The “Framework for the Automatic Exchange of Readily Available Information on Immovable Property” (IPI MCAA) is intended to enable tax administrations to automatically exchange information on immovable property held across borders – including ownership, transactions and ongoing income.

Both Germany and Spain have recently declared their intention to directly implement this framework (Collective engagement to exchange readily available information on immovable property). For taxpayers who own property in both countries, this will have far-reaching consequences, particularly in conjunction with Spain’s existing reporting obligations for assets held abroad (Modelo 720).

Real Estate as the Last Major Transparency Gap

Germany and Spain have been closely involved in international tax transparency initiatives for many years. Through the Common Reporting Standard (CRS), both countries automatically receive information on foreign financial accounts held by their tax residents, supplemented by new rules relating to crypto-assets. You may also wish to read our articles International Tax Assessment and Offshore Companies.

Until now, however, real estate assets have largely remained outside any automatic exchange system. Although Germany and Spain already exchange information upon request and have a double taxation agreement in place, there has been no regular, structured flow of data regarding:

- foreign real estate,

- rental income,

- capital gains from disposals,

- beneficial owners behind corporate structures.

In German-Spanish real estate structures in particular, this has frequently resulted in practical difficulties between national reporting obligations (Modelo 720 – 721) and the actual ability of the tax authorities to verify the information provided.

Algorithms and Big Data

Increasingly “intelligent” algorithms are already fundamentally changing the traditional dynamics of tax audits. Algorithms and AI can operate continuously and without direct human error, but they require direct and automated access to reliable data. In Spain, data from smart electricity and water meters is already being analysed to determine whether an individual’s main residence (tax residence) is in Spain. Further information on whether you are considered tax resident in Spain can be found in our article “Tax Residence in Spain” or in our three-minute podcast on YouTube.

The new automatic exchange of information relating to real estate will make it possible to access existing electronically available property information automatically. Spanish tax authorities and their algorithms will therefore have direct access to information from German land registers, cadastral authorities, tax databases and beneficial ownership registers, allowing this information to be cross-checked with income tax returns, wealth tax returns and declarations of assets held abroad (Modelo 720 and 721) filed – or not filed – in Spain.

This is particularly relevant for Germany and Spain, as both countries have sophisticated registration systems. The information exchanged will include, in particular:

 - owners and beneficial owners,

 - the location, type and value of the property,

 - acquisition and disposal data,

 - ongoing income (e.g. rental income),

 - and, in many cases, information on taxes paid.

The exchange will take place annually and in a standardised format.

Spain: Modelo 720 as a Precursor – and a Future Benchmark for Tax Audits

Spain occupies a particular position internationally, as it has had a comprehensive and controversial obligation to report assets held abroad since 2012. Under Modelo 720, Spanish tax residents are required to report, among other things:

- real estate held abroad,

- foreign bank accounts,

- shareholdings and other assets.

The reporting obligation applies regardless of whether the assets generate ongoing income. Despite the reform of the penalty regime following rulings by the Court of Justice of the European Union, Modelo 720 remains a key control instrument of the Spanish tax authorities.

With the IPI MCAA, Spain will for the first time be able to systematically cross-check information reported under Modelo 720 against foreign administrative data – for example, information received from Germany.

In practice, however, this article of the Double Taxation Agreement is essentially limited to sections a) and b), as both legal systems, as analysed above in relation to Spanish law, refer directly to habitual residence and the 183-day period, thereby using the individual’s place of residence as an indication of the centre of vital interests. Sections c) and d) are generally applied only where an individual does not spend more than 183 days per year in either country.

In summary, tax residence is generally determined by spending more than 183 days per tax year in Germany or Spain, although in many cases the taxpayer bears the burden of proving otherwise due to the applicable presumption.

 

Significance for Residents Owning Property in Other Countries

Incomplete or incorrect information in Modelo 720 declarations will become significantly easier to identify through the exchange of information. Particularly affected are:

- older real estate investments,

- properties held through companies,

- cases in which rental income has been declared in Germany but the underlying assets have not been correctly reported in Spain.

Transparency will also increase considerably for German tax residents who own property in Spain. In future, Spain will automatically transmit information to Germany, where it can then be incorporated directly into the German taxation process.

Timeline and Implementation

The OECD expects the first automatic exchanges to take place from 2029. It should be noted that the exchange may also include information relevant to previous tax years, such as acquisition dates and rental income. As the limitation period in Spain is four years, data relating to current tax years could therefore also become available and subject to review. For taxpayers with German-Spanish real estate structures, this means that existing declarations, such as income tax returns and Modelo 720, may in future be reviewed on the basis of a considerably more comprehensive set of data.

We therefore recommend taking the following steps now:

- reviewing previously filed Modelo 720 declarations,

- reconciling declarations with the actual ownership and income situation,

- analysing corporate and holding structures,

- addressing any tax irregularities in good time before the exchange of information begins.

Conclusion

The IPI MCAA marks a turning point in the taxation of foreign real estate between Germany and Spain. In conjunction with Spain’s Modelo 720, it creates, for the first time, an almost comprehensive transparency system for real estate assets.

Information that previously depended largely on taxpayers’ own declarations will in future be verifiable through automatic cross-border data matching and processed automatically using algorithms. As a result, it will become increasingly unlikely that discrepancies remain undetected simply because of limited administrative resources.

Our law firm will be pleased to assist you in analysing your individual circumstances, handling the necessary administrative procedures on your behalf and preparing and filing the relevant tax returns. If you are interested or have specific questions on this subject, please feel free to contact us by email or telephone.

Author: 

Christoph Sander
Lawyer and Tax Advisor
CEO, Partner, Director
info@sspartners.es
Tel: (+34) 951 12 13 06
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