Inheriting shares of a foreign company whose only asset is a property in Spain

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Taxable or not?

The Inheritance Tax is a big worry for foreign nationals that own a property in Spain, as well as for their families and heirs.

However, the use of a Foreign Company does not have the effect of avoiding the payment of Inheritance Tax.

Article 18.2.2º of Decree 1629/1991, dated 8 November, which approves the Regulation of the Inheritance and Donation Tax, establishes that the following are considered to be on Spanish territory: ‘Assets permanently connected to homes, estates or industrial establishments located on Spanish territory and …’ the interpretation of this regulation leads to understanding that the assets of a foreign company in Spain are considered as property and are received in inheritance by a non-resident, subject to Spanish inheritance tax.

Tax implications

At the same time, the tax consequences derived from the contribution of a property located in Spain to a foreign Limited Company must be taken into account. Thus, in this transaction, the income tax for non-residents is accrued on the latent capital gain which the property carries, and the mandatory 3% retention of the value declared in the property deed. And with that, the appointment of a representative in Spain of the non-resident Limited Company, as well as an address for the purpose of notifications.

Regarding the local taxes, the tax on the increase in the value of urban land (Plusvalía) is payable with the transaction.

In the case that the foreign company resides in a tax haven, they must additionally pay an annual 3% of the cadastral value in the income of non-residents, as a complementary tax.

Transferring a property located in Spain to a foreign company for the sole purpose of avoiding the taxation of the inheritance tax from the heirs and beneficiaries of the deceased in Spain, will not avoid the obligation of taxation in Spain or the application of inheritance tax, due to tax liability.

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