means that these homebuyers would end up paying double for a second home in Spain.

This would affect UK or US nationals who wanted to buy a holiday home in Spain, but a Spaniard residing in a non-EU country would technically be liable to paying twice as much if the controversial tax is finally approved in

INTERVIEW: 'Spain's 100% tax on foreign buyers will end up in EU courts'

Mallorca-based lawyer Alejandro Del Campo of DMS Consulting told The Local Spain that the 100 percent tax "would flagrantly violate EU law, specifically Article 63 TFEU, which prohibits any restriction on the free movement of capital not only between Member States but also between Member States and third countries”.

As this is very similar to the above ruling, he believes that this proposal could also end up in the courts.

This is not the first time that discriminatory cases against non-EU residents have been tried in both the Spanish and the EU courts.

"The Court of Justice of the European Union has already condemned Spain for discriminating against non-residents with the Inheritance and Gift Tax," Del Campo told The Local, adding that Spanish authorities have also been forced to eliminate discriminating taxes against non-residents re Wealth Tax and the Solidarity Tax.

The National High Court is also reviewing the changes to Spanish law on the rights of EU citizens, ending Law 26/2014, reforming the Non-Resident Income Tax Law.

Earlier this year in June, The European Commission opened a formal case against Spain, criticising the way in which the Treasury taxes non-resident property owners, taxing them on theoretical property earnings

READ ALSO: EU slams Spain for taxing non-residents on theoretical property earnings

The European Commission said that it is "discriminatory" for Spain to tax non-resident foreigners on the value of their Spanish homes even if they don't earn income letting them out. According to Brussels, the non-resident tax rule violates the fundamental principles of the European Union, including the freedom of movement of workers and capital.

Del Campo also wants to put a case before the National Court on discrimination resulting from non-EU citizens having pay a 24 percent tax rate compared to the 19 percent rate applicable to EU and EEA residents.