Private wealth structuring in Spain:
income, wealth, inheritance and gift tax highlights
Guadalupe Díaz-Súnico and Alexandre Ibañez
The Journal of International Tax, Trust and Corporate Planning nº 3/2014
Introduction
Over the last decade Spain has became an
relocating either to retire or to manage their
tax framework may not be as attractive to
tax residents if the relocation is not properly
attractive country for foreign wealthy individuals
businesses and wealth. Unfortunately, the current
wealthy foreign individuals who become Spanish
structured from a tax standpoint.
Individuals relocating to Spain should remember that the wealth and estate planning made
before transferring their residence to Spain might not be as efficient as it would have been in
their home countries. For example, the use of trusts or private foundations for wealth and
estate planning purposes appears inefficient, as these institutions are not recognised in the
Spanish legal system.
However, the Spanish tax system has created wealth and estate planning structures to protect
family businesses, and certain measures that allow the taxation of certain financial
investments to be optimised. Individuals relocating to Spain should then review their estate
planning structures in advance to align them with the Spanish tax framework.
The Spanish Government is expected to undertake an ambitious and extensive reform of the
Spanish tax framework that should be effective from 1 January 2015. This reform aims to
deeply affect the direct taxation of individuals and companies, residents and not residents in
Spain. The bill has been recently published in the Official Gazette and it is currently being
studied by the Parliament.
Regarding the taxation of individuals, according to the bill, the reform is expected to:
 Reduce personal income tax (PIT) rates, including those for savings income.
 Reduce non resident income tax (NRIT) rates, particularly for EU residents.
 Strengthen CFC rules for individuals.
 Propose new provisions on exit tax applicable to individuals.
Therefore, not only wealthy individuals coming to Spain, but also individuals that have already
set up estate planning structures, will have to review their tax position under the new
envisaged regulations.
Becoming a Spanish resident taxpayer
The first question that a foreigner relocating to Spain should analyse is whether relocation
means that the individual will be considered a Spanish tax resident and when this will happen.
Acquiring Spanish tax residence will lead to worldwide income being taxed under Spanish PIT
and worldwide assets being taxed under Spanish WT. PIT is applied throughout Spain.
Although the Basque Country and Navarre have their own tax regimes, these are very similar
to the PIT applied in the rest of Spain.
Under the Personal Income Tax Act (the PIT Act), individuals are considered to have their
habitual residence in Spain when:
•
they stay in Spain for more than 183 days in a calendar year; or
•
their main centre or base for business activities or interests is directly or indirectly
located in Spain.
Unless proven otherwise, taxpayers are considered to have their habitual residence in Spain
when, under the above criteria, their spouse (if they are not legally separated) and underage
dependent children habitually reside in Spain.
When dealing with countries or territories legally classified as tax havens, the tax authorities
may require individuals to prove that they have spent at least 183 days of the calendar year in
those jurisdictions. Spanish nationals that are tax residents in Spain and change their
residence to tax havens are considered Spanish tax residents during the year in which this
change occurs and for the following 4 years (the ‘tax quarantine’).
Tax haven jurisdictions are those black listed in the Royal Decree 1080/1991. For these
purposes, when a black listed jurisdiction enters into a tax treaty or an exchange of
information agreement, it is no longer considered as a tax haven once the tax treaty/exchange
of information agreement enters into force.
Income taxation
Taxation of resident versus non-resident taxpayers
Individuals become taxable in Spain when they become resident in Spain, or if they are not
resident in Spain, when they obtain income or capital gains from a Spanish source. Taxable
income includes all of the taxpayer’s earnings, capital gains and losses, and deemed income,
regardless of where it was obtained or the taxpayer’s place of residence.
The tax period coincides with the calendar year, with tax accruing on 31 December.
Individuals becoming Spanish tax residents in a given year will be subject to Spanish PIT on
their worldwide income for the entire taxable period (from 1 January to 31 December), even if
they arrived in Spain after 1 January in each tax period.
