Brussels takes action against Spain again over rental tax: what this means for non-residents

The European Commission has once again turned its attention to Spain’s tax regime for residential lettings. Specifically, it has sent Spain a supplementary letter of formal notice, as it considers that the tax regime applicable to non-residents remains discriminatory compared to that applied to resident taxpayers.

The crux of the problem is clear: whilst residents can benefit from tax relief on income derived from letting a property used as their main residence, non-residents are excluded from this benefit. In the Commission’s view, this difference in treatment may infringe the free movement of capital under Article 63 TFEU.

This issue directly affects thousands of non-resident landlords who let properties in Spain and who face a heavier tax burden than residents for the same property income.

What exactly has the European Commission done?

The Commission has not yet imposed a fine or amended Spanish legislation. What it has done is to reactivate and extend an existing infringement procedure.

The European Commission had already sent Spain a first letter of formal notice on 8 March 2019 regarding this matter. Now, considering that the problem has not been rectified and that, furthermore, the amendments introduced in 2025 maintain the difference in treatment, the Commission has sent a supplementary letter of formal notice.

Legally speaking, this means that the Commission considers that Spain is still in breach of EU law and has granted it a deadline — usually two months — to respond and rectify the situation. If the response is not satisfactory, the next step may be a reasoned opinion and, subsequently, an appeal to the CJEU.

Where does the tax discrimination lie?

The discrimination arises because the Spanish system distinguishes between:

• Taxpayers resident in Spain, who are eligible for significant tax relief on income derived from letting property.
• Non-resident taxpayers, who are not eligible for the same benefit, despite receiving equivalent income from letting a property located in Spain.

The infringement proceedings initiated by the European Commission in 2019 initially focused on the deduction applicable to net rental income from residential property used as a principal residence—traditionally set at 60% and subsequently reduced to 50%—as provided for in Article 23(2) of the Personal Income Tax Act. However, the Commission maintains that successive reforms have not eliminated the discrimination, but rather reconfigured it:

From 2025, the Spanish legislature has replaced that scheme with a system of variable reductions (between 50% and 90%), subject to compliance with certain requirements, but limited in all cases to resident taxpayers filing under the personal income tax regime. In contrast, non-resident owners continue to be taxed under the IRNR and cannot apply these reductions, even when they let a property for residential use under conditions substantially comparable to those of a resident. In the Commission’s view, this asymmetry — based exclusively on tax residence — may constitute a restriction on the free movement of capital (Article 63 TFEU) and a difference in treatment incompatible with the principle of non-discrimination under EU law.

From a European perspective, the objection is not that Spain cannot design tax incentives for residential lettings. What is being questioned is that these incentives are reserved for those who are tax residents in Spain, thereby excluding non-residents who engage in a comparable economic activity: letting a property intended as a main residence situated on Spanish territory.

What exactly is the 50% reduction in rent for a property used as a principal residence?

The reduction is based on Law 35/2006 of 28 November on Personal Income Tax (LIRPF).

Under the personal income tax regime, income derived from letting a property is classified as income from property capital.

The general framework applicable to a resident is as follows:

1. The gross income (the rental income received) is determined.
2. Deductible expenses (interest, council tax, service charges, repairs, depreciation, etc.) are subtracted.
3. The net income is obtained.
4. A reduction is applied to this net income when the property is used as the tenant’s main residence.

Generally speaking, positive net income derived from the letting of properties used as the tenant’s principal residence has been eligible for a 60% reduction for contracts entered into up to 25 May 2023. For contracts entered into after that date, the general reduction has been reduced to 50%.

What does this mean in practical terms?

If a resident receives:

• €20000 in annual rental income
• €5000 in deductible expenses

The net income would be €15000.

With a 50% reduction, they would only be taxed on:

€15000 – 50% = €7500 taxable base.

In other words, the reduction is not a deduction from the tax liability, but a reduction in the taxable base.

Why might this breach European Union law?

The Commission bases this difference in treatment on Article 63 TFEU, which prohibits restrictions on the free movement of capital.

Investment in property and the receipt of rental income generally fall within the scope of that freedom. Therefore, if a non-resident receives less favourable tax treatment than a resident for income earned in Spain, there is a serious indication of a restriction.

For this difference in treatment to be valid, Spain would have to justify it sufficiently and demonstrate that it is based on a legitimate reason and is proportionate. And therein lies precisely the problem: when two taxpayers receive comparable income from letting a property in Spain, it is difficult to argue that one can significantly reduce their tax liability whilst the other cannot, simply because of their non-resident status.

Put simply: the Commission takes the view that investing in rental property in Spain cannot result in a higher tax burden simply because one resides outside Spain, unless there is a legally sound justification, and it considers that such justification does not exist.

Who is actually affected?

This issue is of particular interest to non-residents who rent out properties in Spain for residential use. That is to say:

• non-resident private landlords;
• citizens of other EU Member States;
• EEA residents;
• foreign investors with properties let out in Spain;
• non-EU non-residents with rental income from property in Spain.

