Non-residents’ debt deductibility for wealth tax purposes

Non-residents holding assets in Spain are subject to wealth tax (“WT”) on a source basis, with this tax being levied only on assets and rights located in Spanish territory, or that may be exercised or have to be fulfilled in Spain. To determine the taxable base, article 9.4 of the Spanish Wealth Tax Act specifies that charges and encumbrances affecting assets and rights located in Spanish territory will be deductible, as well as debts for capital invested in the above assets.

Historically, according to the criterion of the Spanish Directorate-General for Taxation (the “DGT”) as to the interpretation of this provision, debts are only deductible if there is sufficient proof of their existence and of their connection with the acquisition of an asset located in Spain and subject to WT.

In the case of non-residents who have acquired a Spanish property through a mortgage loan, the mortgage itself does not decrease the asset’s value, but takes the form of a guarantee to cover the debt. Deducting the outstanding amount of the debt is permitted if it can be proved that it has been used to purchase such a property, regardless of where the lender is located.

The case decided by the Spanish Supreme Court in its judgment dated February 13, 2023 (ECLI:ES:TS:2023:418), involved a couple resident in Denmark that had purchased a property in the Balearic Islands for €3 million in May 2006. Three years later, the couple requested a loan for the same amount secured by a mortgage on that property, considering that the debt should be deductible for WT purposes in Spain. The tax authorities, however, did not accept the deductibility precisely because the funds requested three years later were clearly not used to purchase the Spanish property given that “there is no clear and unequivocal relationship between the deductible charge or debt (mortgage) and the asset the value of which decreases (real estate).”

Although the Balearic Islands High Court of Justice initially ruled in favor of the taxpayers, the court has now ratified the tax authority’s criterion.

It states that “taking out a mortgage on an asset the ownership of which determines the subjection [to WT] due to an obligation in rem cannot be confused with a personal debt for a loan for which that mortgage has been taken out as security and to guarantee payments. Mortgages are an in rem security right of an essentially accessory nature, that is, they are linked to a primary obligation, the fulfillment of which they secure.” In view of this, the court states that the mortgage cannot be deducted to determine the WT base. Rather, if applicable, the outstanding amount of the debt can be deducted. However, in the case under analysis, the debt “cannot be deducted from the value of the asset to establish the taxable base for an obligation in rem unless it has been taken out to obtain the capital invested in the asset.”

Thus, the Supreme Court ratifies the interpretation given by the DGT (e.g., V0590-13) on the deductibility of debts incurred by non-resident WT payers and the mandatory link with the acquisition of assets located in Spain. It is worth noting that this criterion also applies to taxpayers subject to source taxation if they are affected by the Temporary Solidarity Tax on Major Fortunes introduced under Act 38/2022, of December 27.

Finally, note that this year, as set out in its 2023 Annual Tax and Customs Control Plan, the tax authorities intend to carry out checks on the tax residence of taxpayers who have been paying taxes as non-residents despite spending significant amounts of time in Spain. The aim of these checks is to verify whether these individuals are physically present in Spanish territory for more than 183 days in a year, which would imply worldwide taxation of their income and assets.