Although in recent years it was more commonplace than today, it remains an open secret that in many property transactions, it is still agreed that a part of the price is paid in cash, more commonly referred to as “in black” or “in B”. When investing in Ibiza, this can cause a series of fiscal and legal consequences, that on many occasions the participants are unaware of since they cover different areas and sectors. Our legal partner, Bufete Frau, has outlined the consequences of paying and/or accepting cash payments.
- On the one hand, there may be an administrative violation. We draw attention to the following:
1.1. Act 7/2012, of 29th October, covers the modifications of tax and budgetary regulations and the adaptation of financial regulations, in order to intensify efforts to prevent and combat fraud.
Payments of more than EUR 2,500 in cash are defined as serious violations, when either one of the parties acts as an employer or professional, or more than EUR 15,000 when it involves an individual who does not have a fiscal residence in Spain and does not act as an employer or professional. The fine imposed would be 25% of the amount paid.
1.2. Act 10/2010, of 28th April, covers the prevention of money laundering and the financing of terrorism.
It is required that incoming or outgoing cross-border movements through National Territory of more than EUR 10,000 must be declared and said declaration must contain accurate information regarding the carrier, owner, recipient, amount, nature, origin, intended use, route, and mode of transport of the means of payment. The failure to comply is defined as a serious violation, punishable by a fine ranging from EUR 600 to 50% of the undeclared amount.
The omission of said declaration, when it is mandatory, or the lack of credibility of the data declared, when it is deemed particularly relevant, will determine the intervention by customs or police officers acting on all means of payment discovered.
- On the other hand, we must also consider the legal implications, any conduct carried out that can be defined as an infringement of the Spanish Criminal Code, could result in the commission of a tax or money laundering offence. For example, when the amount deemed to have been evaded exceeds EUR 120,000 it is classified as a fiscal offence, and is punishable by a fine and/or a prison sentence of between one to five years, not excluding other consequences.
Other consequences from a tax point of view:
3.1. For the buyer:
3.1.1. Capital Transfer Tax: When a property is acquired, the Capital Transfer Tax (ITP) must be paid. This tax, in the Balearic Islands, ranges from 8% to 11% of the value of the property.
When we present the declaration, we calculate the tax based on the value declared in the deed. However, the Balearic Islands Tax Agency (ATIB), has four years to review these values, and if a lower value has been declared than the known true value, we will be required to pay the tax on the difference.
Example: If I have acquired a property for EUR 100,000, I will have paid EUR 8,000 in Capital Transfer Tax (ITP). If the true value of the property was EUR 140,000, the ATIB will request the payment of 8% of EUR 40,000, plus interests and penalties.
When a cash payment has been made that has not been declared in the deed, (in most cases the declared value is less than the true value), there is a possibility that we may receive notification of a value verification procedure, these are not easy to appeal against, and usually result in the payment of the tax due, plus interests and penalties.
3.1.2. Personal Income Tax (or Non-Residents Income Tax): When the buyer sells their property in the future, the gain (or loss) will be calculated based on the acquisition value declared in the deed. Thus, if they actually paid more but did not declare it in the deed, it cannot be included as a higher acquisition cost, so their profit will obviously be higher, accordingly, they will have to pay more to the tax authorities.
3.2. For the seller:
3.2.1. Personal income Tax (or Non-Residents Income Tax): In the same way that the declared value will be subject to inspection by the Regional Tax Authorities in respect to the ITP, the State Treasury will also have the power to inspect the declared value for the purpose of calculating Personal Income Tax (IRPF), or Non-Resident Tax (IRNR). Equally, when it is considered that the true value is superior to the declared value, the inspected party will be liable to pay the tax on the difference, in addition, to fines and penalties. Also, given that the calculated profit is higher, and the taxation of tax residents is by scale, they will also be taxed at a higher rate.
3.2.2. Investments in main residences: Regarding a tax resident in Spain that has sold their main property to invest the money received in another property, only the value declared will be taken into account to calculate the investment, and not the one that has really been paid, therefore, any exemptions due will be less.
As the reader will surely appreciate, there are numerous consequences that this type of behaviour can lead to. Therefore, the parties in a transaction should think long and hard before agreeing to carry out this type of infringement, which as previously stated, can be considered as a criminal offence.