The current Spanish government, constituting a coalition of the left, has taken a high-tax approach to the affluent. Spanish tax residents are taxed on a worldwide basis. The marginal income tax rates for regular and investment income and gains are set at around 50% (depending on the region of residence) and 30%, respectively (a 2% increase from the investment income rate applicable in 2024).

An individual’s exposure to Spanish personal taxes depends on their tax residence status, as determined by Spanish domestic law and the provisions of any relevant double tax treaty. Tax residence tests under Spanish law consider the following:

• presence in Spain;
• Existence of direct or indirect economic ties to Spain; and/or
• close family ties to Spain.

Tie-breaker tests under double tax treaties largely adopt the OECD model.

Individuals who are tax resident in Spain in any given calendar year are generally taxed on a worldwide basis with respect to income, wealth, inheritance and gifts. Individuals who are not tax resident in Spain in any given calendar year are taxed on a Spanish situs/source basis.

Given the large number of foreign individuals with second homes in Spain and a stable presence in the country, tax residence is consistently among the areas targeted by Spanish tax inspections. The Spanish tax administration is actively using big data, AI, and automatic exchange of information resources, often resulting in large-scale tax assessments and lengthy court cases – including ones involving criminal charges for tax fraud.

Settlors – as well as grantors or beneficiaries of trusts or foundations – declaring themselves non-tax resident in Spain but spending time in the country (even if for less than 183 days per year), or who have a substantial Spanish asset base or relevant direct or indirect activities, are “tax nomads”. They can declare themselves as tax resident in certain favourable jurisdictions, including under the Common Reporting Standard (CRS) or Foreign Account Tax Compliance Act (FATCA), but it is strongly recommended that they examine their tax residence status.

In this context, non-compliant taxpayers, those who are the vested beneficiary of a trust and those who fail to disclose their interests in their Spanish returns are strongly encouraged to consider filing remedial returns to avoid potential Spanish tax fraud charges, which can be criminal in nature.

Potentially qualifying individuals relocating to Spain usually follow the Spanish impatriation tax regime. This six-year regime is available to employees and directors of Spanish companies. Qualifying individuals can limit their Spanish personal income tax liability to Spanish source income and gains, plus any worldwide employment/entrepreneurial income. Spanish wealth and solidarity taxes are limited to net Spanish situs assets, and there is no obligation to file Form 720 (informative tax return).

Under current provisions, the impatriation tax regime is extended to remote workers, certain entrepreneurs and highly skilled professionals. Individuals appointed as directors of Spanish companies carrying on a trade or business may now qualify for the regime even if they are full owners of these companies, albeit with certain strict requirements. Spouses and children under 25 years of age may now also benefit from the regime as part of a family group, subject to a number of requirements and limits.

As a further incentive, the Madrid regional income tax regulations provide for substantial personal income tax reductions for new impatriates in Madrid, albeit with the requirement for certain passive portfolio investments (not necessarily connected to Madrid or Spain). The practical effect of these provisions in the best case scenario is that the marginal rate of income tax on regular income is capped at 24.5%.

However, the impatriation regime has become one of the main targets for review by the Spanish tax inspectors. The Spanish tax authorities often probe overall arrangements, the reality and substance of the underlying business, and the roles of directors. Failure to qualify for the regime necessitates personal taxation on a worldwide basis; assessments are substantial and are increasingly resulting in criminal charges for tax fraud. However, the aggressive inspection practices have led to increasing public and legal scrutiny of Spanish tax audit policies – the outcome of which remains to be seen. Currently, taxpayers are strongly advised to review their arrangements for legitimacy vis-a-vis current inspection practices.

Wealth tax continues to apply in 2025. Under general rules, the marginal rate remains at 3.5% for individuals with a net asset value in excess of EUR10.7 million (with a EUR700,000 tax-free allowance). This tax applies to all Spanish regions, albeit that it may be reduced significantly with planning.

The solidarity tax, introduced in 2022, continues to apply to Spanish tax residents with taxable net worth in excess of EUR3.7 million. This tax coexists with the existing regional wealth tax, which is paid in the region of tax residence and is creditable against the national solidarity tax. The interaction between these taxes is complex, so careful planning is required for an efficient overall strategy.

