7 drawbacks of a Spain residence permit by investment

In order to obtain a temporary Spain residence permit by investment, the investor has to buy real estate or securities, launch a business, or open a deposit account in a Spanish bank.

Spain golden vsa has the highest entry threshold for investors. The minimum investment amount is €500,000, compared to just €250,000 in Portugal and Greece. A permanent residence permit in Malta can be obtained for an investment of €150,000.

Individual cost calculation of the residence permit in Spain

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All investments under the Spain residence permit program are non-refundable until the investor is granted a Spain permanent residence permit. If you sell your property, securities, or business, or close your deposit account any earlier, your residence permit will be canceled.

Only those investors who live in Spain for more than five years are able to recover most of their initial investment and remain permanent residents. If the investor does not move to Spain, they will not be able to recover their initial investment and maintain the validity of their Spain residence permit.

When applying, the investor needs to confirm that they are solvent, have a valid medical insurance policy, and rent or own residential property in Spain. When making a decision, the employees at the migration service check that the applicant is law-abiding, the degree of their integration into Spanish society, and the timely payment of their tax obligations for each year that they have lived in the country.

In Portugal and Malta, the requirements are more favourable for investors: in order to obtain permanent residence in these countries, investors are not required to move there. They need to spend just 7 days a year in Portugal in order to obtain permanent residence or citizenship after 5 years.

In Malta, applicants do not have to obtain a residence permit and wait several years for permission to apply for permanent residence. Here you can get permanent residence by investment directly, and it is not necessary to live in the country either before or after receiving it.

The more favourable terms for the investor for getting permanent residence include the easier ways for the initial investment to be returned to the investor. The Maltese government requires investors to maintain ownership of their property for the first five years after obtaining permanent residence, after which the investment property can be sold. In Portugal, just as in Spain, in order to recover the initial investment, the investor needs to obtain permanent residence or citizenship; however, in Portugal this can be done without moving to the country.

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In order to apply for Spain citizenship, you need to be a permanent residence permit holder; pass exams on your (i) knowledge of Spanish at level A2 or higher and (ii) Spain’s cultural life and the laws in force there; and continuously live in the country for at least 10 years as a resident of Spain.

You can apply for citizenship 7 years after obtaining a residence permit in Greece; and after 5 years, in Portugal and Malta. Note that the relevant exams must be taken in each country. However, Malta and Portugal have set more lenient requirements in their residence permit by investment programs.

If an investor becomes a Spanish citizen, in most cases they have to renounce citizenship of their country of origin, as Spain does not recognize a second citizenship with most countries. To learn more read our material Dual and second citizenship: what’s the difference between them.

If the Spanish authorities discover that the investor has not renounced citizenship of their country of origin within the prescribed period, their Spanish passport can be withdrawn and annulled. Moreover, an investor can be blacklisted and banned for life from entering the country or even the Schengen zone.

We have listed below the countries with which Spain has agreements allowing citizens of these countries to keep their original citizenship even after becoming Spanish citizens. They include countries in which Spanish is recognized as the official language or which were formerly Spanish colonies, as well as three European countries with which Spain shares common borders.

Portugal, Malta and Greece allow investors who have been granted citizenship to remain citizens of their country of origin. However, they will have to give up their original citizenship if that country does not not recognize a second citizenship. For example, citizens of Kazakhstan automatically lose their citizenship upon obtaining a passport from another country.

Usually an individual becomes a tax resident automatically when they spend more than 183 days a year in a country. In Spain, you may also become a tax resident under the following conditions:

• if the entire family of a foreigner lives in Spain;

• if a foreigner owns property in Spain.

Vladlena Baranova,

Lawyer, AML Compliance officer, certified CAMS specialist

If an investor obtains a Spain residence permit by investment in real estate and at the same time continues to live in their country of origin, they can be taxed on their global income twice: both in Spain and in their country of origin. Some of our clients have experienced this: they were obliged to pay taxes in Spain after the renewal of their residence permit. The decision of the Spanish tax service had to then be challenged in court.

Taxes when buying property. If an investor obtains a Spain residence permit by buying real estate, in addition to the minimum investment of €500,000, they also need to pay taxes.

For buying residential real estate in the primary market, the tax rate ranges from 7 to 12% of the transaction amount; and in the secondary market, from 6 to 10% of the cadastral value of the property. When buying commercial real estate, the tax can be as high as 25%.

