Taxation in Spain of rental income from real estate for residents in Mexico

The Directorate General of Taxes (DGT) has clarified the tax treatment applicable to owners residing in Mexico who receive income derived from the leasing of real estate located in Spain. This scenario raises questions regarding the taxing powers of both States and the mechanism to avoid double taxation.

What the DGT has resolved

The inquiry focuses on determining which regulations apply when a tax resident in Mexico obtains income from the rental of real estate located in Spain. After analyzing the Convention between Spain and Mexico, the DGT has established the following:

• Taxing power: In accordance with Article 6 of the Convention between Spain and Mexico, income from real estate situated in a State may be taxed in that same State.
• Tax rate: As these are rental earnings in Spanish territory, the Recast Text of the Non-Resident Income Tax Law (TRLIRNR) applies.
• Tax base: Earnings must be taxed on their gross amount at a tax rate of 24%.

What it means for you

If you are a tax resident in Mexico and own properties in Spain that you rent out, you should know that Spain has the right to tax that income. The applicable tax is Non-Resident Income Tax (IRNR). The fact that the owner resides abroad does not exempt them from fulfilling tax obligations in the country where the real estate asset is located. However, to prevent the same income from being taxed excessively in both countries, the Convention establishes that Mexico will be responsible for eliminating double taxation, in accordance with the provisions of its Article 24.2.

What should be done

It is essential to correctly verify the tax residency status in Mexico to properly apply the Convention and avoid undue withholdings or errors in the tax return. The correct application of the TRLIRNR and knowledge of double taxation elimination mechanisms are key elements for managing these assets. It is recommended to assess each particular situation to ensure that the tax treatment complies with current regulations and applicable international treaties.