Potential strategies with regard to wealth and solidarity tax include maximising the application of existing capping rules, taking advantage of business property relief and shifting wealth via intergenerational gifts.

Regarding the taxation of Spanish situs real estate having non-Spanish tax resident ultimate beneficial owners, foreign wrappers remain taxable for Spanish wealth and solidarity tax purposes. Shares in private foreign entities owning Spanish real estate having a direct or indirect value of 50% or more of the total asset base are deemed Spanish situs, and are thus liable for tax (thereby bringing non-Spanish assets into the structure).

Potential tax planning strategies include broadening the asset base of the foreign entity to reduce the overall value of the Spanish assets in the structure and certain debt restructuring actions.

As for inheritance and gift tax, regional benefits for spousal and close-family-member transfers continue to apply to both EU and non-EU estates and gifts. However, in the mid-term, these may be substantially curtailed with the reintroduction of full inheritance and gift tax – potentially at rates in the region of 34%.

In this scenario, taxpayers with interests in or ties to Spain are strongly advised to perform a review of inheritance and gift tax and make use of current exemptions. Tax planning possibilities include the transfer of asset ownership, retaining the legal right of use while shifting a significant portion of the family’s wealth to the next generation.

Planning for the allocation and management of rights post-transfer is of critical importance, and international private clients should review their Spanish personal tax situation in view of the current areas of concern for the tax authorities.

Javier Estella Lana
Patricia García Mediero
Gabriel Pérez de Cárdenas

Partners
Avantia Asesoramiento Fiscal y Legal

La entrada SPAIN: An Introduction se publicó primero en Avantia.

La entrada Avantia Asesoramiento Fiscal y Legal, one of the leading Firms in the inaugural edition of Chambers & Partners High Net Worth, specialist guide on wealth planning and private clients. se publicó primero en Avantia.

Following the 2023 regional and national election cycle, with the coalition of the left continuing to run the national government, the approach of high taxes for the affluent is expected to persist during the current parliamentary term. Potential attempts to counteract at national level any regional policies reducing personal taxes by the opposing conservative parties (holding office at most regional parliaments) may also be expected.

In terms of the basics of Spanish personal tax for 2024, Spanish tax resident individuals remain taxed on a worldwide basis. The marginal income tax rate for regular and investment income and gains is set at around 50% (depending on the region of residence) and 28% respectively.

An individual’s exposure to Spanish personal taxes depends on their tax residence status, as determined by the Spanish domestic law and the provisions of any relevant Double Tax Treaty. Tax residence tests under Spanish law consider (i) presence in Spain, (ii) economic ties to Spain and/or (iii) close family ties to Spain. Tie break tests under Double Tax Treaties largely adopt the OECD model.

Individuals who are tax resident in Spain in any given calendar year will generally be taxed on a worldwide basis for income, wealth and inheritance and gift tax purposes. Individuals who are non-tax resident in Spain in any given calendar year will only be taxable on a Spanish situs/source basis.

Given the large number of foreign individuals with second homes in Spain and a stable presence in the country, tax residence has been specifically highlighted as one of the target areas in the Spanish Public Tax Compliance Control Plan for 2024; the Spanish tax inspection is actively using Big Data and Automatic Exchange of Information resources in its investigations, which often result in large tax assessment and lengthy court cases – including under tax fraud charges.

Individuals, including settlors, grantors or beneficiaries of trusts or foundations, declaring themselves non-tax resident in Spain but spending time in the country, even for less than 183 days, or having a substantial Spanish asset base or activities (directly or indirectly), are “tax nomads”, declare themselves as tax resident in certain favourable jurisdictions or have been reported as tax resident under CRS, FATCA or other, are strongly recommended to examine their tax residence status.

In this context, non-compliant taxpayers or those applying untenable technical positions (either as regards their tax residence status or in other situations – eg, vested beneficiaries of trusts who fail to disclose their interests in their Spanish returns) are strongly encouraged to consider filing remedial returns to avoid potential Spanish tax fraud charges.

