Mallorca, the largest island in the Balearics, has long captivated the hearts of visitors from around the world with its stunning beaches, rich history, and vibrant culture. As an American citizen considering purchasing property in Mallorca, you may be wondering about the intricacies of the process and the unique factors to consider to start your search.
Mallorca offers a diverse range of properties, including luxury villas, apartments, townhouses, and countryside estates. Foreign citizens, including Americans, can purchase property in Mallorca without restrictions. However, it’s essential to be well-informed about how a property purchase in Mallorca will work for you. Taking the decision to buy a property abroad involves overcoming many fears and doubts.
To conquer all those fears, it is necessary to get support from legal and tax experts who go with you during the purchase process and transform all your fears and doubts into assurance and certainty. The work we do at Lullius Partners involves putting our knowledge and experience at your service, all in an agile, holistic, transparent, and honest way.
As a Majorcan market-leading Private Wealth & Tax Firm, we provide high value advice to individuals from around the world, groups of companies and family businesses in need of joint tax and legal advisory and compliance services, including Spanish, cross-border and international taxation as well as business and legal issues which may affect their global wealth. We field an expert multi-disciplinary team to address all of our clients’ legal needs.
Our advice is comprehensive and includes:
- Ongoing tax advice on direct and indirect taxation
- Legal and tax restructuring of personal wealth
- Inheritance planning and wealth planning
- Taxation of family businesses
- Acquisition and transfer of assets, real estate, companies, and restructuring transactions
- Advice on investment vehicles
- Design of remuneration schemes for managers
- Trusts and fiduciary structures
- Financial products and their taxation
- Investments and international structures
- Expatriation / impatriation (relocation) processes
- Legal assistance in tax audit procedures before the Spanish tax administration and tax litigation
- Compliance with other tax reporting obligation
Global Collaboration
In addition to working with Lullius Partners lawyers in other practice areas, collaborating with US partners is a big part of the success of our international private wealth practice.
Our attorneys routinely cooperate with local professionals in non-Spanish jurisdictions, including other family advisors, who help us leverage the unique planning opportunities that can arise when other countries’ tax and legal systems interact with Spain. Working with these qualified US advisors, combined with seamlessly integrating Lullius Partners attorneys from other areas, allows us to establish holistic and comprehensive plans for our clients that take into account the unique tax and property regimes. Lullius Partners effectively “quarterbacks” its high-net-worth clients’ global planning needs.
Furthermore, Lullius Partners regularly collaborates with worldwide Family Offices representing High Net Worth and Ultra High Net Worth individuals.
Combining our sophisticated experience and knowledge of estate planning and tax laws with our extended network of trusted US colleagues, Lullius Partners understands how to organize our clients’ affairs into customized structures that work best from country to country and achieve their overall goals.
Questions before buying a property in Mallorca
Can I buy a property?
Yes, any foreign natural or legal person can purchase a property in Spain.
- Foreigner Identification Number (NIE).
Any foreigner who wishes to operate in Spain needs a Foreigner Identification Number (NIE), that will identify them to the Spanish tax authorities.
If the purchase is made through a foreign company, both the company and its partners need to obtain the corresponding Foreigner Identification Numbers (NIE).
- Military authorisation.
In cases of the purchase of rural properties in specific areas, buyers who are not citizens of the EU or countries that have signed an agreement on the free movement of people (Iceland, Liechtenstein, Switzerland and Norway) may need special military authorisation.
The areas where this is of greatest relevance are the islands, as it affects all rural land in the Balearic and Canary Islands.
What are the costs involved when buying property?
The amount varies according to the situation, but an approximate estimation would be considering around 10% to 12% on top of the purchase price. The costs you need to consider are:
– Purchase taxes
– Notary fees
– Property registration fees
– Advisors’ fees
This estimation enables us to get a first idea, however, to find out the exact figure, it will be necessary to analyse the specific case, as the amounts depend on issues such as the purchase price, the autonomous community where the property is, its value and other matters.
One of the first things we do for our clients is a preliminar estimation of the costs of the transaction, to ensure there are no surprises later on.
How long can the property purchase process take?
The normal time frame for a standardpurchase process in Spain is 2 or 3 months in normal conditions, evenslightly more depending on the specificsituation of the asset (pendinginheritances, coastal authorizations,military permit, etc.).
This time is needed to carry out thepreparatory procedures for the purchase ofthe property, such as obtaining theForeigner Identification Number (NIE),getting financing, etc.
