The new temporary solidarity High Net Worth Tax: outlook and potential tax planning alternatives
On Thursday 10 November the coalition parties of the Spanish government submitted before the Spanish Parliament draft legislation which, once enacted, will create a new Temporary Solidarity High Net Worth Tax in Spain. It will have the form of a new federal tax which the Spanish regions will not be able to reduce or abate and it will apply to both Spanish tax resident and non tax resident individuals. This new tax will be collected and audited by the Spanish federal tax authorities. Its first year of application will in all likelihood be 2022 (provided that the law is published in the Spanish Official Gazette before 31 December 2022). The intention is that this tax will have a duration of two years, but it may be extended further or applied indefinitely going forward.
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.