Individuals that are not tax residents in Spain (under Spanish law or Spanish tax treaties) will
be subject to non-residents’ income tax (NRIT) on their income and capital gains obtained in
Spain. If the individual is a resident of a country with which Spain has entered into a tax
treaty, this tax treaty will become the applicable norm. Spain has entered into 88 tax treaties
(and is currently negotiating a further 13) with other countries, most of which are based on
the Organisation for Economic Co-operation and Development (OECD) Income and Capital
Model, and it is constantly expanding its treaty network. Under these tax treaties, there are
reduced rates of withholding tax or exemptions for certain types of income, including
dividends, interest and royalties.
Personal income tax
Under the PIT Act, employment income includes all income, regardless of its name or nature,
earned directly or indirectly from personal work or employment, or any similar income not
considered business earnings. Employment income includes salaries, unemployment benefits
and salaries of directors and members of boards of directors.
A significant exemption of up to €60,100 of employment income earned for carrying out work
abroad is applicable to employees under certain circumstances. In contrast, employees coming
to Spain to work for a Spanish company may benefit from a flat tax rate of currently 24.75%
on Spanish source income, and no taxation on income or capital gains not obtained in Spain
(for inbound expatriates, or the ‘Beckham law’).
Income from immovable property includes all income derived from real estate, but mainly
rental income. Rental income that property owners receive (excluding VAT) must be included
in their taxable income, from which they can deduct any directly related expenses, as well as
the property amortisation, as long as it does not result in a negative taxable base. Tax on
income earned from renting residential property is generally currently reduced by 60%.
Taxpayers owning non-rented real estate that is not their primary residence must report
deemed rental income of 2% of the cadastral value (1.1% if the value was adjusted after 1
January 1994) annually.
Business income includes income received from entrepreneurial and professional activities,
and is generally calculated according to corporate tax rules. Rental income is considered
business income if the taxpayer has premises and at least one employee engaged exclusively
in managing the rental activity.
Capital gains not resulting from the sale of assets, such as prizes or indemnities, are
considered general income. This is also the default category of income, and for income
resulting from the controlled foreign corporation regime. General income is taxed by the
Spanish state (the state) and autonomous communities (ACs) under a progressive scale
currently ranging from 24.75%–52%. Some ACs have increased these rates, such as
Catalonia, where the maximum rate applicable is 56%.
Investment income includes any returns or consideration arising directly or indirectly from
capital assets, property or rights held by an individual, such as dividends, interest and
coupons. The deduction of expenses is generally disallowed, with some exceptions. Up to
€1,500 per year in dividends are generally exempt from tax, although the tax reform is
expected to eliminate this exemption.
Taxpayers receive capital gains from the sale of assets and rights (usually real estate, listed or
unlisted shares, stock and units in investment funds). The difference between the sale price
and the acquisition cost will be included in the recipient’s savings tax base. This rule also
applies to gifts, in which case taxpayers should consider the market value of the gifted asset
as the transfer value.
The state and ACs tax savings income. The scale is the same for all ACs, except Navarre and
the Basque Country. The 2014 rates scale ranges from 21%–27% (rate applicable to income
exceeding €24,000). For non-residents in Spain subject to NRIT, the current general tax rate
is 24.75%; for interest, specific capital gains and dividends, the applicable rate is 21%.
The tax reform aims to introduce new provisions on an exit tax applicable to individuals (i)
resident in Spain for ten of the last fifteen tax years, and (ii) holding shares or interests in any
type of collective investment institution or company, with a market value exceeding of certain
thresholds. In this case, the taxpayer would be taxed for any unrealized capital gain when
losing Spanish tax residence. This tax can be deferred or even left without effect in certain
cases established in the draft of regulation.
Wealth tax
WT is charged on an individual’s net wealth, and the taxable event is ownership of the net
wealth on the date of tax accrual (31 December). This tax applies to the worldwide property
and rights of residents in Spain and, in the case of non-residents, their wealth located in
Spain. The residence criterion is the same as that applied to PIT.