Therefore, in Spain a private contract isnormally signed first, establishing theobligation to buy and sell, a specificamount is handed over and the obligationsof the parties are established in order toreach the consummation, which is thegranting of the public deed before a notary,which, in a standard operation, involvespaying the price in full and receiving fullownership of the property, with the handingover of keys.
Understanding the buying property process – Steps of a Real Estate Closing
From the first visits to properties to being able to enjoy your new home in Mallorca, there is a path that you need to take. We will be delighted to walk it with you:
1) Legal analysis and tax planning
2) Private contract
3) Public deed
4) Post-closing
FIRST. – Legal analysis and Tax planning
Due Diligence – Legal and tax review of a property
When buying a property, together with the bricks and walls, there is also a hidden part. The bigger the investment, the more questions are left unanswered, and it becomes advisable to hire an experienced real estate and tax lawyer.
This hidden part is made up of a complete set of rights and obligations that are inherent to the property and that you will buy together with the property, even if you are unaware of them.
The legal review aims to bring to light the hidden part, to ensure you have all the information that enables you to take the right decision.
Among other issues, you may find illegal works, the need for regularisation, limitations on transfer (need for permits for the sale), limitations of specific activities (holiday rental, change of use), differences in the information from diverse sources, debts with third parties, etc.
Finding out the legal status of the property is essential to figuring out the price.
What is the legal review of a property?
The question in any legal and tax review shouldn´t be “Can I legally buy this property?” but rather “Does this property meet the characteristics that I require?”.
Therefore, at Lullius Partners we put you at the centre of the whole analysis, and we need you to tell us about your expectations so we can give specific answers to your questions, whilst controlling the legality of the process.
Sometimes, there are no legal obstacles to carrying out the purchase, but the. Property does not meet your needs and expectations.
We will clearly outline the situation surrounding the property, so you can take the correct decision.
What documents Do I need?
The important thing about a legal review is not compiling a list of documents but extracting all the available information (within and outside the documents) to fully understand the consequences deriving from the legal situation of the property and analyse it in view of the buyer´s requirements.
A list of the minimum documentation required would include at least the land registry extract and the Cadastral reference, but if you are limited to this level of analysis, you are likely to forget about issues that may affect the purchase, such as utilities.
For example, did you know that having a certificate of habitability (“cédula de habitabilidad”) or being registered in the land registry does not guarantee that the property is legal?
Having a trusted lawyer who helps you find your way around the legal system is essential due to the quantity and complexity of the applicable regulations.
What is Tax planning?
Tax planning consists of looking for the correct legal formulae to legally reduce the taxation related not only to the purchase, but also to the ownership and later sale of the property.
Having this in mind at an early stage can help you to legally minimise the tax impact of the property during the different stages. We will clearly outline the possible alternatives and their impact on the transaction.
SECOND. – Private contract
What is the private contract?
The private contract is the one signed between the buyer and seller, which sets up all the terms of the operation, and in which the rights and obligations of the parties are agreed.
It is an essential document that regulates how the parties wish to carry out the operation, and each commit to the other to take the path that will end with the complete payment of the price and the handing over of the keys to the property.
Although there are several types, the most widely used is the “Private sale contract with earnest money agreement” or “Earnest money contract”.
When an earnest money contract is signed, the obligation to buy and sell arises and penalties are established in the case of non-compliance.
Other types of contracts may result in different obligations, therefore it is necessary to analyse each document to understand the applicable legal regime, and not allow yourself to be guided by the title of the document.
Sometimes, the property agency may ask the buyer to sign a “reservation contract”.
Be careful, as sometimes these documents establish the conditions of the purchase, not allowing any furhter negotiation, as the terms have already been set up.
Why Do I have to sign a private contract?
Signing the private contract makes it possible to ensure the commitment to purchase in an agile and secure way, while leaving time to complete other prior necessary steps (obtaining a NIE, financing, meeting the conditions precedent, regularisation actions, etc.) as it has fewer formalities than the public deed.
Despite this, the fact that it requires fewer formalities does not mean that it is not legally binding: the private contract binds the parties and makes it obligatory to carry out the purchase in the conditions stipulated.
Therefore, it is necessary to have prior analysis and negotiate and include the necessary provisions, as once signed, the commitment is firm. At this stage it is essential to have a trusted lawyer if you did not already have one during the search for your property.
