| 02 November 2011
Southern Europe continues to lure Northern Europeans as the number one destination for a second home and/or retirement. No crisis is going to change the fundamentals of pleasant climate, healthy diet and refined culture that the south of Europe has to offer. So let´s have a look at the tax implications of having a second home in France, Italy, Spain, Portugal or Cyprus.
France
First and foremost it is important to determine whether you would like to be a permanent resident or not. France, as well as all the other countries covered in this article, will qualify you as a permanent resident as soon as you live more than 183 days a year within its borders. Being a permanent resident in France means for the most part you will fall under the same tax regime as ordinary French citizens. Your salary, pension, business interests and income derived from real estate will be taxed at a progressive rate between 5.5% and 45%:
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Up to €5,963 - 0%
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Between €5,964 - €11,896 - 5.5%
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Between €11,897 - €26,420 - 14%
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Between €26,421 - €70,830 - 30%
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Between €70,830 - €250.000 - 41%
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Between €250.000 - €500.000 - 44%
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Above €500.000 - 45%
It should be noted that France levies on worldwide income, but the treatment of income from your home country will depend on the applicable tax treaty. France levies a wealth tax of 0.55% to 1,8% on net assets (including real estate) above €800.000.
Temporary residents of France will only be taxed on their French income. Wealth tax on their French properties (if applicable) can be avoided if held through a SEC (real estate limited company).
Property tax
Real estate is levied federally but spent locally. Therefore rates vary per municipality. Real estate transfer tax however is taxed nationally and comprised of several small taxes, 5% in total.
Italy
Italy’s income tax system is not much different to that of France, only the rates vary and there are more deductions. Rates are as follows:
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Between €0 and €15,000 - 23%
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Between €15,001 and €28,000 - 27%
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Between €28,001 and €55,00 - 38%
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Betwwen €55,001 and €75,000 - 41%
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Above €75,001 - 43%
Local taxes and municipal tax adds another 1% to 2.2% depending on municipality. Italy does not have a wealth tax.
Real estate tax (Imposta Comunale sugli Immobili or ICI) is taxed at the municipal level. Annually, you pay somewhere between 0.4% to 0.7% based on the cadastral value of your home, which is often significantly lower than the real value.
Real estate transaction tax for buyers of primary homes is 3% registration tax and a fixed fee of €129.11 'mortgage tax' and €129.11 fee for cadastral register tax. Buyers of secondary homes pay a 'mortgage tax' of 2% (even if there is no mortgage), a cadastral register tax of 1%, and a registration tax of 7% (but 3% for houses of historical value). The registration tax is levied as a percentage of the (much lower) cadastral value of a house. In summary, depending on the use and value of your house, you will pay between 3% and 13% transaction tax. If one is to sell the primary residence and buys a new home within 12 months, the real estate gains are not taxed. A secondary home on the other hand is taxed at 20% capital gains if sold within 5 years after acquiring it.
Transaction tax does not apply on newly constructed houses; those are taxed by VAT at 4% for primary homes, 10% for secondary homes and 20% for luxury homes.
Spain
Spain remains one the most popular retirement destinations. A quick glance at their tax code tells you why: it is reasonably simple and cheap. Again all permanent residents (more than 183 days out of a year) are taxed over their income:
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Between €0 and €17,707.20 - 24%
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Between €17,707.20 and €33,007.20 - 28%
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Between €33,007.20 and €53,407.20 - 37%
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Between €53,407.20 and €120,000.20 - 43%
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Between €120,000.20 and €175,000.20 - 44%
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Above €175,000.20 - 45%
In many cases, foreign pension income is exempt up to €22.000 per year. Moreover, Spain does not have a wealth tax.Spanish real estate is taxed annually at rates between 0.3% and 0.8% depending on municipality. Transaction tax is a flat 7% for transactions between people, and if you buy from a business the VAT of 7% applies. Non residents pay an additional 0,264% to 0.48% on the value of their real estate, and/or 24% tax over rental income.
Portugal
You are considered a resident of Portugal when you spend 185 days a year or more in Portugal. Residents are income taxed as follows:
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Between €0 and 4,898 - 11.5%
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Between €4,899 and €7,410 - 14%
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Between €7,411 and €18,375 - 17%
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Between €18,376 and €42,259 - 35.5%
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Between €42,260 and €61,244 - 38%
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Between €61,245 and €66,045 - 41.5%
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Between €66,046 and €153,000 - 43.5%
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Above €153,001 - 46.5%
There are very few deductions available to minimize your taxable income. Although income tax is high, Portugal does not have a wealth tax.
Real estate is taxed annually at 0,8% for lots and between 0,2% to 0.7% for houses. Transaction tax on real estate is 0,8% stamp duty in rural areas, and slightly more in urban areas.
Cyprus
Out of the five destinations featured in this article, Cyprus is the cheapest when it comes to taxation. Again, any person staying longer than 183 days a year is considered a resident. Income tax rates are as follows:
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Up to €19,500 - 0%
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Between €19,501 and €28,000 - 20%
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Between €28,001 and €36,300 - 25%
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Above €36,300 - 30%
Foreign pension income is only taxed at 5%
Real estate is taxed annually depending on the value of the property:
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up to €170,860 - 0%
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Between €170,861 €427,150 -2.5%
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Between €427,151 and €854,300 - 3.5%
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Above €854,300 - 4%
Municipal real estate taxes add an additional 0.1% to 0.5%. Real estate gains in excess of €85,430 are taxed at 20%. Non-residents on the other hand and home owners who were non-resident at the time of acquisition do not need to pay capital gains tax on real estate.
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