Important: This issue specifically concerns the tax relief applicable to lettings of properties intended as a principal residence, i.e. long-term tenancy agreements (generally exceeding one year), and should not be confused with other proceedings currently pending before the Spanish courts regarding the possibility for non-resident taxpayers in the EU/EEA to deduct expenses related to the letting of properties located in Spain. These are, therefore, two distinct issues from both a legal and a tax perspective.

What about non-residents?

Non-residents are taxed in Spain under the Non-Resident Income Tax (IRNR), governed by the Consolidated Text approved by Royal Legislative Decree 5/2004 of 5 March:

Under this regime:

• Tax is payable on all income earned in Spain.
• It is not included in a general annual tax base as is the case with personal income tax (IRPF).
• The reduction provided for in personal income tax for lettings intended as a principal residence does not apply.

Practical outcome:

Non-residents are taxed on the net income without being able to apply the 50% reduction.

Therefore, for the same property and the same tenancy:

• Residents are taxed only on part of the income (as they can apply the 50% reduction).
• Non-residents are taxed on a significantly higher tax base as they cannot apply this reduction.

This is the difference in treatment that the Commission considers problematic.

The 2025 amendments: has the discrimination been rectified?

The recent reforms introduced by the Spanish Government have replaced the uniform system of a general 50% reduction applicable to all cases with a system of variable reductions, which can range from 50% to 90%, depending on certain circumstances, such as the location of the property in high-demand areas, a reduction in the rental price, or letting to certain groups, such as young people.

However, according to the European Commission:

• These reductions remain reserved for resident taxpayers.
• Non-residents continue to be excluded from the benefit.

In other words, the structural problem persists: less favourable tax treatment on the basis of residence remains in place.

What, then, does the supplementary letter of formal notice entail?

The supplementary letter of formal notice sent by the European Commission to Spain does not entail an immediate change to the current legislation, nor does it automatically create a right to be taxed as a resident, nor does it, in itself, guarantee that tax refunds will be obtained.

However, it does significantly strengthen the legal position of those who argue that the Spanish tax regime may be contrary to European Union law. In practical terms, this action:

• increases the pressure on the Spanish legislature;
• increases the risk of a ruling against Spain if it does not amend the legislation;
• opens up a more favourable scenario for reviewing tax assessments or self-assessments in certain cases.

What might happen next?

In the short term, there are three possible scenarios.

a) Spain amends the legislation

This would be the most reasonable outcome from an institutional perspective. Spain could reform the system to extend the tax benefit to non-residents under comparable conditions.

b) The Commission issues a reasoned opinion

If Spain’s response is not satisfactory, the European Commission may proceed with the infringement procedure and issue a reasoned opinion. In this document, the Commission sets out in detail the reasons why it considers that the Member State is failing to comply with European Union law and formally requests it to take the necessary measures to rectify the situation within a specified period.

c) The case is referred to the CJEU

If Spain maintains the legislation without making any amendments, the European Commission could decide to refer the matter to the Court of Justice of the European Union. In that scenario, the debate would cease to be of a political or technical nature and become a contentious legal dispute, with a potential judicial ruling of great significance and impact on the Spanish legal system.

Can a non-resident make a claim?

It depends on the specific case.

In particular, various factors must be analysed, including:

• tax years not subject to the statute of limitations;
• whether the taxpayer is resident in an EU/EEA Member State or in a third country;
• whether the self-assessments have become final;
• the existence of administrative or judicial proceedings still pending;
• and the possible direct invocation of European Union law.

In any event, this situation does not automatically entitle a taxpayer to a refund, but it may create a potentially favourable scenario for the review of certain tax returns, particularly if the matter is referred to the Court of Justice of the European Union or if the Spanish courts adopt an interpretation in line with European case law on this matter.

Key issue: the tax gap between residents and non-residents

Beyond the technicalities, the European Commission’s message is clear: Spain should not treat a non-resident less favourably simply because they are a non-resident when, in practice, the income earned and the taxpayer’s circumstances are equivalent.

This has a direct impact on the attractiveness of property investment in Spain. For many foreign property owners, the problem is not merely the obligation to pay tax, but the fact that, in certain situations, they may end up paying more tax than a resident for the same type of rental.

In this context, the Commission considers that this difference in treatment may constitute a barrier within the European internal market.

Conclusion

The European Commission’s recent action has reignited a debate that has been ongoing in Spain for years: the difference in tax treatment between residents and non-residents regarding residential lettings.

For non-residents, the message is twofold. On the one hand, the matter remains under review at European level, which increases the pressure for potential reform. On the other hand, there are no automatic changes to the regulations, so each case must be analysed individually, without assuming any automatic refunds or equalisation.

If the Commission maintains its position and Spain does not amend the regulations, this issue could become one of the main sources of tax conflict for non-resident owners with rented properties in Spain.

At IberianTax, we can help you understand your specific situation and resolve any queries regarding the taxation of your rental income. We specialise in non-resident taxation and the management of property taxes in Spain. Please do not hesitate to contact us or visit our blog for further information and up-to-date analysis on this subject.