One of the main tax news for 2007, refers to the entities so-called, until the 31st December 2006, "Sociedades Patrimoniales / "Property Investment Companies". This type of companies has caused a great confusion as it was not very clear which expenses were deductible and which were not.

It was also a shelter for those who, in order to avoid that their properties were registered under the name of individuals, decided on establishing this type of company, or simply because they wished so.

Basically, these companies are owners of some properties, properties used by the partners as their own homes or as investment - for leasing. Let’s think, for example in companies owning villas, which are enjoyed by the partners or leased for one year – a contract is signed in this case- or just for holiday periods for tourists (many of these companies are family businesses where the partners are spouses and children).

TAXES FOR PROPERTY INVESTMENT COMPANIES BEFORE 31.12.2006

Some of the most relevant aspects were that these companies had to pay 40% from their ordinary profits earned during the fiscal year (1st January until 31st December).

For profits earned from property sales they shall pay 15%, when the property sold had been registered under the company’s name for longer than 1 year.

Partners, once this tax was paid, were entitled to take gains without paying any other tax.

SETTLEMENT PERIOD

Since the 1st January 2007 this type of companies will no longer exist.

A period will be opened (from 1^st January until 30^th June 2007) so property investment companies which were, until 31.12.2006, of such nature, can be dissolved and liquidated and become registered under individual names. This process will be tax free for partners during this period, which means that the property will become registered under individual’s name without having to pay any tax.

One of the requisites is that the company has been a property investment company during 2005 and 2006. If these companies are not dissolved during such period, they will become ordinary companies.

Once these companies are dissolved, the properties will be registered under partner’s names depending on their respective shares. If the property is already registered under an individual name and it is sold, 18% will be paid from the profits obtained, a higher percentage than the former 15% which was paid until 31.12.2006

TAXES FOR ALL COMPANIES FROM THE 1ST JANUARY 2007

Property investment companies will no longer exist from the 1st January 2007, and they will have the following fiscal characteristics:

1. From ordinary profits earned during the fiscal year (normally from the 1st January until the 31st December) companies will pay 25 %. Therefore, for property investment companies this tax has been reduces, as these used to pay 40%

2. Resident individual partners will not pay for the first 1,500 euros of dividends if these are share out, but over this amount, a rate of 18% will be applied. An exemption is also introduced for individuals residing in other EU member states or in countries participating in the exchange of information between tax authorities of Member states. Dividends received by non-resident partners will be tax free for the first 1,000 euros. However, the company is required to withhold taxes from dividends although tax refund can be applied for in cases where a document proving the residence for fiscal purposes in an EU country or in a country participating in the information exchange treaty between tax authorities is provided.

3. Loans to be granted to the companies by partners will be valued at their market prices. It is very usual that the company receives certain amounts from partners because it has not enough money to face purchases and expenses. A loan is then granted by the partner to the company. Every year, the company will have to declare the interests (at their market price) paid to partners and these partners will be required to declare such interests in their income tax return. This will be a surprise for them, as they will have to pay taxes for the interest received from the company.

It seems advisable to analyse each company in order to find out whether it is a good idea to dissolve it or to continue with the general regime established for all kinds of companies.

Thus, it is recommended to weigh up the pros and cons of continuing as a company or dissolving the company and register the properties under individual partner’s names. It is also advisable that you consult your accountant on this subject to avoid future surprises.