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

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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

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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

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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

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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

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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

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Further increase in the final costs of the transfer of property in Spain

The costs associated with the transfer of ownership may affect the decisions of both parties, buyer and seller, as the net price that the seller receives after deducting expenses and taxes may be much less than expected in the beginning, and the final price to the buyer by adding costs and taxes may be much higher than previously thought.

The parties of a contract for the transfer of property (usually a purchase contract) can decide freely about these matters. However, we are going to analyze now what the laws say when the parties do not achieve an agreement among themselves:

  • The municipality tax on the added value of the property sold, in the case of urban land, is one of the costs to be paid by the sellers. This is a percentage of the difference between the declared value at the time of purchase and the estimated value of the property at the time of acquiring it by the seller.
  • The income tax on the increase in value is also an expense of sellers. If the seller is non-resident, the buyer must submit a deposit (3% of the price) as an insurance tax directly to the tax office. For this reason, this amount is usually subtracted from the purchase price. Subsequently, we have to calculate the payable tax, which also consists of a percentage of the difference between the declared value at the time of acquisition and declared value of the property at the time of sale.
  • The tax on the transfer of property is the buyer’s responsibility. The tax has been raised again in Catalonia and other regions of Spain, and now the buyer has to pay 10 % of the selling price for this concept.
  • The account of the notary (exclusively for the purchase contract) is according to the law at the expense of buyers, unless the parties agree otherwise. The role of the notary in Spain (unlike other countries) is only a formalization, converting the final contract in a public document. This contract has been issued in advance by the parties with the assistance of a lawyer. The notarization of the contract of sale in accordance with Spanish law is not absolutely necessary, but it is very appropriate, because a contract that is not contained in a public document cannot be registered in the registry of property. And such recordation of the change in ownership is not only a guarantee for the buyer, but also a prerequisite when the buyer has to finance the price with a mortgage.
  • What we have just commented justifies as well that the cost of recording the change in ownership in the registry of property has to be paid by the buyer.
  • The costs of preparing the documents to be submitted along with the case, is to be paid by the seller (these documents are normally processed or checked by lawyers). The cost of a lawyer could be common to both parties, as well as the lawyer provides the following services:
    • To provide consulting and legal assistance during the whole process of transfer of ownership.
    • To translate the will of the parties to the legal and technical language.
    • To make a final agreement of sale and prepare it to be notarized by a notary.
    • To foresee the tax consequences of the transaction for both parties and to prepare and submit formally and in time the tax returns in the most convenient manner.

But it is always better for the parties to agree in advance (even in an oral form) the main terms and conditions of the contract, so that the lawyer is able to represent the interests of both parties without any kind of conflict, simply because he develops the sales agreement already adopted by the parties.

Carlos Prieto Cid – Lawyer

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New campaign of the Tax Agency to demand the payment of income tax to non-residents

Even if they are fiscally non-resident, owners of real estate in Spain must file a separate income tax return each year and pay the so-called income tax for non-residents (IRNR) for revenues earned from the property .

The Spanish state tax authorities have not been very demanding until now regarding the payment of income tax to fiscally non-resident property owners. Many homeowners are not aware of the existence of this tax liability and can not understand why they have to file a tax return and pay this tax in Spain, despite the fact that they are not getting any income. They come to Spain just to spend their holidays: they do not work, they do not receive interest income from cash deposits in the bank, they do not rent their property. However, the mere possession of a property in Spain, as in other European countries, is considered by the law as income, even if the property is not rented. State tax rules require that the owner gets benefit of his own real estate anyway, even though these objects are not leased. The only exceptions are the cases in which the property is one’s own domicile or if the property is devoted to economic activity. Both cases can never happen with non-residents.

There is another tax, the municipal tax on property ownership, the so-called IBI (Spanish Impuesto Sobre Bienes Inmuebles), the payment of which the local municipality requires to property owners each year, and which is calculated and declared by the administration itself. In contrast, in the case of the state income tax for non-residents – IRNR-, the tax inspection is not mandated to prepare tax returns for the non-residents, but it is the taxpayer himself who is required to provide an annual tax return, and calculate and pay the property taxes on its own initiative.

This month, many homeowners who spend their holidays in their own apartments or private homes in Spain, received a letter from the Spanish tax authorities, reminding of the existence of the tax on the income of non-residents and the obligationy of paying it. Earlier, the state tax agency was very generous regarding this tax. Now, however, given that the economic situation is so bad, it appears that IRS has become stricter, requiring submission of tax returns and payment of this tax by all non-residents who own property in Spain.

