The wealth tax in Mallorca

Please note: The following post is for informational purposes only and does not constitute legal or tax advice.

The introduction and structuring of the wealth tax in Mallorca is a subject of particular importance to international investors in the real estate sector. While it aims to create economic justice and address social challenges, it can present a hurdle when acquiring property without tax advice and optimisation. The following outlines what you need to know about the wealth tax in Mallorca. In particular, we always recommend seeking tax advice at the very 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 on Mallorca.

Legal basis and national embedding

The wealth tax in Spain, known as „Impuesto sobre el Patrimonio“, is a direct tax that taxes the net wealth of natural persons. It was originally introduced in 1977, simultaneously with the transition from dictatorship to democracy and the approval of the Spanish Constitution in 1978, as a temporary measure to strengthen state revenue. The tax aimed to increase economic transparency and ensure a fairer distribution of the tax burden among 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 boost economic dynamism and investment. However, the global financial crisis of 2011 forced the Spanish government to reintroduce the tax as a fiscal consolidation measure. Since then, the tax has remained part of the Spanish tax system, despite recurring debates about its necessity and effectiveness. The current legal basis is provided by the state law 19/1991.

Since 1980, the autonomous communities have had the power to manage and collect wealth tax, leading to regional differences. Consequently, the tax-free allowance varies considerably depending on the political orientation of the regions. Catalonia, for example, has a tax-free allowance of €500,000, while in regions such as the Balearic Islands, Andalusia and Madrid, it reaches €3 million, after previously being €700,000 in the Balearic Islands when the socialists were in power.

The wealth tax in the Balearic Islands, including Mallorca, follows the overall Spanish laws, but with regional adjustments to take into account the specific economic conditions and social circumstances of the region. However, this also results in significant differences in the implementation of the tax between the regions of Spain.

It is also worth mentioning the judgment of the European Court of Justice (ECJ) of 3 September 2014 in Case C-127/12. The Court ruled that the Spanish tax authorities must not discriminate against citizens of the European Union. This means that individuals resident in another EU Member State can benefit from the same tax rules and advantages as individuals resident in Spain.

Although the ruling initially concerned inheritance and gift tax, the underlying reasoning was also extended to wealth tax. This led to an adjustment of the Spanish Wealth Tax Law 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 individuals not residing within the European Union. This means that regardless of tax residency 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 wealth of individuals who are tax resident in Spain. Net wealth is understood as the sum of an individual's economically quantifiable assets and rights (such as real estate, bank deposits, company shares, vehicles, and works of art), minus debts and liabilities.

For the valuation of properties under Article 10 of the Spanish Wealth Tax Law, there are generally three methods available, with the highest determined value always being 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, although it is often still 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.

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

Example for calculating tax

Assume that the purchase 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 wealth tax. Therefore, 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 rulings from the Directorate-General for Taxation (V0891-24 and V2120-21).

The calculation for a property with an acquisition cost of 12,500,000 Euros is outlined as follows:

Allowable amount From the €12,500,000, a tax-free allowance of €3,000,000 is deducted, leaving a taxable income 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 euros is taxed at a tax rate of 2.9 %. The tax on this surplus amounts to 117,306.22 euros.

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

Optimization possibilities

Strategic structuring options for reducing the wealth tax burden are of central importance for wealthy taxpayers. One option is the purchase of a property by several people, allowing each buyer to utilise individual tax allowances. However, this solution requires trust and dependence on other owners. Alternatively, buying through debt financing offers tax advantages, as debts are deductible provided the mortgage is in place at the time of purchase. For wealthy non-residents, acquisition through a company can be attractive, as the assets of legal entities are generally not subject to wealth tax. However, potential risks such as compliance with the 50% rule for the property share must be considered in order to avoid tax disadvantages. In addition, the choice of a partnership can offer tax transparency and favour the sale proceeds for tax purposes. The appropriate strategy in each case requires careful analysis of individual circumstances and tax law conditions. We will be happy to put you in touch with a tax consultant who can advise you on the purchase of a property in order to optimise property tax.

Impacts on the property market

The property market in Mallorca is a key element of the local economy and, at the same time, one of the main factors influencing the island's tax environment. Wealth tax consequently imposes an additional financial burden on property owners, who have often invested a significant portion of their assets in land and buildings. This applies particularly to luxury residences and holiday homes, which contribute considerably to taxable wealth due to their high market value.

International investors, who have increasingly been acquiring property in Mallorca in recent years, view the tax as an additional cost factor that can influence their decision for or against investing on the island. Rising tax revenue could potentially lead some investors to look for alternative locations with lower tax burdens. This would not only affect demand for property in Mallorca but could theoretically also lead to a price decrease. In practice, however, there is a continuously growing interest in property in Mallorca. Despite the wealth tax, the property market in Mallorca is stable and demand for property is more likely to grow than fall. This can be attributed to the limited supply and exclusivity of the island.