Acquisition of property by non-residents: important issues that must be considered

We take a lot of risks when deciding to buy a property in Spain. If
the seller is a non-resident owner, there are specific risks that are usually not taken into account by investors.

A big part of the real estate on the Spanish coast belongs to owners who do not reside in our country and it is usually a house or apartment for holiday. If we buy this real estate to owners who are not residents, we must not forget the need to
be cautious to avoid later unexpected problems with the administrations.

The most common risk is the obligation to pay the council tax on the increase in value of urban land (the so-called “plusvalía municipal”). The law provides that this tax should be paid by the seller, and so, the buyer does not usually care about this expense when calculating the total cost of the investment transaction. However, when the seller is not a resident, the law obliges to pay this council tax to the buyer as a substitute of the seller, the one who should be actually required to pay it. This exception to the rule has its own logic, as it tries to avoid that the administration has to prosecute abroad the non-resident sellers who did not pay their taxes voluntarily, because when they sell their property in Spain, they very often do not retain any other property in the country, and, therefore, they are technically insolvent. In this case, the municipality requires the payment of the tax to the party who is closer and this is the buyer.

That is why during the registration of the purchase contract we should require the seller the corresponding provision of funds (or withhold the foreseen amount of the tax from the money that is still owed ​​to the seller for the property). If this exception to the general rule is not considered and no precautions are taken, in the case that the municipality requests that we as buyers pay the tax on the increase in land value because the seller did not pay this tax freely, we will have no choice but to undertake this payment, because, before the Spanish administration, we would be the only one who is obliged to pay. Another thing is that we can claim ourselves afterwards from the seller what we have paid to the municipality, through a civil action against him.

Risks of buying real estate from banks

In these times of severe economic crisis, thousands of properties are sold at auction every month in Spain because their owners can no longer pay their debts. In most cases, the creditor is a bank and if no bidders participated in the auction, the creditor himself receives ultimately the contract.

Although the government related institutions in recent months insist on pointing out that the economic situation of Spain is improving, the reality is that the seizure of property and evictions due to debtors’ failure to pay their own liabilities have no end. The banks are the biggest creditors nationwide. In the judicial auction they usually get the property, without being able to recover the outstanding loans, because of the lack of interest of potential buyers for the seized property. After the bank has become the owner of the property, it passes it to a real estate agency, which is often established only for the purpose of selling this type of property. For the same reasons that the property could not be sold at auction, it often takes months or even years before the agency finds a buyer on the almost at a virtual standstill housing market.

During this period, the attitude of the banks is far from what is expected of a correct owner. For example, in the case of apartments or houses in settlements with community facilities, the banks often do not pay the contributions to the community of owners required for maintenance, swimming pools, gardens, etc., until a buyer is found, thus bringing the condos in financial difficulties, as these depend on the contributions to cover the general expenses for cleaning and maintenance of the common areas. Furthermore, neither the agencies nor the banks take a minimum care about the conditions of the building and so, leaks, pigeon nests or all sorts of other problems that affect the neighbours remain unresolved.

These risks should be considered when investing in Spain. Investors are normally interested in such kind of real estate because they believe that their price might be below the average price. However, it should not be forgotten that the banks have more than enough capacity to hold on as long as necessary until its real estate stock is sold (after all, they were helped for that with a lot of public money). Investors must convince themselves that the banks won’t reduce the price more than other owners who might need the money urgently.

Carlos Prieto Cid – Lawyer

Read this article in Russian
Read this article in German

Planning your succession by setting up a company

One of the most important legal topics for owners of apartments or houses in Spain is how to transfer this property to their heirs with minimal tax and handling cost. An interesting option is to set up a trading company (or other type of legal entity) and transfer the property to it

The following pattern is very often repeated in many families, who spend their holidays every year in Spain: a couple buys a property by the sea to come here every summer with their children; the children grow up, create their own family and continue spending the holidays with their own children in the house of the parents. The grandparents, often pensioners, keep the property in stand and handle all related processes, while the children spend with the grandchildren their holidays there. This situation persists without any problems until the moment where the grandparents can no longer take care of the property for reasons of age. From this point on, and especially after the death of grandparents, the new co-owners have to face, if no precautions have been taken, apart from the usual problems of handling an inheritance, the problems of the management of the property, which is alternately used by the heirs. In addition, the summer residence of the family is often not used exclusively, and the time periods in which the family does not use it personally, is rentes to tourists, thus creating rental income from property.

One way to simplify the procedure of inheritance and, above all, to allow easy control of the house and the income it can generate, is to create a commercial company, which eventually becomes the owner of the property. It would be ideal to set up the company before the acquisition of the property takes place. In this case, the company would already would be the owner of the property from the beginning and the cost of the transfer of the property from the previous owners (the grandparents in the above example) to the company does not arise. But even if this is not the case, the tax costs of this transfer are lower than that of the transfer to the children through inheritance or gift. Shareholders of the company may change over time (you can include other children and even their spouses) without change of ownership, which would imply costs and taxes on the transfer of property.

