European Commission Challenges Spain's Tax Treatment of Non-Resident Property Owners

The European Commission has initiated formal proceedings against Spain over its tax policy affecting non-resident property owners. The issue centers on the imputed income tax applied to properties owned by individuals who do not have fiscal residency in Spain, even when these properties serve as their primary homes.

What is Imputed Income Tax?

Spanish tax law includes a provision for imputed income which is a type of tax concept that attributes a notional economic benefit to property owners based on the value of owning and occupying a property. This is not a tax on actual rental income, but rather a presumed benefit calculated as a percentage of the property's cadastral value - typically 2%, or 1.1% if the cadastral value has been updated within the last ten years.

The rationale behind this tax is that property ownership provides an economic advantage to the owner, similar to the benefit one would receive from renting out the property or not having to pay rent to live elsewhere. This imputed income is then subject to taxation under Spanish law.

While this regulation applies to both residents and non-residents, there is a crucial difference in its application. Spanish residents can declare their primary home as exempt from this imputed income calculation and only pay on secondary properties. Non-residents, however, cannot claim this exemption, even when the property functions as their main residence in practice.

The European Commission's Position

Brussels has raised concerns that this tax treatment violates fundamental EU principles, specifically the free movement of workers and capital as outlined in Articles 45 and 63 of the Treaty on the Functioning of the European Union, as well as Articles 28 and 40 of the European Economic Area Agreement.

The Commission notes that non-residents are at a fiscal disadvantage compared to residents in similar situations. This means that people who live outside Spain—whether they are citizens of the EU, the EEA, or third countries—and who own property in Spain, must pay tax on imputed income, even if they use that property as their actual residence.

In other words, while Spanish residents can exclude their main residence from this tax, non-residents do not have that option. This creates unequal treatment, especially for expatriates or professionals working abroad, who are required to pay tax on this imputed benefit despite using the property as their real residence.

What is Spain’s position on this matter?

When it comes to non-residents with properties in Spain, the main debate revolves around the definition of habitual residence or primary residence under Spanish tax law. By definition, a non-resident cannot have their habitual residence in Spain, since the law sets out very specific criteria to be considered a tax resident.
The Spanish authorities often argue that there is no unequal treatment in this regard. Why? Because Spanish tax residents are also taxed on properties they own abroad, even if that property is their only real estate asset. In other words, both residents and non-residents are subject to rules that tax properties located outside their “habitual residence”:

• Residents in Spain pay taxes on their properties abroad.
• Non-residents pay taxes on their properties in Spain.

The Infringement Procedure

The European Commission has sent Spain a letter of formal notice, marking the first step in an official infringement procedure. Spanish authorities now have two months to respond and address the concerns raised by Brussels.

If Spain's response is deemed unsatisfactory, the Commission may issue a reasoned opinion, giving Spain an additional deadline to modify its legislation. Failure to comply could result in the case being referred to the Court of Justice of the European Union, potentially leading to financial sanctions.

What Might Change?

Spain would need to review its legislation regarding the Non-Resident Income Tax (IRNR) and possibly the Personal Income Tax (IRPF) to ensure non-residents do not receive less favourable tax treatment than residents. The most likely modification would involve redefining the fiscal concept of "habitual residence" to allow non-residents to prove their property serves this purpose, even without Spanish fiscal residency.

Can Taxpayers Claim Refunds?

While no judicial resolution has been reached yet, if the differential treatment is confirmed as contrary to EU law, affected taxpayers may be able to file claims to recover amounts paid in non-prescribed tax years. However, the right to refunds is not automatically guaranteed and will depend on Spain's response and any potential ruling by the EU Court of Justice.

This case highlights the ongoing need for harmonized tax treatment within the European Union, ensuring that citizens are not penalized based on their place of residence when fulfilling their tax obligations.

What Should You Do Now?

At this stage, the pre-existing Spanish tax rules remain the same. That means:

• Non-resident property owners must continue filing Modelo 210 for imputed income tax as usual.
• No refunds are available yet, any claims will only be possible if and when the EU process concludes with a ruling against Spain.