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Spain's Reaction to the Tourism Crisis.

In previous articles I mentioned the failing real estate and tourist industries.
Although the number of tourist visitors has increased, travel habits have changed so this is not really an increase at all because the length of stay is shorter.

ARTICLE HIGHLIGHTS

  The "Black Economy" one of the worst-
     kept secrets of all.

  The Crisis could change everything.
  Property owners legal obligations.
  How great is the risk of detection.
  One good solution.

  Most important of all!

Added to that the huge number of new properties built in the past decade has created a critical excess of supply over demand - in fact a self-catering accommodation bubble!

The result is that the hypothetical demand per property has dropped from 21 weeks (in 1997) to less than 5 weeks now.
The problem has no obvious short-term solution - to fill all of the available tourist beds, and return to the golden era of the 80's, would require a threefold increase to the number of visitors.
Such an increase is not possible because this would equal the combined total of the world's top three destinations (France, Spain and USA).

 

The Spanish so-called “black economy” - one of the worst kept secrets!

The authorities are certainly aware but have not seemed inclined to do anything about it.
Substantial tax revenue is lost due to non-payment of IVA (Value Added Tax), social security contributions, personal income tax, company profits tax and non-resident owner's tax on rentals.

The losses are due to the huge clandestine self-catering industry and its supporting services – Internet advertising sites, cleaners, laundry services etc. as well as the maintenance of pools & gardens, painting and even building improvements, extensions etc.

There could be other considerations -

Significant tax revenue is derived from tourist spending.
Construction, real estate and tourism account for a major portion of the workforce.
There is a 7% transfer tax every time a property changes hands!

- Which could make the tax revenue lost pale into insignificance!

Perhaps its just a case of not cooking the goose that lays the golden eggs!

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The Tourism and Real Estate Crisis could change everything!

The Spanish government is already taking a hammering from the the national and international press for permitting the "land grab" and "real estate corruption" scandals.

Unemployment will increase because of the redundant construction sector.

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The treasury will face falling revenues from taxation and social security contributions.

Increasing pressure will be applied by trade associations (who’s members are also hurting).

Something has to be done before the whole economy is drawn into recession.

The time has come for Spain to clean up the act and properly regulate tourism and real estate.
This would likely include the clandestine tourist renting sector and associated activities.

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What exactly are the legal and fiscal obligations of owners who rent?

Registration with the Tourist Authority: The procedure varies from one autonomy to the other but it is simple procedure and free.
Most areas are currently revising the regulations applying to self-catering renting.

The Valencia Autonomy (Costa Blanca and Costa Azahar) is studying a new draft of the law which should come into force early in 2008.
The draft excuses the need for registration by direct-renting owners and introduces the obligation for them to comply with certain parameters relating to quality, health and safety.

Payment of Taxes: One often hears fairy stories like "I don't have to pay tax because I rent offshore" or ". . . the rental is paid outside of Spain".
This is obviously untrue. Spanish tax law states clearly that the renting activity takes place in Spanish territory, the property is situated there also and rentals are subject to Spanish tax - wherever the money is paid.

The various applicable taxes are -

IVA (Value Added Tax): The rental element is not subject to IVA but the rate for services 16%.
There are two different options -
If the contract or bill is for rental and services combined then the rate is 7%.
If the contract for rental is between the property owner and the client (for the client's own occupation) then the operation is not subject to IVA and the services, if provided by a 3rd party, should be invoiced separately at 16%.

Personal Income Tax (IRPF): All property owners (resident or non-resident) have to make an annual declaration of IRPF. Income from rentals has to be declared in either case (wherever the rental income is received).
Additionally there is a retention scheme on rentals received and all owners are obliged to declare and pay on a quarterly basis all rental received during the quarter.

Important to Note: Three sensible options are suggested below.
In every case the services and agents commission are deductible - as long as they are defined correctly in the rental contract and the owner has a bill from a valid company and the corresponding IVA (Value Added Tax) is shown.
This could make a big difference to the amount of tax to be paid.

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OK - but that is just not happening! How will they have to detect me anyway?

Not true at all! It has happened occasionally in the past and is likely to happen more frequently now! It is extremely easy to detect illegal rentals! -
Many direct-renting owners have an advertisement on the Internet showing 'photos, approx. location, name and contact phone numbers.

So there is no doubt that illegal rentals are easy to detect.

When a tax declaration is made, either in Spain or the owner's country of residence, the income could be zero. Therefore it is stated that the owner is not actively renting the property!

So the tax inspector has reason to think that the property is being rented and perhaps has seen the advertisement.
He asks about it, about it, the owner reiterates that there was no rental income and he just forgets the whole thing?
Now we all know that they don't work like that!
What actually happens is that an assessment is generated, backdated for at least 5 years, with fines, interest and 30 days to lodge an appeal.
The owner then has to pay or appeal and try to convince the appeal court that the property was not rented.
Before the appeal is lodged there is no obligation for the Authority to reveal any evidence, if any, that they actually have.

"The authorities have begun searching rental agents' listings, scanning small adverts and talking to local businessmen and hoteliers to find out who is renting out properties and comparing their findings to people who have registered for tax.
And thanks to the internet, the taxman's task has become a lot easier and a lot more lucrative, with holiday rental sites providing rich pickings.
"

Spanish eyes on holiday homes
Simon Lambert
This is Money
25 March 2006

I realise that this is getting close to scare-mongering.
I have to say that I do not know of a single case of prosecution in Spain. However, I know of several where the property owner was inspected by the UK Revenue and Customs Service and the owners believe that the information came from Spain.