Qualifying individuals relocating to Spain are at present benefiting from the improvements in the Spanish Special Impatriation Regime of 2023. A material upsurge in relocations to Spain under this regime is taking place in 2024 following the termination of the long-standing personal tax regimes for those non-domiciled in the UK and Portugal. This is a six-year regime available to employees or directors of a Spanish company. Qualifying individuals limit their Spanish personal income tax liability to Spanish source income and gains, plus employment/entrepreneurial income worldwide. Spanish wealth tax and solidarity tax is limited to net Spanish situs assets and there is no obligation to file 720 Information returns.

Under current provisions, availability of the regime is extended to remote workers, certain entrepreneurs and highly skilled professionals. Individuals appointed as directors of Spanish companies carrying on a trade or business may now qualify for the regime even if they are full owners of these companies. Spouses and children under 25 may now also benefit from the regime as part of a family group, subject to a number of requirements and limits.

As a further incentive, the Madrid regional income tax regulations are expected to be amended shortly to introduce substantial personal income tax reductions to new “impatriates”, essentially requiring certain passive portfolio investments (not necessarily geographically connected to Madrid or Spain). The practical effect of these provisions on a best-case scenario would be to cap the marginal rate of income tax on regular income to 24.5%.

Wealth tax continued to apply in 2023. Under general rules, the marginal rate continued at 3.5% for individuals with a net asset value in excess of EUR10.7 million (with a EUR700,000 tax-free allowance). This tax is fully transferred to the Spanish regions, so situations vary significantly. Exposure to this tax may be reduced significantly with tax planning.

On 29 December 2022, a national Solidarity Tax was enacted into law. This is a national tax which the Spanish regions cannot reduce or abate and applies to both Spanish tax resident and non-tax resident individuals. In practice, this tax applies to Spanish tax resident individuals with taxable net worth in excess of EUR3.7 million. This tax co-exists with the existing regional Wealth Tax – Wealth Tax paid in the region of tax residence is creditable against the national Solidarity Tax. The interaction between both taxes is complex, particularly following amendments to regional Wealth Tax legislation by a number of regions (notably Madrid and Andalucia) in order to avoid losing tax collections to the Spanish central government, so careful planning is required for an efficient overall strategy.

Potential tax planning mechanisms as regards Wealth Tax and Solidarity Tax include income limitation strategies to maximise the application of existing capping rules, the application of Business Property relief as well as shifting wealth via intergenerational gifts.

As regards taxation of Spanish situs real estate with non-Spanish tax resident ultimate beneficial owners, foreign wrappers of Spanish situs properties continue to be taxable for Spanish Wealth Tax/Solidarity Tax purposes. Shares in private foreign entities with Spanish real estate with a direct or indirect value amounting to 50% or more of their total asset base are deemed Spanish situs and brought into the tax (therefore including any non-Spanish asset in the structure).

Potential tax planning strategies include broadening the asset base of the foreign entity to dilute the overall value of Spanish assets in the structure or certain debt restructuring actions.

As for inheritance and gift tax, regional benefits on spousal and close family free transfers continue to apply to cross-border estates and gifts, both EU and non-EU. In the mid-term, these may be substantially curtailed, reintroducing a full inheritance and gift tax, potentially with rates which might be in the region of 34%.

In this scenario, taxpayers with interests in, or ties to, Spain are strongly advised to perform an inheritance and gift tax review to make use of current exemptions which may potentially be phased out or curtailed. Tax planning possibilities include free transfers of bare ownership of assets, retaining a legal right of use, shifting a significant portion of the family’s wealth to the next generation. Planning for the best legal way to allocate and manage rights post-transfer is of critical importance.

International private clients should therefore undertake a review of their Spanish personal tax situation in view of the current areas of concern and potential personal tax planning strategies and consider shifting wealth over to the next generation in an orderly, flexible and overall tax effective manner.

Javier Estella Lana
Patricia García Mediero
Gabriel Pérez de Cárdenas

Partners
Avantia Asesoramiento Fiscal y Legal

La entrada SPAIN: An Introduction se publicó primero en Avantia.

