Wealth Tax Mallorca

An Overview and a Forecast

A brief introduction: I am neither a tax advisor nor a lawyer and am only sharing my personal opinion here. Without conducting any consultation or even wanting to give the impression of being able to do so! My opinion primarily concerns whether I believe that the wealth tax(es) will ultimately be effectively abolished.

The Mallorca wealth tax, a form of tax levied on a person's total assets, is at the centre of many discussions in Spain, especially on the picturesque island of Mallorca. While many hope that this tax will be abolished, there are aspects and considerations that show this is a complex question with many factors.

The wealth tax on property is a topic that affects many people who live in Europe or own property there. I would first like to briefly look at other European countries where there is a wealth tax on property and how high it is for residents and non-residents respectively.

Let's start with France, a country known for its high wealth tax. The French wealth tax, also called "Impôt de solidarité sur la fortune" (ISF), is levied on the worldwide assets of persons resident in France whose wealth exceeds 1.3 million euros. Tax rates vary between 0.5% and 1.5%. For non-residents, the tax applies only to property located in France and the tax rate is the same.

In Italy, the property wealth tax, also called "Imposta municipale sugli immobili" (IMU), is levied on all types of property, regardless of whether the owner is resident or not. Tax rates vary depending on the type of property and its use, but in general the tax rate is 0.76%.

In Germany, there is no wealth tax in the classical sense. However, there is the property tax (Grundsteuer), which is levied on the value of land and buildings. The amount of property tax depends on various factors, including the type of property and its location, and varies between 0.35% and 1%.

In the United Kingdom, there is no wealth tax on property. Instead, there is the Council Tax, a local tax paid by the occupants of a property. The amount of Council Tax depends on the value of the property and the number of occupants.

In Switzerland, the wealth tax is levied on the worldwide assets of persons resident in Switzerland. Tax rates vary by canton and municipality but are generally between 0.1% and 0.5%. For non-residents, the tax applies only to property located in Switzerland.

In summary, the wealth tax on property varies greatly from country to country in Europe. It is therefore important to inform yourself about the applicable tax laws before buying or selling property in a particular country. It is also extremely important to consult a tax advisor to ensure that all tax obligations are met.

The History of the Wealth Tax in Mallorca

The history of the wealth tax in Spain is a story full of discussions and changes. In 2008, it was temporarily suspended nationwide, but reintroduced in 2011, which remains a controversial point (mallorcamagazin.es). The discussion about abolishing the wealth tax is anything but new in Mallorca.

However, it is important to understand that Mallorca, as part of the Autonomous Community of the Balearic Islands, has the authority to determine its own tax rates and exemptions, in addition to national laws. The wealth tax in the Balearic Islands ranges from 0.28% to 3.45%, depending on the amount of wealth, a characteristic considered progressive.

The Solidarity Tax from Madrid

The new "solidarity tax on large fortunes" from Madrid has also made waves. The tax was introduced by the central government in Madrid in 2020 because Sánchez and his allies in the centre-left coalition did not like the competition between autonomous regions to reduce regional wealth taxes. Madrid, for example, did not collect any regional wealth tax. Andalusia wanted to follow suit...

The regional wealth tax can be credited against the solidarity tax liability.

The tax targets the wealthiest 0.17% of the population and is intended to help mitigate the economic impact of the COVID-19 pandemic. The tax is levied on assets exceeding 10 million euros, with property, bank deposits and securities being taxed. The government hopes to generate additional revenue through this measure to finance public services and support economic recovery.

In the event of the regional wealth tax being abolished, the solidarity tax would still apply, which intensifies the debate about abolishing this tax.

However, the solidarity tax and the wealth tax differ in their application and purpose. The solidarity tax specifically targets the wealthiest citizens, with the aim of reducing larger income disparities. In contrast, the wealth tax affects an individual's entire assets, including property, financial investments, and the like.

The rates of the solidarity tax are essentially similar to those of the Mallorcan wealth tax, but it only applies above a higher wealth threshold, hence the name "solidarity tax on large fortunes".

Differences in Wealth Tax for Residents and Non-Residents

There are clear differences in the application of the wealth tax between residents and non-residents. While residents must pay tax on their worldwide assets, non-residents are subject to the wealth tax almost exclusively on assets held in Spain, such as a holiday property.

This leads to partly high tax burdens for property owners, even if they are not resident in Spain. Is this completely unusual? No, the French also tax both domestic and foreign property owners. In Switzerland, living is also taxed. Only we Germans are simply not used to this due to the previously very low property tax, and many buyers don't want to accept it. Or they realise that they can rent properties more cheaply than they would have to pay in taxes just for ownership.

Impact on the Property Market in Mallorca

The property market in Mallorca could be significantly affected by changes in wealth tax policy. Not only "mallorcamagazin.es" speculates that abolishing the wealth tax in Mallorca would boost the property market. All estate agent associations also pin great hopes on this scenario. Of course, customers are currently deterred from buying property when they hear that they have to pay a considerable annual tax burden just for ownership.

Was it always like this? Firstly no, secondly also yes. The wealth tax has come and gone over the years. More relevant, however, was the fact that there were many concepts where wealthy buyers could make their investment look "poor" through loan structures. This naturally made sense at a time when interest rates were extremely low — at least significantly lower than the wealth tax to be paid. This changed dramatically with the changed interest rate policy of the Fed and ECB; these circumvention models have become economically pointless.

I would therefore rather assume that abolishing the wealth tax would not bring a massive boost in sales. Rather, it would reduce the purchase reluctance of potential luxury property buyers and tend to maintain sales levels.

Of course, this would only make sense if the solidarity tax in Madrid were also abolished. However, after the new elections, this is no longer to be expected at all, because the conservative camp, due to the poor performance of the far-right party VOX, would only manage a shaky minority government. And would certainly not throw itself into this topic, which is also not particularly popular.

There are clearly different opinions and predictions regarding the future of the wealth tax in Mallorca. While some argue that the benefits from a property market upswing could justify abolition, others believe it is unlikely that Madrid would agree to such a change or that the local government would gain sufficient support for it.

My Forecast

In my opinion, the discussion about abolishing the wealth tax is a flash in the pan, an attempt to keep property buyers "on the hook". I see absolutely no scenarios in which an abolition would effectively take place, as this would mean that both the regional government and Madrid would have to reach a unified decision... I believe that simply nothing will happen until the Supreme Court hopefully determines that the solidarity tax is inadmissible for whatever of the many possible legal reasons.