I could well be exaggerating the risk but suppose that I am right?
Is it all really worth the risk for so little gain, when the remedies are so simple?
I may be wrong about this but we did see a lot more such activity during the recession of the ’90.

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A Good Solution for Renting Property Owners.

   
Sorting it all out yourself, making the declarations and payments, can be complicated and time-consuming.
If you are not resident then that means employing a Gestor - more fees and charges.

There are at least THREE simple solutions -
 

1. Employ a rental agency to carry out your services and provide clients.

Make sure that the agency is correctly registered and that provides a "Joint Venture" - type contract. Most of them do these days now that guarantees are no longer provided.

I am not inclined to suggest that you should evade taxes!
Apart from being illegal there could be serious consequences, so you have to work it out and decide for yourself.

The way most rental agencies work -

Rental Contracts: Generally there are two different ways that an agency contracts rentals with 3rd party tenants -

1. The agency buys the accommodation from the owner and resells.
2. The agency acts as an intermediary and contracts on the owners behalf.

"The UK Revenue and Customs Service announced a general amnesty in April 2007 for UK residents with foreign assets, including second homes."
"It is estimated that at least 300,000 UK residents own second homes . . ."
"The RCS has promised to restrict penalties to 10% of the undeclared tax."
"The amnesty expires in June 2007."
"Recent treaties permit the exchange of information between foreign  . . . "
"UK residents have an obligation to declare and pay tax on their worldwide income. You should not be taxed twice as double-taxation treaties exist."

UK Tax Amnesty for Owners of Holiday Homes
Moraira-Info.com
July 2007

 

The are two different ways the agency contracts with the tenant -

1. Rental and services included and the IVA (value added tax is 7%)
2. Rental and services separate.
The rental is not subject to IVA and the services charged at 16%

Any combination is correct and acceptable. Important to note that, if the agency works as an intermediary, the invoice for services to the tenant proves a rental only without services contract between the owner and the tenant which is not subject to IVA.

All reservations are recorded and charted. Some agencies even have online facilities where the owners can see the reservations and make their own.
The clients name and the booking agent (if any) are recorded.
Bookings designated as "Owners" could be family, friends or clients. If a rental is paid (or not) is not the concern of the agency.

Reporting: Rentals paid to the owner are reported to the Tax Authority in Spain. This information may be available now to the Tax Authorities in other countries.

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Owners Tax Obligations (Agency Bookings): As far as rentals made by the agency are concerned everything is resolved and reported correctly.
The IVA is settled and a certificate of earnings is issued for the owners tax declaration.
There may (or may not) be a retention against tax held by the agency but this is deductible in full before the tax is paid.

Owners Tax Obligations (Own Bookings): The owner must file separately for these.
However, if the owners bookings are all friends and/or family (i.e. not paying rental) then there is nothing to declare.

NB: With this option commissions and services are deductible.

 

2. Employ a tour operator or self-catering holiday company.

Once again you should make sure that the company operates "joint-venture" contracts and that they have facilities in the resort to provide services for your clients.

Please note that, even though they might pay you outside of the resort country, you should still declare any rentals received in Spain and the country where you are resident.
The same advice applies about how you deal with your own "occupations".

NB: With this option only the rental paid is taxable.

 

 

3. Arrange the rentals yourself.

Find an advertising website or rental agency that works on a commission basis so the you have a valid bill for their commission for each client (showing the VAT or IVA)

Employ a valid company to carry out your services with a valid bill.

NB: With this option commissions and services are deductible.

 

My Earnest Recommendation: All owners who rent do so with a joint venture contract with a bono fide rental agency or self-catering holiday company.

Apart from resolving issues with the authorities, proper, professional care is provide for the clients and the property.

Most Important of All - The UK still only accounts for 40% of visitors to Spain. You will find strong competition here as the Internet is absolutely saturated with English-language advertising sites.
The Spanish market (for example) is developing strongly now that incomes have improved and rental prices have fallen.
Most Spanish, French and German Internet browsers have their PC set to show pages in these languages - so they probably won't find you!
Here is the main advantage of also booking through an agency or tour operator. Most of them have already realised that there is little point in advertising to less than half of the market and have pages in at least 4 languages.

There are sure to be those who will say that I am biased as I work for an established rental agency, but I can truthfully state that this is not the case.

Rental agencies, tour operators and self-catering holiday companies have been around a long time, during good times and bad.
When tourism is booming we need more properties (just like everyone else), give rental guarantees to most and have good profit margins.
When times are tough we have all the properties we want and just have to work harder to sell a lot more holidays at reduced margins but with no risk from the rental guarantees – it's roundabouts and swings.

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© Mike King July 2007

ABOUT THE AUTHOR: Mike King has lived and worked in the Moraira Area since 1971. Currently he manages Villa Holiday Services of Moraira, a rental agency that specialise in Villa Holidays in Moraira and Property Sales in the Moraira Area.
Mike is also responsible for a popular advertising and information website about the Moraira area.

 
Links to other articles about Spanish real estate and renting.

1. Spanish Real Estate - A Crash or some Adjustments?

2. Spanish Real Estate - The Future.

3. Spanish Real Estate Survey - The Most Popular Areas could be the Best Investment.

4. UK Tax Amnesty for Owners of Holiday Homes

5. Tourist Rental Income 2007 - What's gone wrong? Overview of the situation.

6. What will happen next? Spanish tourist renting during the next 10 years.

7. How the Spanish authorities could react to the tourism crisis.

8. Making the best of it - advice for Spanish property owners who rent!

9. Property Values and Tourist Rental Income - Written in 2004. A very long article which foresees the present economic depression.

10. Spanish Young Persons Rental Subsidies.