The second stage, the sale deed, implements what was agreed in the private contract, -normally- with payment of the rest of the price and the handover of the keys to the property in exchange. With the signing of the deed of sale you are now the full owner of the property.
How much is normally paid in the private contract?
The most standard market practice is to pay 10% of the total price.
However, this amount is a convention that is not based on any legislation, therefore it is something that can be freely negotiated between the parties.
The amount paid acts as a sign of commitment between the parties and will be normally considered as the basis for the calculation of the penalty in the case of breach by any of the parties.
When and where is the agreed deposit paid?
Once the contract has been signed, the buyer is obliged to pay the deposit or “earnest money”.
Usually, the buyer is given a short time to arrange the bank transfer (between 3 and 7 days). If payment is not verified within this period, the agreement will automatically become null and void.
Market standard practice involves a direct payment to the seller, specially when the seller is a national.
However, to prevent potential problems, we recommend that it is deposited in the trust account of a third party (agency, lawyers, notary).
Thus, if the seller breaches the agreement, it will be easier to have the money back, minimizing the risks.
THIRD. – Public Deed
What is the Public Deed?
The public deed is a public document that is formalised before a Spanish notary, and which implements what is agreed in the private contract.
Although both the private contract and the public deed are fully valid documents, they have different forms and effects, which is why the operations are structured in two phases.
Normally, the full price is paid when it is granted and the keys of the property are received in exchange, and the buyer is the full owner from that point on.
The public deed marks the end of the purchase process, as the property is handed over in exchange for the full Price and, therefore, the buyer is now the new owner of the property. Formalising the purchase in a public deed makes it possible to register ownership in the Land Registry.
What happens between the Private Contract and the Public Deed?
Between the signing of the private contract and the granting of the public deed, the parties have a period to arrange the paperwork required for the sale and obtaining.
It will thus be in this period when the buyer organises matters such as obtaining the NIE, looking for financing, opening a bank account in Spain, etc.
On the other hand, the case may be that the seller also needs to resolve issues, whether legal (obtaining the certificate habitability, the energy efficiency certificate, granting notary documents…) or physical (carrying out repairs, removing furniture, etc.), therefore both parties can use this period to prepare the closing of the operation according to what is agreed in the private contract.
FOURTH. – Post-closing
Although the property transfer process is completed with the granting of the deed and the buyer is now the new owner, it is necessary to carry out a series of subsequent actions, such as paying the taxes and registering your ownership in the land registry.
Which taxes will I have to pay?
Taxes on the purchase of properties vary according to whether you are buying a new or a used property.
- New properties have a VAT tax rate of 10% and also have to pay Stamp Duty, which is 1.5% in the Balearic Islands.
- The purchase of used properties entails paying the Real Estate Transfer Tax (RETT). In the Balearic Islands, this tax is on a sliding-scale from 8% to 13%, depending on the property value according to the following scale.
For example, a purchase of a used home worth €1.75M will be taxed €180,075, with an effective tax rate of 10.29%.
Other types of properties, or acquisitions in other circumstances (premises, works in progress, etc.) may result in different taxation (certain tax deductions may apply). Therefore, it is important to seek advice on this matter before entering any kind of deal.
Do I need to register the ownership in the Land Registry?
Registration in the Land Registry grants special protection of ownership, which enables a better defence of the right registered. This way, you can be protected against liens against previous owners or double sellings of the property.
Although it is not compulsory, the legal certainty it provides for the owner registered is enormous compared to its cost. Also, the entry in the Register will help in a future sale, as the purchase of a property not registered in the name of the seller can entail legal risks that few buyers would accept.
Notifications to third parties
Also, within the post-closing phase it may be necessary to issue communications to different parties involved, such as the council or, where applicable, the community of owners, the tenants -if there are any-, to inform them that you are the new owner of the property and that, from now on, matters relating to the property should be handled with you.
Taxes during ownership of the property
Once you own your property in Mallorca, every year you will have to pay a series of periodic taxes, which are levied on different issues.
As part of the tax analysis of the operation, we offer our clients an estimate of the impact of these taxes during the tenancy of the property, so that you can also take them into consideration even before you buy.
It is difficult to make an accurate estimate, as there are several taxes and each one of them depends on different factors: cadastral value, acquisition cost, structuring of the transaction, etc.
