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Buyers who struck a cheap property deal might have to fork out extra money later on. 

Whenever property buyers on Mallorca receive a postal communication that contains the heading “Owed to the Tax Office”( In Spanish: “A favor de la Agencia Tributaria”), the whole scenario is likely to turn out to be expensive.


Although the crisis that affected the real estate market on Mallorca is supposed to be over, quite a few property buyers who closed deals in the past few years might have to face yet another sort of financial setback, since the Spanish Tax Office may be after them for having bought properties cheap.


The current year 2016 could well represent a turning point for the real estate market on Mallorca. In fact, after prices had reached a bottom peak after a series of massive downturns in the previous two years, they now have started to climb back up again for the first time following a long downward spell. The latest figures for the Balearic Islands show a 7.5% recovery in the 3rd quarter of the year in comparison to the same quarter in the previous year. Almost every other property buyer is foreign, and Germans constitute the majority amongst foreigner purchasers.


Nevertheless, umpteen property bargain hunters who have been active during the past years, are currently in for a nasty surprise. In fact, all those buyers who took advantage of partial price reductions from 30 to 40% when purchasing real estate on Mallorca, are currently receiving postal communications from the Tax Office that demand a retroactive tax supplementary payment on top of the already high Property Acquisition Tax (8 to 10% according to the original purchase price paid) levied on real estate transactions. Estimates carried out by the Tax Office indicate that many properties were worth considerably more than the value stipulated for them in the notarial purchase documents; therefore, on the basis of such estimates, buyers become liable for a retroactive Property Acquisition Tax plus related additional interest sums, calculated starting from the original date of purchase.

 

“75%” is affected.
Many buyers are affected. The lawyer Matthias Jahnel, who practices law in Palma, states that, “according to his experience, about 75% of all the purchases that took place during the years of real estate market crisis and entailed purchase price reductions, are now subject to retroactive taxation”. Such tax retroactive payments often amount to several thousands Euro.


An example of such practice, based on an actual case study, follows below:


Taking it that somebody has purchased an apartment for 200.000€, the corresponding Property Acquisition Tax, levied at 8%, would have already entailed a payment of 16,000€. Assuming that the Tax Office now retroactively sets the apartment‘s real value at 250,000€, the buyer would have to come up with an extra 4,000€, plus additional related interest on this sum. The amount of interest levied is calculated according to the length of time elapsed from the date of the purchase.

 

The possibility of additional retroactive taxation covers a span of four tax years, going back in time. Currently, retroactive taxation has “caught out” mainly a great number of property buyers whose transactions date back to the year 2013. For a period that goes back about two years, a retroactive interest of around 10% is charged. In this particular case, the payment would amount to approximately 4,400€. Still, things get even more expensive if, in the course of the calculation of the additional retroactive payment, the taxation rate threshold is exceeded, since, then, the retroactive taxation rate for the total purchase price goes up.

Tax fraud laws  


Lawyers report that property owners feel that they are being struck out of the blue and are unable to grasp what is going on. It must be pointed out that part of the problem lies in the fact that taxmen on Mallorca send off the paperwork related to the tax calculation basis in the Catalan language, which, of course, even proficient speakers of Spanish can hardly be expected to understand.


The so called ” Legal Basis Law” is a Spanish law that was originally conceived to deal with tax fraudsters ( Article 57 of the 58/2003 Law). In fact, over a period of decades it was usual in Spain to “under declare” the value of properties. The notarised purchase transaction documents (a copy of which was sent to the Tax Office) contained a sort of “special friendly price”, while the real price difference was readily paid to the seller through a “black” transaction in cash or through a check, as the Notary conveniently pretended to look away.


What happens now is that cash-strapped municipalities see the law as a vehicle hunt for cash at the expense of property buyers, even in cases when the latter have honestly paid the whole purchase price. At present, this phenomenon is occurring in many Spanish municipalities that send out paperwork which justifies the demand for retroactive taxation, pretending that the prices‘ crash in the real estate sector never happened. The taxmen in the Balearic Region are apparently particularly keen on this practice, since the local government faces a huge budget deficit. 


Ten days‘ deadline


What can be done against it? Affected buyers are entitled to put forward counter arguments ( alegaciones, in Spanish ) against the valuation proposal (propuesta de valoración, in Spanish) made by the Tax Office in the course of a preliminary hearing, but they must be quick as the deadline allows only ten days. According to lawyer Dominic Porta from P&A- Lawyers in Palma de Mallorca, ” property owners may, for instance, allege that their property ought to have been individually valued, or that they had considerable renovation expenses”.


Should the Tax Office remain unconvinced by such counter arguments, a Court Decision Notice will be issued, against which–as it happens in England– it is possible to present a request for a review or an appeal within one month. Nevertheless, without qualified expert advice, the prospects of success are narrow. On the other hand, there is some consolation to be found in the knowledge that buyers who receive a demand for retroactive tax, have somehow also obtained official evidence that they were able to come up with a good buy in the years of real estate crisis.


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