EU slams Spain for taxing non-residents on theoretical property earnings

The European Commission has said that it is "discriminatory" for Spain to tax non-resident foreigners on the value of their Spanish homes even if they don't earn income letting them out.

According to Brussels, the non-resident tax rule violates the fundamental principles of the European Union, including the freedom of movement of workers and capital.

The commission has demanded that the Spanish authorities modify their non-resident income tax (IRNR), specifically when it comes to real estate income.

READ ALSO: What's a non-resident in Spain?

Spanish law states that non-fiscal residents have to pay tax of up to 2 percent of the cadastral value of their Spanish homes, even if they make any rental income from them.

This 2 percent of the cadastral value would be 1.1 percent if the cadastral value has been revised within the last 10 years.

The Spanish Treasury is essentially just charging non-residents a tax for theoretical income, even if they are not making any money from renting out their second home while not using it.

IRNR: What you need to know about Spain's non-resident tax

However, this rule also affects Spanish residents who have a second home in Spain. For example, a Spanish fiscal resident who has their habitual residence in Barcelona but has a second home in Málaga would pay the aforementioned tax on the latter, even if they didn't make any money from it while not using it.

Therefore, some commentators in Spain have said that the tax is not prejudicial at all for non-tax residents. An unfair tax for everyone perhaps, but not discriminatory towards non-residents or foreigners per se.

The reason why Brussels may consider it discriminatory for non-residents with second homes in Spain is perhaps the fact that these people presumably pay any income tax derived from letting it out any of the properties they own in their own country of fiscal residence.

There's also the fact that in most cases their Spanish home will be their habitual residence during the periods they spend in Spain, and in many cases their one and only Spanish property.

The EU believes Hacienda's non-resident tax on theoretical earnings is incompatible with the Treaty on the Functioning of the European Union (TFEU) and the Agreement on the European Economic Area (EEA). Specifically, the Commission invokes Articles 45 and 63 of the TFEU, which guarantees the free movement of workers and capital.

It also cites Articles 28 and 40 of the EEA Agreement, which provide similar guarantees for countries in the extended economic area that are not part of the EU, such as Norway, Iceland, and Liechtenstein.

They argue that this tax could discourage non-EU citizens from investing or temporarily moving to Spain and creates a barrier to the freedom of movement.

The Commission has urged Spanish authorities to correct the situation within a maximum of two months. If the EU find the response does not solve the problem though, they may consider starting further proceedings at the European Court of Justice.

INTERVIEW: 'Spain's 100% tax on foreign buyers will end up in EU courts'

Whatever happens, it certainly indicates what could happen to the Spanish government's plans to introduce a 100 percent property tax on home buyers who reside outside of the EU, a proposed measure to help alleviate the current housing crisis.

The so-called 'supertax' suggested by Spain's ruling Socialist party was officially presented in a draft proposal in the Congress in May. The text confirmed that the 100 percent would be applied to the taxable base or value of the property itself, not on the property transfer tax. This would effectively double the price of the property for these buyers.

FACT CHECK: Yes, Spain's 100 percent tax doubles the property price

The document specified that it would be a ‘State Complementary Tax on the Transfer of Real Estate to Non-Residents of the European Union’.

This suggests that EU residency determines this extra property tax, rather than EU citizenship. Incredibly, if a Spanish citizen who lives in the UK wanted to buy a holiday home in Spain, they would be charged this 100 percent tax.

In any case, this headline-grabbing 100 percent property tax would have to get approval in the Spanish Parliament, where Sánchez's PSOE have a weakened position, and there's every likelihood that Brussels could once again have the last word.