Several exemptions are applicable for qualifying family businesses, habitual abodes, a number
of art objects and antiques, and pension plans, although some ACs apply their own
regulations. There is a general exemption of €700,000 (which ACs can increase or reduce).
For non-residents in Spain, WT is levied on the net value of non-resident individuals’ assets
and rights located, or exercised, in Spain. Any debt taken on to finance the acquisition of
assets and rights located in Spain is deductible when calculating the tax base. There are
different rules to compute the value of the different categories of assets (such as real estate,
and listed or unlisted shares) for WT purposes. The state tax rate is progressive, ranging from
0.2%–2.5%. ACs can increase or reduce these tax rates. Some ACs, such as Madrid, have
applied a 100% relief to the WT quota, whereas Catalonia has increased the tax rate to a
maximum of 2.75%.
The PIT and WT due is limited to 60% of the total taxable income for the taxpayer’s income
tax purposes. If it exceeds that amount, the net WT liability may be reduced by the excess
amount. However, a minimum tax of 20% of the net WT liability must be paid. A number of
Spanish tax treaties include provisions on WT.
Inheritance and gift taxation
Inheritance taxation
Mortis causa transfers are subject to Spanish inheritance and gift tax (IGT). Because ACs have
legislative authority to apply their own tax rates and reductions to the taxable base, the tax
burden varies significantly between them. IGT taxpayers are either Spanish tax resident heirs
or non-tax resident heirs receiving assets located or rights exercised in Spain.
The Inheritance and Gift Tax Act (the IGT Act) and its regulations give a general tax
framework applicable to non-resident heirs and resident heirs, when the decedent is nonresident. When both the heir and the decedent are Spanish tax residents, the estate would be
taxed under the ACs relevant regulations. The regulations applicable would be those of the AC
where the decedent resided the longest in the 5 years before death.
IGT benefits in the case of transfers on death are relevant, and the final quota is almost nonexistent in many ACs, particularly when there is a close relationship between the deceased
and the heirs (descendents, ascendants and spouses – including unmarried couples).
Additionally, several reductions and rebates apply when inheriting qualifying family businesses
and the habitual abode.
Tax rates differ from one AC to the other. The default scale approved by the state ranges from
7.65%–34%. The tax quota obtained after applying the tax rate is multiplied by a coefficient
that depends on the relationship between donor and beneficiary, and the beneficiary’s preexisting wealth (from 1–2.4 in the state default regulations). As a result, the applicable rate
can reach 81.6%. Relevant tax benefits apply when gifts qualify as family businesses.
Taxation of gifts
From the donor’s perspective, gifts are treated as a transfer of assets at market value (capital
gains). If the donor is a Spanish tax resident, this capital gain will be subject to PIT,
regardless of where the goods are located. If the donor is not a Spanish resident, but the
goods are located or can be used in Spain, the capital gain will be subject to NRIT.
From the beneficiary’s perspective, gifts are subject to IGT on:
•
gifts received by Spanish tax resident beneficiaries, irrespective of the location of the
assets or rights received; and
•
gifts received by non-residents when the assets or rights received are located or can be
exercised in Spain, and on life insurance policies with a Spanish entity or with a nonSpanish entity operating in Spain.
As explained, since ACs have legislative authority to apply their own tax rates and reductions
to the taxable base, the tax burden varies significantly between them. In Catalonia, there are
special reduced tax rates ranging from 5%–9% for certain beneficiaries (spouses – including
unmarried couples, descendents, and ascendants).
When a real estate property (including shares in real estate companies) is gifted, the
applicable legislation is established by the AC where the property is located. In other cases,
the beneficiary’s residence determines the applicable law. Under anti-fraud provisions, the
laws of the AC where the beneficiary has lived longest during the 5 years before receiving the
gift should apply, to avoid forum shopping.
The ECJ has ruled against Spain in the judgement of September 3, 2014. In the opinion of the
ECJ Court, the Spanish legislation is in breach of the free movement of capitals because it
allows a different tax treatment for non-resident and resident tax-payers for IGT purposes.
The ECJ Judgment may trigger future changes in the Spanish IGT regulations.
