Starting in 2023, rentals of properties located in Spain that are owned by non-residents are subject to VAT and are not exempt from it; this includes the leasing of commercial spaces, offices, industrial warehouses, etc.
Previous Rule, through 2022. If a non-resident of Spain owned a business premises in our country and leased it to a company, whether or not the transaction was subject to Spanish VAT depended on whether or not the non-resident had a permanent establishment.
- With EP. If the nonresident had a permanent establishment, they were required to charge Spanish VAT on their lease invoices and remit it to the tax authorities.
- Without a PE. (In most cases, when an individual who is not a resident of Spain owns real estate located in Spanish territory and rents it out), they did not have a permanent establishment and were not required to pass on the tax. In that case, the tax liability was reversed, such that it was the business owner to whom the property was leased who was required to self-assess the applicable VAT; therefore, they issued invoices without VAT.
Concept of Permanent Establishment (PE): A permanent establishment (PE) exists in Spain when a nonresident has an adequate structure of human and technical resources—whether owned or subcontracted, and with a sufficient degree of permanence—to manage the rental, according to a TEAC ruling dated October 20, 2016.
Changes and Requirements Effective in 2023
Now, as of 2023, the previous rule has changed. Whether the lease of the premises is carried out through a permanent establishment or not, the non-resident landlord is now required to charge the applicable Spanish VAT and remit the tax to the Spanish tax authorities. Thus, the property owner (landlord) must obtain a Spanish Tax ID Number (NIF) (if they do not already have one) and file self-assessed VAT returns with the Spanish Tax Authority, All of this is required by the amendment and approval of Law 31/2022, Article 75.1, which amends the VAT Law (LIVA), Article 84, Paragraph 1, Subparagraph 2. The landlord must file Form 303 quarterly and calculate and remit the VAT liability in Spain.
Withholding Tax System
We must also remember that the withholding tax rules applicable to the tenant remain unchanged. If the landlord does not have a permanent establishment, he or she must pay tax on rental income under the IRNR (nonresident income tax), through the withholding tax applied by the tenant (19% if the lessor resides in the EU, Norway, Iceland, or Liechtenstein; 24% if the lessor resides elsewhere).
If there is a permanent establishment in Spain, the withholding tax is 19%, and it must be paid using Form 115.
Tax Obligations and Procedures to Follow
For all these reasons and as a result of the regulatory change, if you have moved or have moved abroad or to an EEC country and are renting a property such as a commercial space, office, or warehouse, (not a residential property, since these are not subject to VAT), you must register for VAT, file a VAT return, and issue invoices with the current 21% VAT rate in 2023.
Similarly, if you have always been a resident of another EEC country or abroad but have investments in Spain and rent out property, you will be in the same situation and will be affected by the regulatory change.