La entrada Public Events since 2023 se publicó primero en Avantia.

The tax rate will be 0% for the first 3 million Euros, 1.7% for taxable net worth between 3 and 5.3 million Euros, 2.1% for taxable net worth between 5.3 and 10.7 million Euros and 3.5% for taxable net worth in excess of 10.7 million Euros.

Valuation rules and the general structure of the tax will be identical to the current Wealth Tax.  Therefore, Business Property Relief will apply under the same conditions as at present – this however does not provide a total tax exemption on business assets, as it only applies to net assets used for the purposes of trade or business.

There will also be capping rules, limiting the total High Net Worth Tax, Wealth Tax and Income Tax payable to 60% of the total taxable income for income tax purposes – with a minimum High Net Worth/Wealth Tax payable of 20% of the gross High Net Worth tax in any event.

Existing exemptions under Wealth Tax will remain of application, including a principal private residence exemption for the first 300,000 Euros of taxable value and a de minimis amount of 700,000 Euros (which do not apply to non Spanish tax residents).  Therefore, in general, a Spanish tax resident individual will be exposed to the new High Net Worth Tax if his/her taxable net worth exceeds 4 million Euros.

This new federal tax will coexist with the existing Wealth Tax levied by the Spanish regions.  Any Wealth tax paid in the region of tax residence will be fully creditable against the new High Net Worth Tax.  Therefore the new tax will be particularly relevant to taxpayers who reside in regions which currently operate a wealth tax exemption (Madrid and Andalucia) or reduction (Galicia).  Taxpayers in other regions with a taxable net worth in excess of approximately 15 million Euros will also be affected by the new tax, as its 3.5% marginal rate exceeds the current marginal rate in a number of regions (2.75% in Catalonia, 3.00% in Asturias, 3.03% in Cantabria, 2.5% in Galicia, 3% in Murcia and 3.45 in the Balearics); these taxpayers will pay Wealth Tax in their region of residence and High Net Worth Tax to the Spanish federal authorities on the balance up to the marginal rate of the new tax.

The new High Net Worth Tax will apply to taxpayers under the Special Impatriation Regime (generally known as “Beckham rules”), as well as non Spanish tax resident individuals, on Spanish situs net worth in excess of 3 million Euros.  This tax will be collected and audited by the Spanish federal authorities. Non-residents holding the majority of their assets in Madrid or Andalucia will be the most affected by the new tax, as they are currently exempt under present Wealth Tax regulations.

Spanish tax resident taxpayers who may be contemplating a transfer of tax residence outside Spain should note that this is a complex process with substantial tax implications, which must take into account, among other factors, remaining links and investments in Spain, the new jurisdiction of tax residence and the application of exit tax provisions in Spain.  In practice, transfers of tax residence abroad will very likely be exposed to a detailed Spanish personal tax audit, now even more likely with the introduction of this new tax, so this is a situation that requires detailed prior Spanish tax planning.

As regards potential tax planning and tax minimisation alternatives, in general, one of the most tax efficient strategies is limiting the obtention of taxable income for income tax purposes in order to maximise the application of the capping rules, with a view to limiting the new tax to 20% of the gross tax payable.

It will also be essential to consider the possibility to apply, maintain and meet the requirements to apply Business Property Relief, a complex but highly efficient alternative, as well as increasing the number and value of qualifying assets, a matter that requires detailed analysis.

Prima facie, this new tax is covered by the Double Tax Treaties signed by Spain which include wealth taxes, which allows for some tax planning in certain cases.

Another potential tax planning strategy would involve gifting assets which would otherwise be subject to the new tax to descendants, under adequate and efficient legal provisions and administration clauses.  There are several regions in Spain with near Inheritance and Gift tax exemptions on close family transfers, allowing for individual gifts of 3.7 million Euros to descendants which would subsequently be free from High Net Worth Tax under its de minimis provisions.