Tax treatment of trusts
Spain has not ratified the Hague Convention on the Law Applicable to Trusts and on their
Recognition 1985, so Spanish legislation does not recognise trusts, and there is no difference
between formal and beneficial ownership. The Spanish tax authorities have disregarded trusts,
so the provisions of each trust deed must be analysed to ascertain its tax treatment. This
leads to substantial legal uncertainty when dealing with trusts for Spanish tax purposes.
Under Spanish law, trusts are generally considered a group of assets without legal personality.
Spanish tax legislation does not contain any provisions on the taxation of trusts or settlors,
beneficiaries or trustees. This has caused legal uncertainty when dealing with trusts for
Spanish tax purposes.
The only existing guidelines on the tax treatment of foreign trusts under Spanish law can be
found in the legal doctrine and a few tax rulings issued by the Spanish tax authorities. The
Spanish tax authorities’ position on trusts is to disregard their existence, recharacterising
transactions carried out through trusts as transactions made directly between the settlors and
beneficiaries, even where the trustees had discretionary powers to allocate or distribute the
trust’s assets to the beneficiaries.
The tax authorities have issued their opinion mainly on mortis causa transfers. Based on
existing tax rulings, (1) distributions made by trusts to beneficiaries on the settlor’s death will
be considered mortis causa transfers between the settlor and the beneficiaries, and (2)
Spanish-resident beneficiaries would be subject to IGT on the value of the assets received,
and the tax liability would be calculated under the rules established by the ACs or the state
default legislation, depending on where the settlor was resident when he died.
According to the Spanish tax authorities, the relationship between the settlor and beneficiaries
(relevant in applying lower IGT rates) should be considered. Non-resident beneficiaries in
Spain would be subject to IGT on the Spanish assets acquired or rights that can be exercised
in Spain. In the above rulings, the Spanish tax authorities established that Spanish residents
would be liable to pay IGT ‘when they receive the assets, that is, on the death of the
decedent, disregarding the incorporation of the trust for Spanish tax purposes’.
Tax measures for optimising private wealth taxation
As explained, when an individual becomes a Spanish tax resident, he may be liable for income,
wealth, and inheritance and gift taxes. However, all these taxes allow for certain measures
and incentives that may be applicable to minimise the tax burden derived from the ownership,
the income and the succession in the ownership of such wealth.
Family businesses
Spanish legislation provides a set of rules aimed at protecting family businesses, which would
be guaranteed through tax incentives relating to the donation or the mortis causa transfer of
stakes in family businesses. The taxation derived from family companies plays its role in WT
and IGT (donations and mortis causa transfers).
Under the Wealth Tax Act (the WT Act), there is a 95% exemption in the WT taxable base of
family businesses and participation in entities that meet the following criteria (family
companies):
(1)
The company is engaged in a business activity. The entity is considered not to carry out
a business activity (and will not benefit from the exemption) if, for more than 90 days in
the taxable period (a) the majority (more than 50%) of its assets are securities (less
than a 5% shareholding) or (b) the majority of its assets are not engaged in business
activities.
(2)
The individual must own at least 5% of the stake in the entity, individually, or 20%
together with the individual’s spouse, ascendants, descendents or collateral up to the
second grade.
(3)
A Spanish tax resident individual belonging to the family group described above must
carry out management activities in the company, and remuneration received for this
must be the source of more than 50% of the individual’s total business, professional or
dependant employment income.
If the above criteria are met, only 5% of the value of the ‘family company’ (calculated as
described above) would be taxed with WT.
In addition, under the IGT Act and the regulations, there are certain exemptions or tax
benefits related to the family companies benefiting from the 95% WT exemption. These
exemptions and tax benefits vary across the different ACs, but their aim is to minimise or
eliminate the taxation of the donation of family companies or their mortis causa transfer.
These exemptions and tax benefits would also apply to non-resident companies.
