Investing Mallorca: 5 reasons why investors struggle

Investing Mallorca: 5 reasons why investors struggle

Investing Mallorca: before you invest in Mallorca Real Estate, invest in these 5 Mallorca Tips

The resilient Mallorca residential real estate market is back in business. For the third consecutive year, Mallorca was named among the top 10 luxury property markets in Christie’s International Real Estate report.

The number of sales transactions overall on the market increased by approximately 20% in 2017, helped by interest in second homes remaining consistently strong and rising buyer confidence.

What sets Mallorca apart from the other destinations on the list, including Paris, New York and Sydney, is the relative value it offers, making it extremely attractive to investors, especially foreign buyers looking to invest funds from their home countries. Cash-rich investors from Germany, United Kingdom, Scandinavia and even East European countries are fueling the latest boom, often outlaying 100% in cash to finance their investments.

For a foreign investor, seizing the moment and identifying a property is generally the easy part of the investment process.

Choosing the right structure for the acquisition from a legal, tax and risk standpoint, isn’t quite as easy (or enjoyable). And some foreign investors might not realize the potential spanish tax-related pitfalls that can come with buying a spanish property.

If you’re a foreigner considering purchasing a property in Mallorca, proper planning is required to make sure your investment doesn’t come with any unexpected financial surprises. As such, here are five simple steps you may want to consider:

  1. Find a local tax professional with international tax expertise.

Investing in Mallorca property can involve significant financial implications under the Foreign Investment Tax Act (IRNR) and other local tax laws like wealth tax, so you need a local tax advisor who understands the complexities of the tax code.

As the saying goes “nothing in life is certain but death and taxes.” This couldn’t be more apropos than when it comes to acquiring a Mallorca property. In every scenario, there will be some form of spanish tax ramification, and depending on your situation, spanish and balearic estate taxes may also come into play. As such, it is vital to meet with a tax professional who can help guide you through the process.

Tip: It is generally more advantageous and cost-efficient to engage a tax professional before you acquire the property, rather than after, as restructuring (i.e., transfer of U.S. property) may prove costly and result in spanish gift & inheritance or high income tax consequences.

  1. Ask your accountant and attorney about the most optimal structure under which to acquire the property.

Every transaction is different and every buyer has unique facts and circumstances. So it’s imperative to find the optimal structure that best fits your situation. For example, a foreign investor acquiring several rental properties may not want to acquire all of the properties under a single entity because that may expose him or her to a greater amount of liability from a legal standpoint. Likewise, foreign investors who value anonymity may choose a structure that shields their identity, while others may value a structure that minimizes any potential tax liability in their home country. In the end, the structure should address the investor’s unique facts and circumstances while fitting his or her needs and goals.
Finanzkontor Investment Boutique can help you to set up a structure. We therefore cooperate with your Tax Advisor.

Tip: Although it’s usually the most common structure utilized, acquiring the property in an individual or joint capacity is generally not the most optimal structure for foreign investors.

  1. Apply for an NIE.

A NIE is an individual tax identification number. It’s similar in format and purpose to a spanish passport number, but NIE are strictly for foreign nationals. A NIE allows a foreign individual to file a spanish tax return and, when disposing of a spanish property, may ultimately reduce the amount of taxes withheld at closing.

The process to obtain a NIE can be cumbersome.

Finanzkontor Investment Boutique can help you with this: rather than visit the local Police office in Palma as an investor you can make an appointment at our office to facilitate the application process.

  1. Consider filing an annual tax return to record your property’s activity.

Wether your Mallorca property is a pure flip investment or a rental property you shall file annually a tax declaration. Chances are it may generate an annual operating and tax loss. In order to preserve those losses and offset them against any possible gain in the disposition of the property, you must file a IRNR tax return. A special non resident tax may apply if you don’t set up a tax structure properly.

  1. If you sell the property, consider filing a withholding certificate.

Under IRNR, a withholding agent is required to withhold 3% of the gross proceeds upon the disposition of Mallorca real estate by a foreign seller, irrespective of the gain on the sale. For example, if you are selling an investment property for 500,000 EUR, the withholding agent would withhold 15,000 EUR at closing. The amount withheld must be submitted to the AEAT within 30 days of closing.

investing Mallorca for more than 20 years
Christoph Albeck, Finanzkontor Investment Boutique. Investing Mallorca for more than 20 years.

If you’re a foreigner who is considering purchasing a Mallorca property, contact me through LinkedIn. I help in investing Mallorca for more than 20 years.

I can help you navigate the complexities of AEAT and IRNR and advise you on structuring the deal in a way that will align with your financial goals.

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