Other potential avenues would include the gift of bare ownership over certain assets, with the donor retaining a lifetime usufruct (right of use) right, so that the new High Net Worth Tax would be split between the bare owner (with a de minimis amount of 3.7 million Euros) and the usufructuarian.  This would have the added benefit, of great importance in this high-tax environment, of granting protection over potential future changes in the Spanish Inheritance and Gift tax legislation repealing in practice the current close family exemptions, under the same mechanism as is now being put in practice in respect of Wealth Tax.

If you wish to discuss in further detail or address individual situations, please do not hesitate to contact us.

La entrada The new temporary solidarity High Net Worth Tax: outlook and potential tax planning alternatives se publicó primero en Avantia.

The impact of the aftermath of the pandemic, paired with the current cost of living crisis in a context of high inflation and escalating energy costs, will be shaping the economic policy actions of the Spanish government until the end of the current parliamentary term, expected in Autumn 2023. The injections of both domestic and EU public funds into the Spanish economy in an attempt to ease off part of their adverse effects will in all likelihood continue to have substantial implications in terms of domestic tax policies. Taxes, including personal taxes (which were already raised in 2021), are likely to either remain in their higher-end level or even increase in the medium term.

In terms of the basics of Spanish personal tax for 2022, Spanish tax resident individuals remain taxed on a worldwide basis. The marginal income tax rate for regular and investment income and gains continues to be around 50% (depending on the region of residence) and 26% respectively.

An individual’s exposure to Spanish personal taxes depends on their tax residence status, as determined by the Spanish domestic law and the provisions of any relevant Double Tax Treaty. Tax residence tests under Spanish law consider (i) presence in Spain, (ii) direct or indirect economic ties to Spain and/or (iii) close family ties to Spain. Tie break tests under Double Tax Treaties largely adopt the OECD model.

Individuals who are tax resident in Spain in any given calendar year will generally be taxed on a worldwide basis for income, wealth and inheritance and gift tax purposes. Individuals who are non tax resident in Spain in any given calendar year will only be taxable on a Spanish situs/source basis.

Given the large number of foreign individuals with second homes in Spain and a stable presence in this country, tax residence is one of the main target areas of the Spanish tax inspection, now actively using Big Data and Automatic Exchange of Information resources to pinpoint specific individuals and situations. These investigations often result in large tax assessment and lengthy court cases – sometimes under tax fraud charges – and are based on an increasingly aggressive interpretation of the Spanish and Treaty provisions regarding an individual’s tax residence situation.

Individuals, including settlors, grantors or beneficiaries of trusts or foundations, who declare themselves as non-tax resident in Spain but spend time in this country, even below 183 days, or have a substantial Spanish asset base or activities (directly or indirectly), or have been reported as tax resident under CRS, FATCA or other, are strongly recommended to examine their tax residence status, particularly if they are “tax nomads”, claim tax residence in low-tax jurisdictions or are applying beneficial personal tax regimes in their jurisdiction of tax residence.

Taxpayers with passive investments abroad may fall under the punitive Spanish CFC provisions for income tax purposes. This may have a special impact on individuals with US, Canadian, Dutch, Luxembourg or other similar holding structures. Spain also has exit tax provisions in the form of a taxable gain deemed arising on 31 December of the last year of Spanish tax residence. This may however be postponed in a number of situations and there are special provisions for transfers of tax residence within the EU.

Spanish tax resident individuals holding an interest in non-Spanish assets must continue to file Form 720 Information returns. However, the most burdensome aspects of its penalty regime have been abolished following the sentence of the European Court of Justice against Spain of 27 January 2022 (Case 2019/C432/35). The ordinary four-year statute of limitations provisions have also been reinstated as a result of this sentence – which had in practice been abolished and turned limitless by the original Form 720 legislation. This in practice eases Voluntary Disclosure procedures, as taxpayers are no longer facing legal uncertainties with extremely burdensome economic consequences caused by Form 720 provisions.

Taking this into account, as well as the material reduction in surcharges introduced in 2021, uncompliant taxpayers or those applying untenable technical positions (e.g. vested beneficiaries of trusts who fail to disclose their interests in their Spanish returns) are strongly encouraged to consider filing remedial returns to avoid potential Spanish tax fraud charges.