Therefore, it is advisable for foreign individuals relocating to Spain to make sure that their
stakes in family companies benefit from these requirements, in which case they would benefit
from the 95% WT exemption. Under certain conditions, the stake in the relevant family
company could be donated with no capital gains being taxed in the hands on the donor, under
the PIT Act. In this case, no IGT would be levied if the beneficiaries were non-Spanish tax
residents.
Long-term versus short-term capital gains
Under the PIT Act, savings income is taxed at progressive rates ranging from 21%–27%.
However, short-term capital gains (ie gains made from transfers of assets held for less than 1
year) are taxed as general income, at the progressive scale ranging from 24.75%–52%.
Wealthy individuals whose main source of income is from financial assets may plan the
composition of their portfolios, so they are able to minimise or defer their PIT and WT as
Spanish tax residents. From the PIT perspective, it would be more efficient to avoid short-term
capital gains, to qualify for a lower tax rate. In addition, as mentioned, the WT quota can be
limited in this way.
Under the WT Act, the PIT and WT due is limited to 60% of the total taxable income for the
taxpayer’s income tax purposes. For this purpose, the total taxable income does not include
long-term capital gains. Therefore, individuals earning income mainly from this type of gain
might be able to reduce substantially the WT due by the maximum allowed (ie up to 80%). In
other words, a minimum tax of 20% of the net WT liability must be paid.
Tax deferral of gains from qualifying stakes in collective investment institutions
Under the PIT Act, capital gains from collective investment institutions (CIIs) reinvested in
other CIIs may benefit from a tax deferral regime. This allows taxpayers not to pay PIT until
they sell the investment in the CIIs and cash it in. Thus, this measure allows taxpayers to
increase the value of their wealth through several reinvestments in CIIs with no taxation.
To benefit from this special regime, certain requirements must be met, such as the obligation
for the CIIs to be incorporated and domiciled in an EU Member State and registered with the
Spanish Stock Market Commission (Comisión Nacional del Mercado de Valores, CNMV), and to
be regulated by Directive 2009/65/EC (the UCITS Directive).1 The acquisition, sale and
reinvestment in those CIIs must be done through financial entities registered with the CNMV.
The Spanish tax authorities recently clarified that, for this purpose, the financial entities must
be domiciled in Spain.
Use of collective investment vehicles
An appealing alternative for certain wealthy individuals moving to Spain is the investment in
the financial markets through collective investment vehicles, such as, among others, the
Spanish SICAV or, even in foreign vehicles such as the Luxembourg SIF. These investment
vehicles require a minimum investment, a certain number of investors and are subject to
regulatory supervision and requirements. They are subject to very low taxation (ie SICAVs are
subject to 1% corporate tax in Spain, and SIFs are subject to 0.01% tax on its net equity in
Luxembourg), and, therefore, they can be suitable for a tax deferral estate planning scheme.
1
Directive 2009/65/EC of 13 July 2009 the European Union adopted Directive 2009/65/EC on the coordination
of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable
securities (UCITS) (2009) OJ L 302/32.
Conclusion
The Spanish tax framework provides for relevant measures aimed at private wealth protection
from which individuals relocating in Spain can also benefit, in some cases, even if keeping
their investments abroad.
Ownership of family companies would benefit from a WT exemption. The transfer of these
companies either mortis causa or through a donation would benefit, under certain conditions,
from certain tax incentives that would guarantee the continuity of the businesses, avoiding the
heirs or beneficiaries having to sell the assets received to pay the applicable IGT.
In addition, savings taxation may be optimised, planning investments appropriately, either by
avoiding short-term capital gains (which would allow lower PIT rates to apply and substantially
reduced WT), by investing in qualifying CIIs (which would allow for a deferral of the gains
reinvested), or investing through collective investment vehicles, such as the Spanish SICAV,
or even in foreign instruments, such as the Luxembourg SIF.
However, when relocating to Spain, it must be carefully assessed whether the wealth and
estate tax planning made before transferring their residence is as efficient as it would have
been in their home countries, mostly due to the lack of recognition of certain entities in the
Spanish legal system (trusts, private foundations, etc). Relocating to Spain should be almost
as enjoyable as its weather from a tax perspective if carried out properly.