When you sell a property in Spain there is a requirement for 3% of the value of the property to be paid to the tax authorities as a retention if you are non-resident in Spain. There is a lot of misunderstanding regarding this 3%. Some people think that this is a tax on the seller. Some people think that this is an extra cost to the buyer. Some people refer to this as a Withholding Tax. None of these is correct.
The 3% Tax Retention is actually quite a clever device that was thought up by the Spanish Tax Authorities and once you understand what they are trying to do it becomes much easier to understand.
Imagine a situation where somebody sells a property in Spain and doesn’t buy another property in the country. They – the seller - moves the money out of the country back to their home country and then never have anything to do with Spain again. In those circumstances it is very tempting not to pay your Capital Gains Tax in Spain or to leave an unpaid tax bill of some sort.
The Spanish Tax Authorities would then find it much more difficult to recover the amount due to them from the seller.
The Spanish Tax Authorities therefore came up with the clever idea of introducing the 3% Tax Retention. The way that this works is that if you are non-resident in Spain and sell a house then the buyer has the obligation to withhold 3% of the price from you and only pay you 97% of the price.
The buyer then has the obligation to pay the 3% to the Tax Authorities. By making the buyer pay this rather than the seller the tax office can make sure that it is paid.
The 3% Retention is exactly that – a retention. It is not a tax. The seller can apply to have this returned to them. If the seller has paid all their taxes up to date then they should get the full 3% back. If there is some unpaid tax due then the Spanish Tax Authorities will deduct the amount of tax due from the 3% and they get any balance back.
Of course this is where the confusion starts as some people will have large amounts of tax unpaid and this may be more than the 3% Retention. They therefore cannot claim this back and treat the retention as a tax even though it technically isn’t. In theory if the amount of tax due is greater than the 3% Retention then the tax authorities can go after the seller for any balance.
How likely they are to do this obviously depends on whether they know where to find the seller and how much the amount due is.
The Buyer of a property has a period of one month in which to pay the 3% Retention if this applies. The seller can then apply for a refund three months after the 3% Retention is paid although it can take 18 months for the refund to be processed and returned to the seller if this is applicable. This delay can simply be down to the Spanish Tax Authorities being over worked and understaffed.
If you would like to know more about the Tax Retention in Spain then you can contact Peter Esders at peteresders@judicaregroup.com