The taxes involved when buying property in Spain are notorious high – in most parts of the country, the buyer is liable for an average of 8% of the purchase price just in transfer tax. Therefore, it’s no surprise to discover that some buyers prefer paying under the table for Spanish property and saving thousands of euros in tax. You may also be tempted to follow suit when you purchase but be aware that the risks are higher. And that you could end up paying more than you saved in fines.
In this article, we look at the practice of paying under the table and the risk that this practice incurs for both the buyer and the vendor.
What is paying under the table?
Paying under the table is known as buying in black (en negro) or ‘en B’ in Spanish. It involves a cash payment that does not officially exist and is never declared to the tax authorities. VAT also goes undeclared and unpaid.
It forms part of everyday life in Spain and ranges from a small one-off payment to a plumber to large-scale amounts when buying property. As a result, the black or shadow economy accounts for a large slice of Spain’s GDP. Conservative estimates put the amount at 10%, while others believe it’s nearer 25%.
Why pay under the table for Spanish property?
Purchasing resale Spanish real estate inevitably involves high taxes in transfer tax. Rates vary from region to region but are typically at least 7 to 8% and rise as high as 10% in some areas. They include Costa Blanca and Costa Brava, both popular destinations for foreign buyers.
To avoid being liable for tax on the full purchase price, some sellers pay part of it in cash (under the table) to the seller. This proportion does not form part of the official price and is not declared on the title deeds.
While paying under the table used to be common practice when buying property, increased vigilance from the tax authorities and heavy fines have reduced its incidence. However, there are still cases of buyers who pay under the table.
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An example
A buyer purchases a property on the Costa del Sol with a price of €300,000. He decides to pay the vendor €50,000 in cash so that the officially declared price on the title deeds is €250,000.
The transfer tax in Andalucia is currently levied at a flat rate of 7% so the buyer would pay €21,000 on the total purchase price. By paying under the table, the taxable amount is considerably reduced.
While paying under the table used to be common practice when buying property, increased vigilance from the tax authorities and heavy fines have reduced its incidence. However, there are still cases of buyers who pay under the table.
What’s the risk for the buyer?
The Spanish tax authorities have cracked down on fraudulent declarations for Spanish property in the last decade or so. As a result, inspections are common as are revisions of the declared price, which the authorities generally compare with the market price.
Those who are caught at risk must pay the full amount of transfer tax plus interest and risk a high fine. This wipes out all potential savings and usually costs more than the transfer tax on the full amount.
The buyer also faces potentially higher capital gains on selling the property. A low declared price at the time of purchase will result in a bigger difference between the buying and selling price later on. And the more capital gains, the higher tax you have to pay.
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What’s the risk for the seller?
In theory, the vendor has a lower risk from this practice. However, the tax authorities may still choose to check the sale and compare the selling price with the market price. Should there be a discrepancy, the vendor must prove beyond doubt that they sold the property for the declared amount. If this isn’t possible, the seller too faces a high fine.
And of course, there’s the problem of what to do with a large amount of cash. In today’s world of money-laundering regulations, making a large cash payment into your account inevitably leads to questions from your bank and you have to show where it came from. The only alternative is hiding it under the mattress, which has never been an advisable place to keep your money!
Play safe when buying Spanish property
As this article shows, the risk involved in paying under the table for Spanish property is high and it could end up costing you thousands of euros more. At Costaluz Lawyers, we advise our clients to accept that a purchase must take place as per the correct legal procedure to avoid problems now and in the future.
If you’re thinking of buying a home in Spain, make us your first port of call. Get in touch with our expert team to ensure that you buy with complete peace of mind and 100% above the table.
Maria Luisa Castro
Hola,
I am interested in buying a small apartment in Spain for 60.000 euros. The real estate agent suggested that I pay a small portion in cash.
Is this legal? If so, what is the maximum amount that I could pay in cash?
And what is the advantage to the Sellers? To reduce their taxes?
If I pay a small portion in cash, will the final sale price of the apartment still be 60.000 euros?
How does it work?
Gracias.
Thank you for reaching out with your question regarding the purchase of an apartment in Spain through our blog.
We strongly advise against paying any part of the purchase price in cash. This practice is not only unethical but is also illegal under Spanish law. In this situation, both the seller and the buyer would be committing a tax evasion offense, which is a serious crime.
The seller may suggest this to reduce their capital gains tax liability, as it would appear that they are selling the property for a lower price. For you, the buyer, while it might reduce your immediate liability for the property transfer tax, it could increase your capital gains tax liability when you come to sell the property in the future. This is because it would seem as though you had sold the property for a greater profit.
The Spanish Tax Authority conducts regular inspections and punishes this type of offence. It’s important to keep in mind that such actions can lead to severe penalties, including substantial fines.
Additionally, please note that your refusal to pay in cash should not affect the agreed-upon price of the property. The legality of the transaction should be paramount, and any reputable seller should respect your decision to abide by the law.
Thank you so much for this valuable information! It is very clear and concise.
It actually brings me to another question regarding estate agents. It seems that there are quite a few “dodgy” estate agents in Spain. I was warned about them beforehand and told to be careful (which is why it’s so important to find yourself a good lawyer.) If you don’t speak Spanish and do not know the culture, some people will take advantage of you.
What are the regulations for estate agents in Spain? Do they have to take an examination and obtain a license before opening an agency?
Thank you again.