Buying a house in Spain almost always involves paying 'black money' to evade tax but would-be expats should be warned the government is getting tough on this type of fraud. We report on how it works and how it can be avoided.

To buy that dream home some are prepared to pay 'black money'

There is an anecdote which some Spanish property lawyers tell about King Juan Carlos.

They relate with apparent nonchalance how he only declared 50 percent of the cost when he sold one of his many homes – technically breaking the law by avoiding tax. However, the attitude of those who tell this story is not one of appalled concern that even the monarch has such disrespect for the law.

Instead, the king is seen as a chip off the old block; the attitude appears to be "if he can get away with it, why not the rest of us?"

If you buy a house in Spain, you will almost certainly be asked to break the law as a routine part of the process. Refusing usually means you face losing the house of your dreams; but if you go ahead and commit what is a crime, as so many estate agents advise - be warned.

Spain's Socialist government has launched a crackdown on tax cheats and money launderers who use the booming property market to hide their ill-gotten gains.

International publicity surrounding the recent case of a EUR 250 million money-laundering fraud which centred on a law firm in Marbella helped to focus the government's attention on the problem. Eastern European mafias were said to be channelling millions through this law firm. The scandal was even linked to the Russian oil giant Yukos, though the company strenuously denies the allegations. 

In simple terms, the fraud works like this: to reduce capital gains tax, a seller will ask a buyer to declare they are buying the house at a reduced price - and then pay them the difference in cash.

This practice of using 'black money' to make cash buys 'under the table' for all kinds of services is part of the culture in Spain – as the story about the king proves.

A recent estimate suggested 30 percent of all EUR 500 notes in Europe are in circulation in Spain. This is not purely by chance, but linked to money laundering.

The practice of under-declaring is so common that sellers will often not sell to buyers who refuse to go along with it all.

Often a foreigner who has fallen in love with that dream home in Spain plays the game, partly as they are told it is the norm here, but also so they don't lose the place they have set their heart on. 

A British man, who prefers to remain anonymous, bought a flat near Malaga for EUR 131,000 but was told by his own lawyer verbally that officially the seller would say it was sold for EUR 100,000.

"He told me it was a 'shady area' in Spain," he said. "Everyone does it in Spain and it is difficult to know how they would be caught."

Paying money 'under the table' is part of Spanish culture

Another woman, who also wants to remain anonymous, revealed that her lawyer advised her to pay about 15 percent of the sale price under the table. When she refused, she was told the house in the sun she had set her heart on was no longer for sale. She quickly changed her mind and bought the place.

One theory used to justify the tax evasion is that the whole system relies on cash. Builders pay illegal immigrant workers in cash, which keeps the prices down, so everyone benefits in the end.

Some buyers even talk about the thrill of turning up at the office of the notary, who overseas property purchases, with a bag full of money.

"It was very exciting and made it feel foreign," says one recent buyer. "When in Spain, do as the Spanish do," says another. But the Spanish treasury department views things rather differently. It recently launched an anti-fraud plan to combat black money in house purchases.

Since there are about 60,000 homes built in Spain every year, it is obvious that there is a great deal of untraceable cash in the system.

Enrique Blasco, a property lawyer, said: "The problem for the buyer is that you leave a trail when you pay by cash."

Would-be expats, who want to buy a home in Spain and move here, are most at risk because they are injecting 'black money' into the system.

The authorities will not find it hard to check bank accounts and match them with the purchase of a house.

It is, admittedly, rare for people to be caught, but there are increasing numbers of fines being handed out and with the change of official policy, this trend is likely to continue.

Another practical problem for any expats buying that house in Spain, will be with capital gains tax. Unless they can convince the next buyer to under-declare in the same way, they will pay for the capital gains tax of the previous owner.

So, if for example, they buy a house for EUR 150,000 but only declare EUR 100,000, and the real value increases to EUR 200,000, the buyer will be liable for capital gains tax on the difference between the two declared figures (EUR 100,000 not EUR 50,000).

In this case, they will pay double what they should be paying. Non-residents in Spain are liable for a capital gains tax of 35 percent.

John Rawlins, a British estate agent in Valencia, blames unlicensed estate agents for causing most of the problem, but others say property developers are also part of the problem.

It is clear it will be a slow process to reform a practice which is so much a part of the culture in Spain. The best way to find a reputable estate agent is to ask for their company and tax registration number (known as a CIF number).

Lawyers must be registered with the Collegio di Abogado, but even if they are it is no guarantee they will not try to advise you to break the law.

At the end of the day, if either an estate agent or lawyer tries to get you to break the law in this way, it is up to you to say no even if the house is a dream or risk the consequences.

Contacts

Enrique Blasco 963 442 990.

Rawlins & Holden, overseas members of the National Association of Estate Agents (NAEA), based in Lliria near Valencia 962 028 218

[May 2005]

[Copyright Expatica ]

Subject: Spain, property fraud