Carlos Prieto Cid – Lawyer

Read this article in Russian
Read this article in German

The new European Certificate of Succession

If at the moment of our death we still have property assets located in Spain, our heirs are obliged to fulfill a number of formalities requirements in order to register this property on their name. These processes will be facilitated in 2015 through the creation of a European Certificate of Succession.

We all want to be together with our beloved ones at the time of our death. And in most cases, these people close to us are going to be also our heirs. Therefore, during the registration of inheritance, it is desirable that the authorities our heirs will have to address to, were not too far away geographically from the place where we spend our last days with them.

Until now, for example, in the event of a German couple who had moved to Spain to spend his retirement in a property house, their heirs had to apply to the authorities in Germany for a certificate of succession, because according to the present laws only German authorities are competent in determining who the heir is. This led to the fact that  the spouse of the deceased, who had moved to live with him or her in Spain, and probably had no longer residence in Germany, was forced to travel to Germany to apply for the certificate of inheritance or had to entrust someone to get it .

A new European law, which applies in all the countries of the European Union, will try to lighten things up in this case we have just described by the new European Certificate of Succession, which is automatically recognized in all member states and may be issued by the authorities of the State  where the deceased had his habitual residence. But, on the other hand, we must take into account that the law of the State of habitual residence becomes the general rule of law applicable to the succession. It is therefore advisable to consult and be be aware of how this law will govern our inheritance and, if necessary, avoid unintended consequences through a notarized will.

Carlos Prieto Cid – Lawyer

Read this article in Russian
Read this article in German

Setting up a business in Spain as a way to obtain a residence permit

The conditions for non-EU foreign nationals who wish to set up a business in Spain and obtain a residence permit which includes permission to carry on an activity on their own account are a guarantee of the business owner’s solvency and the legality and viability of the business.

A residence permit for Spain (which also allows free movement within the Schengen area) can be obtained by setting up a business.  The legislation aims to prevent potential fraud by ensuring that the applicant for the residence permit with permission to carry on an activity on their own account is not planning to establish a dummy company, and that the business will generate jobs and contribute to the nation’s prosperity.

How can it be proved that the business has sufficient funds with which to implement the planned investment?  How high is the expected return on the investment?  How many jobs will be created?  Here, an opinion should be sought from a business association registered in Spain or an association for self-employed workers and freelancers.  The application for a residence permit with permission to carry on an activity on one’s own account, together with additional proof of the legality and viability of the business, must be submitted to the Spanish consulate in the respective country in which the applicant usually resides.  Only once the office approves the application will a visa be issued for travel to Spain and the establishment of a business.  For this reason, the process is usually undertaken in collaboration with Spanish partners, who will work on the setting-up of the business until a residence permit has been issued.

Carlos Prieto Cid – Lawyer

Read this article in Russian
Read this article in German

Opening a business in Spain as a foreign citizen

When setting up a business in Spain, EU citizens have to meet similar conditions to those required of Spaniards.  In contrast, other foreign nationals, such as Russian citizens, for example, are subject to a special procedure if they want to carry on a business activity in Spain.  In future, it is likely that this procedure will also apply to business start-ups by Swiss nationals.

Unlike employees of third parties, who could be seen as a threat by job-seekers, investors are always welcome.  Investors are both those who make use of their investments personally (a holiday home or retirement residence, for example), and those who invest as entrepreneurs in order to carry on a business activity on their own account.  However, when setting up a business in Spain, foreign entrepreneurs are not all subject to the same conditions.

A lot of dust has been kicked up by the news that a referendum was held in Switzerland in which it was decided to shortly make changes to the law to restrict immigration and the free movement of EU citizens.  One direct consequence of this restriction is that the agreement on free movement and free choice of residence within the Schengen area will have to be revised.  As always used to be the case, Swiss nationals will then no longer be able to settle in Spain and carry on a business without meeting the same conditions as other non-EU citizens, such as Russian citizens, for example.  In contrast, EU citizens from member states in the Schengen area can set up a business in Spain virtually unhindered.

Carlos Prieto Cid – Lawyer

Read this article in Russian
Read this article in German

Under the new Entrepreneurs’ Law, a residence permit can be obtained by purchasing a property in Spain

In enabling this, the Spanish government is attempting to reinvigorate the property market by attracting foreigners from outside the European Union with the granting of a residence permit for investing in Spain, which brings the added benefit of being able to move virtually freely around various member states under the Schengen Agreement.  

Here, too, there is a danger that an investor will view the purchase of a property as an opportunity to do business in Europe.  This can mean that they fail to check sufficiently thoroughly as to whether the purchase of the property is safe and reputable, as they want to take advantage of the opportunity to gain legal residency in Spain.  The risk is the same as for the tourist who wants to enjoy their holiday rather than attending meetings with lawyers.  In this case, too, the investment is a means, not an end, for just as the tourist sees the acquisition of a property as a means that secures them their holiday in Spain, the entrepreneur sees their opportunity to obtain a residence permit by purchasing a property, which then enables them to move freely around the Schengen area.  Both view getting adequate protection for their purchase as unnecessary.  If any problems subsequently arise, they find themselves compelled to find a lawyer to solve the problems arising from their failure to seek independent, professional advice.  However, by then it is often too late, and if there is a solution, it will involve much higher costs than if they had sought advice at the right time.  Well-advised investors can avoid making such mistakes.

