On 13 January, Prime Minister Pedro Sanchez announced during an economic forum in Madrid a proposal to increase the tax on the purchase of properties by non-European Union buyers who do not reside in Spain.
The information provided by the government during the appearance is so scarce and confusing that it has sparked panic in many sectors and abroad, as Prime Minister literally said ''We are going to limit the purchase of homes by non-resident non-EU foreigners by increasing the tax burden they will have to pay in case of purchase up to 100% of the property's value, something unprecedented in Spain but applied in other countries like Denmark or Canada." Even the target buyer is not clear and we have to assume that it refers to nationality, so non-EU nationals who reside or will reside in Spain u pon the purchase will fall out of the scope of the measure.
Without knowing exactly the proposed measures or their scope or what the Prime Minister intended to say, we have learnt that the government is exploring two options: a)Modifying the existing Transfer Tax and b) Creating a new special tax specifically targeting these purchases.
Transfer tax is shifted to regional governments, mostly governed by the Conservative Party, so the real effect of this measure is doubtful.
About creating a new tax, in theory it is not possible if there is already an existing tax for the same concept or taxable event. However, we have the precedent of the Solidarity Tax, a complementary tax on State level to Wealth tax (at regional level) who has been admitted by the Constitutional Court.
Finally, the Spanish Constitution establishes that the tax system should not have a confiscatory scope, meaning it should not exhaust the taxpayer's wealth. Although a 100% tax has been proposed for the purchase of homes by non-EU foreigners, this is an exceptional and specific measure.
Confiscatory taxation refers to a tax that eliminates the taxpayer's source of wealth. Generally, a 100% tax on the taxable base would be considered confiscatory and, therefore, unconstitutional in most cases.
Of the 12 measures announced by the Prime Minister, at least four must go through the Congress of Deputies, and the tightening of regulations for the purchase of homes by non-EU foreigners is one of them.
Therefore, we have to bear in mind that this is just a proposal announced during a forum, that we have to wait for the formal proposal to be released, and that the government cannot develop this measure for non-EU buyers without the approval of the Congress.
In the event that this measure if f1nally approved and the law is enacted, its constitutionality will be likely questioned. As commented, if the measures depend on regional governments, it will be counteracted. And, once published, we will have to study what alternatives are applicable (i.e., setting a Spanish company).
Rest assured, this proposal is still in its early stages and will undergo thorough scrutiny and debate befare any implementation. The government is committed to ensuring that any new measures are fair and constitutional. We will keep you informed of any developments and provide guidance on how to navigate any changes.
Santiago Lapausa Gonzalez- Partner/Economist
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