Tax benefits of real estate investments in Mallorca

Attractive tax laws for Spanish property investors

There are a couple of laws encouraging property investments in Spain. Firstly, there are corporate income tax advantages for investors who own more than 8 rental properties in Spain. To benefit from this law the investor does not need to live long-term in Spain. Secondly, for investors who also consider long-term living in Mallorca the so-called Beckham Law and Golden Visa are also compelling factors. 

We would like to highlight three important aspects when investing in investment properties on the Balearic Island:

Stable location to ensure high rental income and attractive returns

The real estate market has continued its positive development at a stable, high level and is expected to continue to do so in the years to come. The proportion of foreign buyers, now just above 40%, has almost doubled since 2009.The development of the population on the Balearics also reflects the attractiveness of the islands. According to the Spanish Statistical Office, the population on the Balearic Islands grew strongly from 2018 to 2019, more than any other region in Spain, with a total increase of 1.8%. This is mainly attributed to inflow from EU countries. The total population increased by 43% between 2000 - 2018 and is continuing to grow and consequently there will be demand for rental properties. Population growth by 2030 is expected to be 300.000 people. According to the state government and expert reports, 19.000 apartments are lacking in the Balearic Islands and 70% in Mallorca.

Real estate price levels are comparable to 2008, with an index value of 105 percent above the market prior to the financial crisis. Looking back over the average purchase price of real estate in the Balearics, as recorded by the Notaries and published by the Ministry of Infrastructure, prices are surprisingly strong and largely unaffected by international crisis of the past. So, real estate prices are expected to be little impacted by the Coronavirus.

For this reason there is an ongoing increase in investment and new construction projects across all sectors, in order to meet accommodation requirements for the growing population and international buyers. Mallorca is and remains an interesting location for rental properties - both for short-term and long-term. Whilst new short-term rental licenses have become more difficult to obtain, there are many properties with existing holiday rental licenses which are mainly to be found in the north and southwest of the island. Long-term rental yields of between 4% and 6% are realistic across Mallorca (in particular in Palma and Mallorca Southwest) and thus provide a very attractive return on investment. Short-term rentals can achieve even higher rental yields.

Taking advantage of low interest rates when buying property and covering costs through rental income

Thanks to the ongoing phase of low interest rates, the conditions for financing remain favourable. Euribor, the reference interest rate for mortgages, has exhibited a strong downward development into a low interest rate setting. This leads to an extremely favourable situation for property investors who are planning to finance an acquisition on credit. The banks generally only charge a low premium on these credit interest rates (between 1 and 2%).

When purchasing investment properties, the same recommendation applies as for residential properties: Ideally, investors should pay 30% of the purchase price as well as the acquisition costs from their capital. Investors should also ensure that the ongoing rental income not only covers the loan, but also generates a surplus. There are different ways to structure the loans ranging from bullet loans, Lombard loans and repayment loans through local Spanish banks and also international banks.

Tax benefits for property investors

The Beckham law and Golden Visa is interesting for investors who want to live long-term in Spain.

The Beckham Law is a Spanish tax law passed in 2005 that enables all foreign workers to be taxed as a non-Spanish residents under the Spanish Non-Resident Income Tax rules. Thus, they will only be taxed on income earned in Spanish territory, and not on income earned elsewhere while living in Mallorca.

The Spanish Golden Visa programme launched in 2013 is equally as enticing – with a €500,000 real estate investment in the country comes family residency. The Golden Visa is flexible with no minimum duration of stay, is easily renewable without living in the country and enables EU Schengen Zone travel, among other benefits. These factors are highly attractive to many global investors that not only want to live in a high-quality ecosystem, but also wish to exploit the advantages of fast entry to all major European cities.

However, for property investors who not want to live long term in Mallorca they can still benefit from tax advantages. It is beneficial for investors to set up a real estate company to look after their rental properties. Based on Articles 48 and 49 of the Spanish Corporate Income Tax, companies whose main economic activity is the letting of housing located on Spanish territory are eligible for tax benefits. This is subject to fulfilling certain requirements, such as the number of homes rented or offered for rent needs to be greater than 8. Further, dwellings need to be rented or offered for rent at least 3 years. Please consult a lawyer for more details on the scheme.

Overall, the corporate income tax based on rental income is reduced from 25% to 3.57%. Finally, the VAT tax rate will be 4% (against the general 10%), as long as all conditions will be met.