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Spain declares a problem - 28 May 2008

According to reports in the overseas property trade press today, the problem under-declaring the value of property in Spain is growing as pressure on prices forces developers to sell for lower values, unwittingly putting their buyers at risk of fines from the Spanish Revenue Department.

Although the issue of under-declaration of property value has been one that has blighted resales of property in Spain for many years as sellers attempt to avoid paying the capital gains tax on their investment to the true value of the property, this is the first time that the issue has come up with new-build properties.

To give an example of how the new, tough market conditions have brought under-declaration into the new-build market, if a villa is sold on a development for €200,000, buyers will pay €40,000 deposit as 20 per cent of the purchase price. If those buyers then face difficulties that force them to pull out of the sale and forfeit their deposit, the developer already has €40,000 in the bank for that property. In a tough market, they may then decide to sell the villa for €160,000 to another buyer, thus meaning that the new buyer declares only the €160,000 value of the property. In reality, they have bought significantly under the market value, but both the developer and the buyer have acted in good faith, but the buyer could face fines for declaring an unrealistically low value on their new property.

This issue was raised by Spanish Solutions’ taxation specialist Yvonne Hollywood in Overseas Property Professional. She said that most customers have not been informed of their liabilities by agents and developers, and are consequently giving themselves and the industry a bad name, while not actually doing anything illegal. If nothing else, it goes to show the value of expert, independent taxation and legal advice when buying property overseas.

Under-declaration of the value of a property is a tactic used primarily in Europe, (not just restricted to Spain), by which sellers ask for a sum of the purchase price to be paid in cash so they can declare a much lower value to the property and avoid paying tax on the full sale value. While many sellers have in the past insisted on this in order to proceed with the sale, it saddles the buyer with the decision to either do the same thing when they come to sell, or to take on the burden of paying the full tax-liable amount upon selling.

Neither option is appealing, and with the fact that revenue authorities in most countries have declared war on this kind of tax avoidance, entering in to an agreement of this kind could leave buyers open to harsh penalties.

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