Tax rates when buying investment property:

• 5% — in Malta,

• 6—8% — in Portugal,

• 6—12% — in Spain,

• 10% — in Greece.

Income tax for individuals. Tax residents of Spain pay income tax on a progressive scale varying from 19 to 47%. For non-residents, a flat rate of 24% applies.

New tax residents may be eligible for preferential tax treatment under the Beckham Law. The application of this law allows you not to pay tax on your global income. On income earned in Spain, tax is charged at the rate for non-residents, i.e., 24%. This concession is valid for 6 years.

Only residents who work in Spain based on an employment contract or are directors of Spanish companies in which their share does not exceed 25% can apply for the Beckham Law regime. Most investors do not meet these conditions.

In Portugal, investors can be offered a more favorable tax regime: the Non-Habitual Resident. The tax incentives are valid for 10 years, and the tax rate of 20% is lower. This regime can be applied not only to specialists who work in Portuguese companies but also to the self-employed, as well as managers and company executives. To learn more read our article "Beneficial tax status in Portugal: how to get the NHR and what is its benefit".

Inheritance tax. Official inheritance and gift tax rates in Spain range from 7.65 to 34%. However, these tax rates have to be multiplied by kinship coefficients. A coefficient ranging from 1 to 1.2 is applied to an inheritance made to children, a spouse or parents, which can increase the tax rate to 40,8%.

If the inheritance is maded to distant relatives, for example, a partner who was not officially married, the coefficient ranges from 2 to 2.4. In this case, for properties worth more than 4 million euros, such as villas on the ocean, the tax can reach 81,6%.

In neighboring Portugal, inheritance and gift tax is levied at a flat rate of 10%, and if the inheritance is received by close relatives, such as a spouse, children, parents or grandchildren, the tax is not charged at all. To learn more about taxes read our material "How to get an individual taxpayer number in Portugal".

When inheriting real estate in Spain valued at more than 4 million euros, the tax ranges from 40 to 81% of the cadastral value of the property

Due to the crisis caused by the coronavirus pandemic, the number of people in Europe who find themselves without work and housing is increasing. As a result, there has been a dramatic increase in the number of squatters moving into vacant premises.

The villas owned by investors in Spain who do not rent them out because they prefer to spend their holidays there and do not want tenants to live in them for the rest of the time are left vacant for most of the time and are in danger of being taken over by squatters.

Squatters can also be a threat to landlords. Tenants can simply stop paying rent, and they are just as difficult to evict as the squatters who move in without the landlord’s knowledge.

Residential building in Spain occupied by squatters. They use banners to declare their intention not to vacate someone else's property

In Spain, squatting is common partly due to the peculiarities of the local legislation. It is not possible to evict illegal tenants even with the help of the police: the police do not have the right to enter a property without the permission of the tenants, even if the real owner of the property presents them with all the necessary documents.

If the homeowner tries to break into their own property by force, they may even be prosecuted.

The tenants residing illegally in a property, or squatters, can only be evicted through a court order. Moreover, the Spanish court often supports the squatter rather than the owner by referring to the law that every human being has the right to housing.

Furthermore, Spanish real estate is not a profitable investment, not only because of squatting. The Spanish real estate market is saturated, with limited potential for profit. According to Eurostat, real estate prices in Spain rose by less than 1% in 2020. In comparison, the prices in Portugal increased by 5%, and in Greece, by 3%.

Real estate price growth in 2020:

• 1% — in Spain,

• 3% — in Greece,

• 5% — in Portugal.

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The cost of living in Spain is higher than in neighboring Portugal, but the level of safety and comfort for ordinary citizens is lower.

Prices for consumer goods in Spain are on average 12% higher than in Portugal; food prices are 17% higher; and rental prices are 3% higher.

The average bill in Spanish cafes is estimated to be 33% higher than in Portuguese cafes. At the same time, there is a tradition of eating fresh food in Portugal: locals almost never cook at home, and when buying an apartment they look for a cafe on the ground floor where the whole family can have breakfast and dinner.

Spain is ranked below Portugal in all rankings assessing the level of peacefulness and safety in countries. In addition to squatting, Spain also has high rates of theft and robbery.

Spain is a popular travel and relocation destination. The country is famous for its beaches, Mediterranean cuisine, comfortable climate and Gaudí architecture.

However, if you are thinking of applying to Spain only in order to obtain an EU residence permit and visa-free entry to the Schengen countries, we advise you to also consider all the shortcomings of a Spanish residence permit that are usually not mentioned.