A recent ruling by the National Court of Spain (636/2021) states that the tax treatment received by non-EU/EEA non-residents when declaring rental income from properties in Spain violates the principle of free movement of capital, as established in Article 63 of the Treaty on the Functioning of the European Union (TFEU).
Differences in taxation to date
Until now, these non-residents were not allowed to deduct expenses related to the rental activity (such as property tax, interest, repairs, etc.). And were taxed on 100% of the gross rental income. In contrast, EU/EEA residents could deduct these expenses.
Equality in the deduction of expenses
The ruling determines that this unequal treatment is unjustifiable and orders that non-EU/EEA residents must also be allowed to deduct the same necessary costs, thus aligning them with EU/EEA residents.
Importance of claiming refunds now
Although the ruling can still be appealed before the Supreme Court, we recommend that all individuals affected by it submit requests for rectification of previously filed tax returns under the current, more burdensome regulations and claim refunds for undue payments. This will ensure that, once the Supreme Court issues its decision —which we hope will confirm the same interpretation— affected taxpayers will be eligible to receive the corresponding refunds.
Lessons learned from the municipal capital gains tax case
We emphasize the importance of requesting refunds now, as there is a risk of a similar situation occurring as in the case of the municipal capital gains tax (Plusvalía), where the Constitutional Court’s ruling did not allow refunds for settlements that had not been appealed or corrected before the judgment was issued.
Outstanding issues: tax rates and reductions
Finally, we note that this ruling does not address the discrimination arising from the fact that non-EU/EEA residents are required to apply a tax rate of 24%, compared to the 19% applicable to EU/EEA residents, nor the inability to apply the rental reduction (formerly 60%, currently 50%). We await further rulings on these matters, which are expected soon and —if favourable— could lead to increased refund amounts.
We remain at your disposal to assist you with the processing of the corresponding claims.