Individuals relocating to Spain may still opt to apply the Special Impatriation regime in 2022. This is a six-year regime available to employees or directors of a Spanish company (with less than a 25% shareholding). Qualifying individuals limit their Spanish personal income tax liability to Spanish source income and gains, plus employment income worldwide. Spanish wealth tax is limited to net Spanish situs assets and there is no obligation to file 720 Information returns. However, at present no protection is provided from Spanish inheritance and gift tax and it does not extend to spouses and/or dependant children.

There is however draft legislation, still under Parliamentary debate, aimed at improving the regime, including favouring the relocation to Spain of “digital nomads” (entrepreneurs in digital businesses and remote workers) and extending the benefits to qualifying spouses and children.

One of the focus areas of the Spanish tax inspection is the review of “sham” Special Impatriations, generally questioning the reality of employment arrangements, resulting in large tax assessments and even tax fraud charges. We strongly encourage individuals applying this regime to review their specific basis of application by reference to current inspection practices.

Wealth tax continues to apply in 2022. Under general rules, the marginal rate continues to stay at 3.5% for individuals with a net asset value in excess of EUR10.7 million (with a EUR700,000 tax free allowance). This tax is fully transferred to the Spanish regions (from 2021, non-residents may also apply regional regulations), so situations vary significantly, with Madrid applying a full exemption. Exposure to this tax may be reduced significantly with efficient tax planning.

As regards developments on taxation of real estate, the Spanish Administrative Valuation is now generally speaking the minimum taxable value of real estate for Spanish tax purposes (determined by the Spanish administration by reference to Spanish public deeds of sale). This is increasingly giving rise to significant tax increases on transfers of real estate affecting both resident and non-residents, so intergenerational gifts or sales will now require particularly careful planning.

As for inheritance and gift tax, regional benefits on spousal and close family free transfers continue to be of application to cross-border estates and gifts, both EU and non-EU, by application of a complex set of rules. Mid-term, these may be substantially curtailed, reintroducing a full inheritance and gift tax, potentially with rates which might be in the region of 28% to 32%. Increases in inheritance and gift tax (resulting from streamlining actions across regions) are now backed by the White Paper on Tax Reform, made public in March 2022 and largely expected to be the basis of any future tax policies by the current government.

In this scenario, taxpayers with interests or ties to Spain are strongly advised to perform an Inheritance and Gift Tax review to make use of current exemptions which may be phased out or curtailed during the current Parliamentary term. Tax planning possibilities include free transfers of bare ownership of assets, retaining a legal right of use, shifting a significant portion of the family’s wealth to the next generation. Planning for the best legal way to allocate and manage rights post-transfer is of critical importance.

International private clients should therefore undertake a review of their Spanish personal tax situation in view of the high-tax landscape ahead. Taxpayers should make use of the current (but somewhat diminishing) tax favourable environment in most Spanish regions in order to shift wealth over to the next generation in an orderly, flexible and overall tax effective manner.

Javier Estella Lana
Patricia García Mediero
Gabriel Pérez de Cárdenas

Partners
Avantia Asesoramiento Fiscal y Legal

La entrada SPAIN: An Introduction to Private Wealth Law 2022 se publicó primero en Avantia.

Patricia García Mediero, speaker at the webinar ‘Wealth Taxes – The Future of Taxation in a Post-COVID World’, Thought leadership webinar 2, STEP Global Congress.

La entrada STEP Webinar Video: Wealth Taxes – The Future of Taxation in a Post-COVID World – 23 October 2020 se publicó primero en Avantia.

La entrada US-UK Tax Planning COVID-19 Webinar Video se publicó primero en Avantia.

In terms of the current basics of Spanish personal tax for 2020, resident individuals remain taxed on a worldwide basis. At present, the general marginal income tax rate for regular and investment income for 2019 is set at 45% and 23% respectively. Potential developments include an increase in marginal rates to around 50% and 27% for regular and investment income, respectively.

