EU says non-residents who rent homes in Spain should be able to deduct 60% from their income taxes

The European Commission has opened an infringement procedure against Spain on the grounds that it discriminates against expats who rent their homes. This is because at the moment non-EU residents in Spain cannot apply the 60% tax reduction for the net income obtained by renting a habitual residence in the Income Tax for Non-residents (Impuesto sobre la Renta de los No Residentes or IRNR). This is seen to be unfair because the tax return for rental income in Spain is a benefit that is enjoyed by Spanish taxpayers.

José María Salcedo, a partner of the law firm Ático Jurídico, assures us that this is a difference in treatment between Spanish residents and non-residents living in the country that makes no sense and is discriminatory: "Spain gives a better tax treatment to residents in Spain who obtain income from renting out property, compared with non-residents who receive the same income.”

In the view of the European Commission, this difference in treatment unduly restricts the free movement of capital, which is protected by Article 63 of the Treaty on the Functioning of the European Union (TFEU). That is why the EU has given Spain two months to change the tax rules to make things fairer for non-residents. Otherwise, it could lead to a court case and sanctions in the European Court of Justice (ECJ).

What are the stages of the EU infringement procedure?

At this stage, the EC has only sent Spain a letter of formal notice granting it a period of two months in which to give a detailed reply to the alleged infringement. If Spain’s reply is not convincing, Europe will send back a reasoned opinion, explaining why it considers that Spanish law violates European Union law. At that time, a formal request will be made for Spain to comply with EU Law, granting Spain a period (normally two months) to report on the measures adopted, as José María Salcedo notes.

In the event that Spain ignores this warning, Brussels will be able to bring the country before the ECJ in a legal trial, something that is expected to happen shortly with the penalties that Spain currently applies to the Modelo 720 form.

What should non-residents do in the meantime?

Salcedo assures us that the beginning of this infringement procedure opens the door for non-residents in Spain to request that their self-assessments be corrected if they did not apply the tax deduction. "And this is even before the right to request such rectification is granted," says the lawyer, who points out that the criterion of the Central Economic-Administrative Tribunal (Tribunal Económico-Administrativo Central or TEAC) is to allow non-residents to apply the tax reduction, even if it was not included in their tax assessment at the time it was declared. However, non-residents of the EU can only claim these tax returns for their back taxes as long as the Hacienda Treasury has not initiated checks that affect the declared income from the rental.