Brexit: changes in tax for non-resident property owners in Spain

We have now entered the final quarter of 2020 and the end of the Brexit transition period is fast approaching. From the 1st of January 2021, the UK will no longer benefit from being an EU member state, and UK-resident owners of property in Spain will be affected with increased tax implications.

In Spain, tax rates are determined by the taxpayer’s residence—for EU/EEA residents the general tax rate of 19% is applicable, however, once the Brexit transition period ends, British property owners will enter the higher, non-EU resident tax bracket of 24%.

Unfortunately, the jump in tax rate is not the only impact Brexit will have on tax on Spanish property owners as they will also lose the benefit of deducting expenses from rental income. Any expenditure related to running the rental property will no longer be claimable and the tax due will be calculated directly on the total income earned.

Even if the Spanish property is not let out, the deemed rental income calculated on the annual non-resident’s tax return will also be taxed at the non-EU resident rate of 24%.

The Spanish tax office has posted further information on the consequences of Brexit on Non-resident income tax, click here for more details.

Spanish and UK VAT implications of a no-deal Brexit

So a Brexit without any agreement is being considered a very real possibility. How would this affect VAT on transactions between Spanish and British companies ?

Current members of the European Union apply the provisions of the the EU 6th VAT Directive.  By far the most important regulation included in the Directive regards the VAT on the provision of services between businesses in different EU countries. For instance, if a consultancy business based in Spain provides B2B services to a UK company, then no Spanish VAT needs to be added to their invoice. This is the so-called Reverse Charge principle, where the place of supply of goods is considered to be where the customer is based, and therefore in this case the UK customer would account for the UK VAT on the invoice as both Output and Input VAT, the net result being zero.

After Brexit, the same Spanish consultancy company sends an invoice to its UK customer.  Spanish VAT cannot be applied because the UK is now outside the scope of application of EU VAT.   The customer would not apply the reverse charge because they are no longer governed by EU VAT legislation. So the transaction would simply be exempt from Spanish VAT.  In a similar way, invoices on professional services by a UK consultancy business to a client in Spain will be exempt from UK VAT.

Being exempt rather than zero-rated transactions, any local VAT on costs associated with the provision of services will not be deductible. So in the case of a Spanish consultancy company providing services to clients in other EU countries (80%) as well as clients in the UK (20%), then 20% of the Spanish VAT on associated expenditure (phone, internet, commissions etc.) would not be deductible. So in this respect, it is the Spanish businesses which will suffer from Brexit more than their UK counterparts !

For further information and details on our services, please visit our Spain Accountants website.