Individuals holding financial interests in non-Spanish assets must continue to file Form 720 Information Returns. In an important development, the European Commission has taken action against Spain before the European Court of Justice on potential discriminatory elements in the legislation governing 720 returns (Case 2019/C432/35). This case is in its preliminary stages and therefore no court resolution is expected shortly.

In terms of corporation tax, the general tax rate remains at 25% for 2020. The legislation excludes from tax, under participation exemption rules, most dividends and capital gains derived by any Spanish tax resident corporation. Potential likely developments include a curtailment of the current participation exemption regime, totally or partially. Taxpayers affected by these potential developments are strongly recommended to consider this issue and obtain advice on short-term tax planning alternatives.

In terms of impatriation planning alternatives, the Special Impatriation regime continues to apply to certain individual impatriations in 2020. Qualifying individuals (employees or company directors/members of the board of a Spanish company with no or less than a 25% shareholding) limit their Spanish personal income tax liability to Spanish source income and gains, plus employment income worldwide. Spanish wealth tax is limited to net Spanish situs assets and there is no obligation to file 720 Information Returns. However, no protection is provided against Spanish inheritance and gift tax. The regime applies for the first six years of tax residence.

A growing number of individuals applying this Special Impatriation regime are being subject to Spanish tax audits. Consequently, international private wealth clients currently applying the Special Impatriation regime are strongly advised to perform an urgent analysis of their eligibility to their regime with a view to determining their potential exposure to Spanish personal tax assessments and even potential Spanish tax fraud charges under current inspection practices.

Wealth tax continues to apply in 2020. Under general rules, the marginal rate remains at 2.5% for individuals with a net asset value in excess of EUR10.7 million (with a EUR700,000 tax-free allowance). This tax is fully transferred to the Spanish regions, so situations vary significantly, with Madrid applying a full exemption.

This situation is however highly likely to change in the short to medium term, before 31 December 2020. Barring a completely new tax on wealth, potential developments include a full reintroduction of the tax in all Spanish regions, including Madrid, amendments in provisions resulting in a significant increase in asset valuations, and provisions bringing to the tax certain foreign unit-link insurance wrappers.

As for inheritance and gift tax, regional benefits on spousal and close family free transfers may be applied to cross-border estates and gifts, both EU and non-EU, by application of a complex set of rules.

Again, there is a strong probability that these tax benefits will be substantially curtailed in the short term, likely before 31 December 2020, reintroducing a full inheritance and gift tax with rates which could be in the region of 28% to 32%.

Consequently, taxpayers with interests or ties to Spain are strongly advised to perform a specific full inheritance and gift tax review, including planning for a full implementation before 31 October 2020.

Tax planning possibilities include free transfers of bare ownership; as an example, the free transfer of bare ownership (legal title) of a property located in Marbella by an ascendant to his/her descendants, retaining a usufruct (right of use) during his/her lifetime, would at present enable the transfer of this property virtually free of Spanish inheritance and gift tax, without losing the exclusive right of use of the property.

For Spanish tax resident taxpayers, short-term planning possibilities include free transfers of bare ownership of shares (even in non-Spanish entities) from ascendants to descendants, shifting a significant portion of the family’s wealth over to the next generation. Regulating the legal and mercantile aspects of political rights over shares would be of critical importance for a successful generational transition.

These tax planning possibilities require a careful global analysis from a tax perspective, including analysing the capital gains implications and the municipal taxes involved.

The Spanish tax authorities continue to be particularly active in tax enforcement and tax audit activities, following the creation of the Central Unit for Private Wealth, which is now fully operational and acting upon information obtained from national and international information exchanges. Individuals affected include settlors and vested beneficiaries or have any other reportable connection to a trust or foundation.

Tax residence has been identified by the Spanish tax authorities as one of the key focus areas of Spanish personal tax audits. These tax inspections usually end in substantial tax assessments, leading to lengthy court procedures and, in certain cases, criminal prosecutions under tax fraud charges.

