Executive summary

On 28 July 2025, the Spanish National High Court ruled in favor of a United States (US) taxpayer regarding rental income the taxpayer received in connection with real estate property located in Barcelona.

The controversy centers on whether the taxable income the US individual received from Spanish real estate can be calculated by deducting expenses allowed under the rules for Spanish-resident taxpayers (Spanish Personal Income Tax).

Spanish tax rules already allow European Union (EU) and European Economic Area (EEA) taxpayers to deduct expenses as long as the taxpayer demonstrates that (1) the expenses are directly related to the income earned in Spain, and (2) there is a direct and inseparable economic link to the activities carried out in Spain. In the case of EEA taxpayers, this is only allowed when there is a tax information exchange agreement between Spain and the relevant EEA jurisdiction. However, the Spanish tax rules do not expressly allow non-EU/EEA taxpayers to deduct any expenses on rental income.

The taxpayer argued that this difference in treatment constituted a restriction on the free movement of capital, prohibited by Article 63 of the Treaty on the Functioning of the European Union (TFEU) and was not justifiable.

Decision

The Spanish National High Court judgment (SAN 3630/2025) upholds the taxpayer's position. The court's decision accepts that the Spanish tax rules governing the taxable base of nonresidents are not fully aligned with EU principles with respect of non-EU taxpayers, such as US taxpayers.

Since its initial drafting, the scope of the Spanish regulation has been expanded to include residents of the EU or EEA, as well as the possibility of deducting expenses for determining the taxable base, in accordance with various rulings from the Court of Justice of the European Union (CJEU) that have interpreted whether the legal framework of relevant EU Member States have complied with community freedoms. This extension has not been applied to residents of third countries, such as the United States, via Spanish tax rules, although it has been applied via other court cases.

The Spanish National High Court also notes that a tax information exchange agreement could be used as a tool to avoid the risk of double deduction of expenses.

The court's decision is not final, in that the State Attorney may appeal the case to the Spanish Supreme Court (within 30 working days following notification of the parties).

Implications

The impact of this judgment, along with its referred precursors, is significant and goes beyond the case analyzed by the National High Court.

Non-EU resident taxpayers who own and rent out Spanish real estate and have paid Spanish taxes on Spanish rental income on a gross basis (vs. net basis) will want to assess whether to file reclaims to request the refund of any excess taxes paid.

Though the judgment refers to rental income, it will be interesting to see whether the decision's conclusions may be also extended to taxes applied to other types of income (such as interest and royalties), also for non-EU corporations. This decision represents one more step by Spanish judicial courts toward invoking EU principles.