Wealth Tax in Mallorca

Note: The following article is not intended to provide legal or tax advice, but is for informational purposes only.

The introduction and structuring of wealth tax in Mallorca is an issue that is particularly important in the real estate industry, especially for international investors. Although it aims to create economic justice and at the same time overcome social challenges, it can pose a challenge when purchasing a property without tax advice and optimization. The following section outlines what you need to know about wealth tax in Mallorca. In particular, we recommend that you always seek tax advice at the beginning of your search for a suitable property. Please feel free to contact us so that we can put you in touch with a tax advisor who can advise you in German in Mallorca.

Legal basis and national integration

The wealth tax in Spain, known as "Impuesto sobre el Patrimonio," is a direct tax that taxes the net assets of natural persons and was originally introduced in 1977 as a temporary measure to strengthen state revenues, coinciding with the transition from dictatorship to democracy and the adoption of the Spanish Constitution in 1978. The tax was intended to increase economic transparency and ensure a fairer distribution of the tax burden between different income groups.

In 2008, the wealth tax was abolished due to improved economic conditions. The decision at the time reflected the hope that a reduced tax burden would promote economic momentum and investment activity. However, the global financial crisis in 2011 forced the Spanish government to reintroduce the tax as a measure to consolidate the budget. Since then, despite recurring debates about its necessity and effectiveness, the tax has remained part of the Spanish tax system. The current legal basis is provided by State Law 19/1991.

Since 1980, the autonomous communities have had the power to administer and levy wealth tax, which leads to regional differences. As a result, the tax-free allowance varies considerably depending on the political orientation of the regions. One example of this is Catalonia, where the allowance is €500,000, while in regions such as the Balearic Islands, Andalusia, and Madrid, it reaches €3 million, having previously stood at €700,000 in the Balearic Islands when the Socialists were in power there.

The wealth tax in the Balearic Islands, including Mallorca, follows Spanish national legislation, but with regional adjustments to take into account the specific economic conditions and social circumstances of the region. However, this also means that there are significant differences in the implementation of the tax between the different regions of Spain.

Also worth mentioning is the ruling of the European Court of Justice (ECJ) of September 3, 2014, in case C-127/12. The Court ruled that the Spanish tax authorities may not discriminate against citizens of the European Union. This means that persons residing in another EU member state can benefit from the same tax regulations and allowances as persons residing in Spain.

Although the ruling originally concerned inheritance and gift tax, the underlying reasoning was also applied to wealth tax. This led to an amendment to the Spanish Wealth Tax Act in order to avoid potential discrimination, which is prohibited under Article 65 of the Treaty on the Functioning of the European Union.

Since the introduction of Law 11/2021, the prohibition of discrimination has been extended to include persons who are not resident within the European Union. As a result, regardless of one's tax residence in Spain, one enjoys the same tax rights as domestic taxpayers, particularly in the autonomous community of the Balearic Islands.

Tax liability and calculation

Wealth tax is levied on the worldwide net assets of individuals who are resident in Spain for tax purposes. Net assets are defined as the total economically assessable assets and rights of an individual (e.g., real estate, bank deposits, company shares, vehicles, and works of art), less debts and liabilities.

There are basically three methods available for valuing real estate within the framework of Article 10 of the Wealth Tax Act, whereby the highest value determined must always be used: Firstly, the cadastral value, which is usually significantly lower than the actual market value. Secondly, the reference value, which is assigned to many Spanish properties and represents an approximation of the market value, but is often also lower than this. Thirdly, the acquisition value, which comprises the actual purchase price paid plus all costs and taxes associated with the purchase and in most cases represents the highest value.

In the Balearic Islands, the tax-free allowance for residents and non-residents is currently €3,000,000 per person. If net assets exceed these limits, they are taxed progressively, with rates ranging from 0.28% to 3.45%. The following official table of wealth tax according to Balearic law is as follows:

Example of tax calculation

Assume that the acquisition value of the property is €12,500,000. Additional purchase costs such as VAT, notary fees, and registration are also taken into account when calculating the wealth tax. This means that the tax is levied on a basis of €12,500,000 instead of an estimated market value of €11,000,000. This method of calculation is based on binding information from the Directorate-General for Taxation (V0891-24 and V2120-21).

The calculation for a property with an acquisition value of €12,500,000 is as follows:

Allowance: An allowance of €3,000,000 is deducted from the €12,500,000, leaving a tax base of €9,500,000.

Up to an amount of €5,454,958.00: According to the official table, the tax burden for this amount is €100,639.06.

Surplus: The remaining surplus of €4,045,042 is taxed at a rate of 2.9%. The tax on this surplus amounts to €117,306.22.

Total tax burden: The wealth tax for the assessment basis of €9,500,000 therefore amounts to a total of €217,945.28.

optimization opportunities

Strategic options for reducing the wealth tax burden are of central importance to wealthy taxpayers. One option is for several people to purchase a property together, allowing each buyer to take advantage of individual allowances. However, this solution requires trust and dependence on other owners. Alternatively, purchasing with external financing offers tax advantages, as liabilities are deductible provided that the mortgage exists at the time of purchase. For wealthy non-residents, acquisition through a company may be attractive, as assets held by legal entities are generally not subject to wealth tax. However, potential risks such as compliance with the 50% rule for real estate holdings must be taken into account in order to avoid tax disadvantages. In addition, choosing a partnership can offer tax transparency and provide tax advantages on the proceeds of the sale. The appropriate strategy in each case requires a careful analysis of individual circumstances and tax law conditions. We would be happy to put you in touch with a tax advisor who can advise you on the purchase of a property in order to optimize wealth tax.

Impact on the real estate market

The real estate market in Mallorca is a central element of the local economy and, at the same time, one of the main factors influencing the island's tax environment. The property tax therefore places an additional financial burden on property owners, who have often invested a significant portion of their assets in land and buildings. This is particularly true for luxury residences and vacation homes, which contribute significantly to taxable assets due to their high market value.

International investors, who have increasingly purchased real estate in Mallorca in recent years, view the tax as an additional cost factor that may influence their decision for or against investing on the island. Rising tax revenues could potentially lead some investors to look for alternative locations with lower tax burdens. This would not only affect demand for real estate in Mallorca, but could also theoretically lead to a fall in prices. In practice, however, there is a steadily growing interest in real estate in Mallorca. Despite the wealth tax, the real estate market in Mallorca is stable and demand for real estate is growing rather than falling. This can be explained by the limited supply and exclusivity of the island.