The likelihood of a Spanish tax audit on individuals (including settlors and beneficiaries of trusts and foundations) who declare themselves as non-tax resident but are in practice spending a substantial amount of time in Spain, or have a substantial Spanish asset base or activities, or have been reported as resident under CRS or have failed to make a full disclosure of their foreign interests in their Spanish returns, is currently very high. A full analysis of their Spanish tax situation is therefore of critical importance.

Individuals who are not tax compliant or have applied questionable technical criteria in their Spanish tax returns should consider entering into a voluntary disclosure procedure.

Taxes concerned on voluntary disclosures include income tax (with marginal rates under general rules ranging from 45% to 46% on regular income and 23% to 23.5% on investment income and gains), wealth tax (with rates generally ranging from 0.2% to 2.5%, with tax exemption for Madrid residents at present), inheritance and gift tax where applicable, and Foreign Asset Information returns (Form 720).

Full voluntary disclosures enable uncompliant taxpayers to avoid potential Spanish tax fraud charges. They also entail a substantial reduction in penalties.

International private wealth clients are therefore recommended to undertake an urgent review of their Spanish overall personal tax situation, bearing in mind the very likely increase in taxes in the short to medium term before 31 December 2020. Clients are strongly encouraged to make use of the current tax favourable environment in most Spanish regions in order to shift wealth over to the next generation in an orderly, flexible and Spanish tax effective manner.

Javier Estella Lana
Patricia García Mediero
Gabriel Pérez de Cárdenas

Partners
Avantia Asesoramiento Fiscal y Legal

La entrada SPANISH INTERNATIONAL PRIVATE WEALTH PLANNING IN 2020/2021: SUBSTANTIAL SPANISH PERSONAL TAX INCREASES AHEAD, POST-COVID se publicó primero en Avantia.

• Provisions to defer certain tax debts to certain taxpayers (including individuals) for up to € 30,000 and for a period of up to six months (no interest on overdue tax would be levied during the first three months), for Spanish tax returns with a deadline for submission between 13 March and 30 May 2020.  This deferment requires a prior specific request by the taxpayer.
• With some minor exceptions, provisions to suspend all deadlines for legal and administrative proceedings of a non-tax nature for the duration of the State of Emergency.
• Provisions not to compute time elapsed during the duration of the State of Emergency for the purposes of calculating the date of application of the statute of limitations.
• Provisions to defer until 30 April 2020 the obligation to settle due and payable tax debts as at 18 March 2020 (including deferred tax debts and foreclosures by reason of tax debts) arising from assessments previously raised by the Spanish tax administration (eg by reason of a tax audit, pending surcharges, penalties etc).
• Provisions to defer until 30 April 2020 the obligation by taxpayers to respond to queries raised by the tax administration outstanding as at 18 March 2020.  Taxpayers nevertheless have the option to submit responses during the deferment period.
• Provisions to defer until 20 May 2020 the obligation to settle due and payable tax debts arising from assessments raised by the Spanish tax administration (eg by reason of a tax audit, surcharges, penalties etc) after 18 March 2020.
• Provisions to defer until 20 May 2020 the obligation by taxpayers to respond to queries or the submission of first appeals against assessments raised by the tax administration received after 18 March 2020 (or later if by application of standard procedures).
• At present, these deferment and suspension provisions do not apply to deadlines for submission of personal tax returns.  Therefore:
• Foreign Asset Information Returns (Form 720) are still due to be submitted on or before 31 March 2020.
• Income Tax and Wealth Tax returns will need to be submitted on or before 30 June 2020.
• Gift Tax returns must be submitted within 30 working days from the date of the gift.
• Inheritance Tax returns must be submitted within six months from the date of demise (with specific deferment provisions for an additional six month period). Requests for extensions must still be filed before the end of the fifth month after the demise.
• In addition, there are several other regional and municipal extraordinary provisions dealing with the impact of COVID-19 on certain regional and municipal taxes.

The situation is nevertheless fluid, so further provisions adding, modifying or extending the above, including introducing further revised deadlines, are likely to be enacted in the short term.

Javier Estella Lana

Patricia García Mediero

Gabriel Pérez de Cárdenas

Socios-Directores

La entrada COVID-19: The current Spanish tax legislation at a glance se publicó primero en Avantia.