The main periodic taxes you will have to pay if you are not a tax resident in Spain are:
- Property tax (IBI)
- Solid waste tax (rubbish)
- Non-Resident Income Tax (NRIT)
- Wealth tax (Mallorca reduces Wealth Tax)
- Tax on large fortunes (ISGF)
The IBI and the rubbish tax are paid at different times depending on the town hall, and it is most convenient to have them paid by direct debit so that you are always up to date with your payments.
If you rent your home, you will have to make quarterly payments, but if you do not rent it, you will only have to make one payment a year. If you are a non-tax resident in Spain, wealth tax and ISGF will only accrue if the net value of your assets in Mallorca are above €3,000,000. On this point, we recommend a comprehensive tax analysis on a possible tax optimization structuring.
Relocation – Permits for residency and tax residency in Spain
As an US citizen you can stay in Mallorca for up to 90 days within a rolling 180-day period without a Visa. Depending on how often you wish to use your home or whether you are looking to relocate and move to Mallorca, you may be required to apply for a visa known as residency. In any case, whether you are a citizen of the EU or not, you need to bear in mind that if you spend more than 183 days in Spain you will become a tax resident in Spain, thus, if you are going to take that step, it is advisable to get advice beforehand about the tax system in our country.
As a non-EU citizen, American citizens are eligible for a Golden Visa, Non-Lucrative Visa or Digital Nomad Visa.
If you are a citizen from outside the EU and your investment in a property is over €500,000, you can request the so-called “Golden Visa” which will enable you to reside and work in Europe (Mallorca), for an initial period of two years, it can be extended for five additional years provided that the investment is maintained. It also makes it possible to obtain a residency permit for your spouse and children.
You can also obtain the Golden Visa and keep your residency abroad, which will enable you to visit Mallorca without having to request a visa each time.
The Non-Lucrative Visa is intended for individuals who want to reside in Mallorca for personal reasons, such as retirement, study, or pursuing personal interests rather than work.
The Digital Nomad Visa was introduced in early 2023 to encourage those who can work from home or who are Business owners/Self-employed to come to Spain and enjoy the slow lifestyle and work from Mallorca.
This visa allows you to live here for between 1-5 years. The duration of the visa depends on whether you apply in the US or once you arrive in Spain.
Spanish Special Tax Regime for Expats. Tax advantages of Spain’s Digital Nomad Visa
One of the many tax developments of this new legislation (2024) refers to the current Spanish tax regime for expatriates. This special regime, well-known as Beckham Law (as the football player was one of the first to take advantage of this measure), allows those taxpayers who move to Spain to work and pay taxes as a non-resident for a 6-year period. Not only can be eligible for expatriates but also from 2024 onwards it will apply to entrepreneurs, investors and professionals who perform a business activity (self-employed) and want to be relocated to Spain.
The Spanish legislation modifies the expatriate tax regime and reduces from 10 to 5 years the period of non-residence in Spain prior to the year of arrival in Spain. The movement can take place both in the first year of application of the regime and in the previous year.
Article 93 of the Spanish Personal Income Tax Act regulates the special tax regime and establishes a flat tax rate of 24% for employment income up to EUR 600,000.00 and 47% above that amount. This taxation is currently in force prior to this new legislation.
Moreover, the regulations will add new reasons to apply for the Beckham Law. Up to now, only physical displacement due to an employment relationship with a Spanish company or the acquisition of director status (with less than 25% of the share capital) has been contemplated. However, from now on, it will also be allowed in the case of an employment relationship with a foreign company to be provided remotely (teleworking) in Spain. This new system is designed for digital nomads.
Furthermore, it will allow access to all administrators of Spanish companies, regardless of the participation of the share capital. If the company has the status of a holding company, then the text of the regulations requires the participation of less than 25% of the share capital.
It also contemplates performing an economic activity in Spain qualified as an entrepreneurial activity, that is, in aim of the innovation with particular economic interest for Spain and for those who carry out an activity by a highly qualified professional who provides services to companies or carries out training activities, R+D+I (Research and Development and Innovation) may also be eligible.
In addition, the new legislation extends the special tax regime to the spouse and children under 25 years of age (or of any age if they are people with disabilities) displaced with the taxpayer or later (if it occurs during the first year of residence of the taxpayer).
Finally, it is essential to know that there is a 6-month period to apply for the special tax regime since the registration date at the Spanish Social security system.
(*) Disclaimer: This article is intended for informational purposes only and should not be construed as legal, tax, or professional advice. It is advisable to consult with qualified professionals before making any decisions related to property purchases.
