Deductibility of Expenses under Spanish Non-Resident Income Tax (IRNR) for Non-EU Residents: Towards the End of an Outdated Tax Rule

Deductibility of Expenses under Spanish Non-Resident Income Tax (IRNR) for Non-EU Residents: Towards the End of an Outdated Tax Rule

Author : Manuel Pérez

Contributors: Daniel González, Susana Lozano, Marc Urgell

The Spanish National Court’s judgment of 28 July 2025 (SAN 3630/2025) introduces a significant change in the taxation of non-resident taxpayers in Spain.

The ruling recognises the right of a taxpayer resident in the United States to deduct expenses associated with the rental of a property located in Spain, despite not being resident in either the European Union or the European Economic Area.

This decision challenges the traditional interpretation of Article 24.6 of the Spanish Non-Resident Income Tax Act (IRNR) and reinforces the direct application of the free movement of capital principle established under Article 63 of the Treaty on the Functioning of the European Union.

The Previous Tax Regime

Until now, non-resident taxpayers without a permanent establishment in Spain, particularly those resident outside the EU and EEA, were taxed on their gross income obtained in Spain.

Unlike EU residents, they were not entitled to deduct expenses related to generating such income, including:

• Maintenance expenses.

• Property management costs.

• Financing interest.

• Depreciation expenses.

This difference in treatment stemmed from Article 24 of the IRNR Act, which limited expense deductions to taxpayers resident in EU or EEA countries with effective tax information exchange agreements.

The Case Before the National Court

The case concerned a taxpayer resident in the United States who requested the amendment of several Non-Resident Income Tax returns (Form 210) relating to rental income generated from a property located in Barcelona.

The Spanish Tax Authorities and subsequently the Central Economic-Administrative Court (TEAC) rejected the request based on the literal wording of Article 24.6 of the IRNR Act.

However, the National Court fully upheld the taxpayer’s claim and recognised her right to deduct expenses directly linked to the generation of rental income.

Free Movement of Capital as the Legal Basis

The Court’s reasoning is primarily based on Article 63 of the Treaty on the Functioning of the European Union.

According to the Court, the free movement of capital applies not only between EU Member States but also to transactions involving third countries.

As a result, non-EU taxpayers cannot be subject to a less favourable tax treatment unless there are objective and proportionate reasons justifying such a distinction.

The Influence of European Case Law

The judgment follows a well-established line of case law developed by the Court of Justice of the European Union.

Particularly relevant is the Miljoen case (C-127/12), together with subsequent decisions rejecting discriminatory tax treatment based solely on the taxpayer’s country of residence.

The Spanish Supreme Court has also relied on this doctrine in areas such as inheritance and gift taxation.

The Spain–United States Double Tax Treaty

The National Court also highlighted the relevance of the Double Taxation Treaty between Spain and the United States.

The treaty provides sufficient mechanisms for tax cooperation and includes specific non-discrimination provisions.

Consequently, residence outside the European Union cannot, by itself, justify denying the right to deduct expenses connected with Spanish-source income.

Practical Consequences for Taxpayers

The judgment creates an important opportunity for taxpayers resident outside the European Union.

Both individuals and companies may consider:

• Requesting amendments to previously filed IRNR returns.

• Claiming refunds of overpaid taxes.

• Applying deductible expenses related to Spanish-source rental income.

These actions remain subject to the applicable statute of limitations.

Impact on International Real Estate Investment

The National Court’s interpretation may increase the attractiveness of Spanish real estate investments for investors resident in jurisdictions such as the United States, the United Kingdom, Switzerland and Latin America.

Allowing the deduction of expenses reduces the effective tax burden and contributes to equal treatment between EU and non-EU investors.

Conclusion

SAN 3630/2025 represents a significant step towards a tax system more closely aligned with the principles of non-discrimination, proportionality and neutrality.

The ruling challenges the current structure of Article 24 of the IRNR Act and may encourage future legislative reform extending expense deductions to all non-resident taxpayers regardless of their country of residence.