Carlos Prieto Cid – Lawyer

Read this article in Russian
Read this article in German

Purchasing property in Spain as an investor, not as a tourist

Each year, many of the millions of tourists who spend their holiday in Spain decide to buy a property in their destination country.  However, when investing their savings in Spain, they often act whilst still in a holiday mood, and make major decisions without due care and attention.

In almost any language, the term ‘tourist’ leaves a slight aftertaste in the mouth.  Airlines offer their cheapest tickets under the heading ‘tourist class’, while in every country that survives on tourism – and Spain is no exception – tourists are seen as easy prey who are only in town for a short period of time and can easily be taken for a ride.  This image of the typical tourist, whom it is easy to hoodwink and escape unpunished, is largely down to their poor language skills and lack of knowledge of the local customs, but also because tourists are on holiday, of course, and want to enjoy their short time away from home and are therefore relaxed and less vigilant.  As a result, they do not act with the same amount of care as they might in a similar situation at home.

Purchasing a property always involves a large outlay.  In many cases, sums are invested which represent many years of saving.  Such a decision should be given the appropriate degree of protection and made with as much information as possible on the potential legal and financial risks.  Sadly, as lawyers, every day we see how foreigners are conned when purchasing a property and lose their money as a result of failing to seek advice.  Often, people think they don’t need any advice, but then comes a rude awakening.  The cost of an independent consultation is minimal compared to the often hidden dangers when signing a contract of sale for a property; and such advice can only be independent if it has no connection with any other professionals involved in the sales contract.

Carlos Prieto Cid – Lawyer

Read this article in Russian
Read this article in German

The relationship between children and beneficiaries of life assurance

Life assurance policies taken out in Spain are subject to Spanish law, even if both the policy holder or insured party and the beneficiary are foreign nationals.  The law rules how the designation of a particular beneficiary must be interpreted.

According to the law, if a person’s children are designated the beneficiaries, it is understood that by ‘children’ what is meant is all descendants with a right of inheritance.  However, if the designation favours the heirs of the policy holder, the insured party or any other person, the ‘heirs’ are those who are considered as such at the time the insured party died.  In this provision, the law distinguishes between children and heirs with regard to the beneficiary of the insurance policy.  While the heirs must be the universal successor of the deceased (usually the policy holder) at the time of their death (in the case of life assurance, the policy holder and insured party are usually the same person), the children are the beneficiaries irrespective of whether or not they are the universal successors of the policy holder or insured party.  Beneficiaries who are simultaneously heirs (by way of a will or legal ruling) remain as such, even if they reject the inheritance.

If several beneficiaries are appointed, in the absence of a more detailed designation the sum will be divided into equal shares.  If the heirs are appointed the beneficiaries, the division will be carried out according to their share of the inheritance.  Shares which are not accepted by one beneficiary are divided among the shares of the other beneficiaries.

Acceptance of an inheritance is not required for the acquisition of an insurance payout.

Carlos Prieto Cid – Lawyer

Read this article in Russian
Read this article in German

The relationship between heirs and beneficiaries of life assurance

Heirs are persons upon whom, according to the law or a valid will, the rights of the testator are conferred after the testator has died.  However, when taking out life assurance, the beneficiary of the insurance payout can be freely chosen, regardless of the inheritance.  The inheritance is bound to the nationality of the testator, while a life assurance policy taken out in Spain is subject to Spanish law.   

It can happen that the sum a beneficiary receives from a life assurance policy is worth more than the total estate.  Taking into consideration the importance of regulating the transfer of assets with regard to an inheritance by drawing up a will, it soon becomes clear that the choice of beneficiary of a life assurance policy should not be disregarded, as the amount of insurance paid out following the death of the policy holder does not generally form part of the estate.

Regardless of the heirs, the holder of a life assurance policy may choose the beneficiary at their own discretion, or change a previous choice without needing the consent of the insurer.  Designation of the beneficiary can be given either in the ‘police’, in a later written declaration disclosed to the insurer, or in the will, where in the latter case all the details needed for the identification of the insurance policy must be given.
The insurance payout only becomes part of the estate if no specific beneficiary was designated at the time the policy holder passed away, and if there are no arrangements in place with which to determine the beneficiary.  In all other cases, the beneficiary receives the insurance payout, irrespective of the whereabouts of the inheritance.  This fact is of particular interest if acceptance of the inheritance is bound with a large number of liabilities, or there is a dispute between heirs.

Carlos Prieto Cid – Lawyer

Read this article in Russian
Read this article in German