Carlos Prieto Cid – Lawyer

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More detailed information about the new Spanish law on the coasts

Last month we discussed about the main features of the new Spanish Coastal Law and its impact on the environment and the legal status of real estate close to the sea. This month we continue our analysis of the issues related to the details of this Directive.

Restrictions of the right of ownership in the case of real estate land adjacent to the public domain or being a part of it: regarding the use of beaches, it is decided that future regulations of the government should establish a different legal regime for the urban beaches (adjacent to an urbanization), and for areas of natural beach (adjacent to protected areas or rural areas). For the natural beaches applies a high level of protection, limiting any activity. It is important to maintain in a natural state the beaches located far away from urban centers and, on the other hand, to keep the city beaches accessible to the public.

Owners of real estate that legally occupies land in the area of ​​special protection (subjected to the legal servitude or easement) will be allowed to carry out works to improve, modernize and strengthen the real estate, but only if they are not associated with an increase in height, volume or area of ​​the building. This is not new, but now the permission of the regional administration is replaced by a responsible statement, which should include evidence that these buildings meet the legal requirements of energy efficiency and water savings. This is to avoid the license of regional autonomous powers being juxtaposed to municipal licenses. In any case, the Spanish government may suspend the administrative acts and agreements adopted by local governments affecting the integrity of public coastal protected area or its easement. The law introduces a fast and effective precautionary measure to prevent the execution of illegal activities, despite the fact that within ten days, the local decision must be challenged by the State in the courts of administrative disputes.

Changes in the regulation of concessions and permits related to coastal public property: The prorogation or extension of existing concessions is subject to an economic report, which is to determine the impact that the use of the area has on the environment. Thus, the duration will depend on the concession environmental sustainability.
The law also changes the maximum term of public concessions to 75 years and also allows to transfer and to sale them. In the case of transfer through inheritance, the period given to the heirs so that they can declare that they agree with the subrogation of the rights of the concession is increased from one year to four years. This prevents the risk of losing the property of the concession if the decision is not taken in a short term of up to one year, given the difficulties that may be especially faced by foreigners. In the case of transfer of rights between living persons, the validity period shall require the prior approval of the Administration.

Carlos Prieto Cid – Lawyer

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Impact of the new Spanish Coastal Law in existing buildings and coastal preservation

The last revision to Coastal Law pretends to achieve an economic use of the coasts sustainable over time and respectful with the environmental protection. The changes introduced give more legal certainty and clarity and solve some short-term problems created by the previous legislation, but in practice, they reduce the chances of preserving the coastal strip.

The Coastal Law was adopted in 1988 and assumed significant changes in relation to the former regime. Nevertheless, the legislator was very cautious and therefore decided that the legal changes should not immediately entry into force but be delayed over the time. This has led to a conflicting application of the rule and even to its retreat: the law of 1988 failed to defeat the established social realities and that is actually why the government decided that it should be corrected. On the other hand, this law of 1988 created significant legal uncertainty that caused the resolution of the European Parliament in 2009, asking the Spanish authorities to “urgently review and, if necessary, modify the action of the Coastal Act to protect the legal rights of dwelling property owners and those who own small plots in the coastal areas, which do not adversely impact on the coastal environment … “.

Let’s analyze the key amendments of the reform:

1 – Clarification and specification of the concept of marine and coastal public property and improvement of the procedure of demarcation of boundaries:

The littoral is legally defined as the strip where the sea meets the land. The Spanish Constitution establishes that the littoral (including the coastal zone, the territorial sea and the beaches) will always be in any case public domain. Thus, it is important to recognize how far this common property extends, especially when we consider that the Spanish coast is the most densely populated area in the country and it concentrates the most strategic economic activities of the nation, such as tourism and fishing.

The law states that the coastal protection zone will be the land strip within reach of the biggest waves recorded during strong storms. This recording depends on technical criteria that should be created to give more confidence, reliability and stability at the borders.

The main innovation introduced in relation to the protected coastal zone is to reduce the width of the legal easement from one hundred to twenty meters, but only in settlements which were not classified in 1988 as an urban area although they had the characteristics of such. This reduction also applies exceptionally   in the upper shores of the rivers, sensitive to the ebb and flow, in order to avoid that at sites far away from the river mouth, this easement of100 metershas to be respected.

Carlos Prieto Cid – Lawyer

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