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Income from rental property; Differences between residents in Spain, EU and non-EU countries

Our previous posts mirrored on taxation of incomes of non-residents and who is obliged to filing. We also talked about issues related to different scenarios of tax residency. Today we focus on the differences in the taxation of rental income between residents in Spain, EU and non-EU.

The latest Tinsa report for the year 2021, referring to property valuations both nationally and internationally, shows that property prices are changing all along the Spanish coast. Aspects such as the rise of teleworking are driving up property prices in attractive areas outside the cities. This is attracting for both, private individuals looking for just that and investors who identify that there is a growing demand, besides usual transactions during the summer season. Many of these investors are foreigners who are not tax resident in Spain (whether they are companies or individuals) and acquire these properties for rental purposes. This rental income will be taxed differently, depending on the country of residence of the lessor, so in the case of a non-resident investor in particular, it is important to be clear about these aspects before carrying out any transaction.

Differences in taxation of income from rental properties

Focusing on individuals and referring only to the taxation of rental income:

  • If the lessor is resident in Spain, taxed under IRPF (personal income tax), then he will be enabled to deduct the expenses inherent to the same (consumption if he pays them, community, IBI=property Tax...) In addition, from this income there will be a 60% reduction.

  • If the lessor is resident in another EU country, the income from the rental of the property in Spain will be taxed by IRNR (non-resident income tax) at a fixed rate of 19%. He will be able to deduct the expenses inherent to this rental but this will not imply any reduction on the income.

  • The lessor is resident in a country outside the EU. In this case, the income from the rental of the property in Spain will be taxed by IRNR (non-resident income tax) at a flat rate of 24% and no expenses can be deducted.

Example of differences in the taxation of rental income

The following example illustrates the huge differences that apply.

For instance: Let us assume a rental income of 10,000 euros per year. The costs of the property attributable to the proprietor (the tenant pays for the utilities) are as follows:

  • IBI (Property tax): 500 euros

  • Household insurance: 200 euros

  • Depreciation of the property: 1,000 euros per year.

  • Other expenses related to the lease: 150 euros

In each case, the taxation described above (assuming a tax rate of 20% for IRPF= personal income tax. This will vary as it depends on the total income of the taxpayer and not only on the rental income):

The example is not a realistic case, but it clearly shows that, in the case of an EU resident, the rental income can rise to more than 130%; if you are resident outside the EU, this percentage increases to 260%.

This issue leads to contention; does Spain discriminate fiscally, depending on the place of residence? In fact, this could go against the universal principles of equality. At the moment, the European Commission has not made any declarations related to Spain (unlike what other countries have done).

Are you receiving rental incomes? We invite you to contact us. Our Tax Advice Department can help you in clarifying your doubts, whether you are resident in Spain, the EU or outside the EU. We will be pleased to assist you, whatever your doubts may be.

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