In the Balearic Islands it is common for a property to belong to two people with different tax residence: siblings who inherited it and one of whom settled abroad, a couple who separate, partners from a joint purchase. When they decide to dissolve the co-ownership and one of them keeps full title by compensating the other, the transaction is usually analysed only from the perspective of transfer tax and stamp duty. That is where the problem begins, because if the co-owner who leaves is non-resident, a second obligation arises, this time on the person who keeps the property.
The Spanish Directorate General for Taxation resolved this in binding ruling V1832-12, and the position remains fully in force.
The facts
A Spanish resident co-owns 50 per cent of a property located in Spain. The other 50 per cent belongs to a non-resident individual. By means of a deed dissolving the co-ownership, the resident acquires full title and duly compensates the other co-owner.
The question raised is direct: whether there is an obligation to withhold under article 25.2 of the consolidated text of the Non-Resident Income Tax Act.
First: the transaction gives rise to a capital gain
Article 33.2 of the Personal Income Tax Act provides that no alteration in the composition of the estate is deemed to arise in cases of division of jointly owned property, dissolution of the marital community of acquisitions, and dissolution of co-ownerships or separation of co-owners. The same provision adds a decisive caveat: those cases may under no circumstances give rise to an update of the value of the assets or rights received.
Hence the dissolution of a co-ownership, with an allotment to each co-owner corresponding to their share, is tax-neutral. However, when the asset is allotted in full to one co-owner and the other is compensated in cash or in kind on an updated value, a capital gain or loss arises for the co-owner who leaves.
This position, which the tax authorities have held for years, was confirmed by the Supreme Court in judgment 1269/2022 of 10 October, which ties the existence of a capital gain precisely to the updating of value between acquisition and allotment.
Second: that gain is taxed under non-resident income tax
Article 13.1.i).3º of the consolidated text of the Non-Resident Income Tax Act charges to tax any capital gain arising, directly or indirectly, from real estate located in Spain or from rights relating to it.
Where the taxpayer is resident in another European Union Member State, article 24.6 of the same text refers, for determining the taxable base corresponding to the capital gain, to the rules of the Personal Income Tax Act. The gain is therefore calculated as the difference between the allotment value and the acquisition value of the share transferred.
Third: the 3% withholding is for the account of the party receiving the allotment
This is the point most often overlooked. Article 25.2 of the consolidated text of the Non-Resident Income Tax Act requires the acquirer of a property owned by a non-resident without a permanent establishment to withhold and pay in 3 per cent of the consideration agreed, as a payment on account of the tax due on the gain.
The ruling confirms that a dissolution of co-ownership with compensation falls squarely within that scope. Payment is made using form 211, within one month of the date of the transfer.
The obligation falls, note carefully, on the person who keeps the property. Not on the person who receives the income.
The consequences of not withholding
Article 25.2 itself resolves the point in no uncertain terms: if the withholding is not made or not paid in, the property transferred remains charged with payment of whichever is the lesser of that withholding and the tax actually due.
In other words, the property answers for the debt. The party receiving the allotment, who probably did not see themselves as a taxpayer but simply as someone putting a family or estate matter in order, ends up with a third party's debt secured over the property they have just acquired. And that charge will surface, sooner or later, on the next transfer or on the first tax audit.
What the non-resident co-owner should know
It is worth explaining the mechanism clearly to the co-owner leaving the community, because it is often perceived as an additional cost, and it is not.
The 3 per cent is not a final tax but a payment on account. If the gain actually obtained results in a liability lower than the amount withheld, or if the transaction produces a capital loss, the non-resident can claim a refund of the excess by filing form 210.
Withholding, therefore, does no harm to the party transferring their share. Failing to withhold does harm, and substantially so, to the party who keeps the property.
Practical recommendations
Before executing the deed it is worth verifying the other co-owner's actual tax residence, rather than simply relying on the nationality or address stated in the title of acquisition, since the position may have changed since then.
The withholding must be quantified on the consideration agreed and deducted at the time of compensation itself, with payment made within the deadline using form 211. It is equally advisable to record all of this expressly in the deed and to keep the documentation evidencing the acquisition value of the share, which will allow the non-resident to correctly quantify their gain and, where applicable, claim a refund.
Conclusion
Dissolving a co-ownership with a non-resident co-owner is not a complex transaction, but it requires looking beyond the tax charged on the deed itself. Alongside the indirect taxation there coexist a capital gain subject to non-resident income tax and a withholding obligation that the law places on the party receiving the allotment, backed by a real security interest.
Resolving this before signing costs little. Resolving it afterwards, once the property is already charged with the debt, costs considerably more. The same requirement to verify the tax position of everyone involved applies, with its own nuances, to a dissolution of co-ownership between residents and to buying property as someone resident outside Spain.
At Lex·on we advise residents and non-residents on real estate transactions and on the reorganisation of family assets from Palma de Mallorca and Manacor. If you are dissolving a co-ownership with a non-resident co-owner, we can review the transaction before you attend the notary.
Source: Binding ruling V1832-12 of 20 September 2012, Spanish Directorate General for Taxation. Supreme Court judgment 1269/2022 of 10 October.
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This article is for information purposes only and reflects the administrative position in force on the date of publication. It does not constitute legal or tax advice and does not replace an individual analysis of each case.