Spanish Tax Facts. The Expatriate Financial Guide to Spain

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1 The Expatriate Financial Guide to Spain Spanish Tax Facts Introduction Tax Year Assessment Basis Taxation in Spain occurs at a national level and at a regional ( Autonomous Community ) or municipal level. The Spanish taxation system was subject to a significant review in 2007 that resulted in the introduction of a new Personal Income Tax Act. The tax regime in Spain is controlled by the Ministry of the Treasury. 1 January to 31 December. Spanish residents are taxed on their worldwide income (earned and unearned), capital gains from all sources and on their worldwide assets. Spain operates a self-assessment regime. All Spanish residents owning overseas assets worth over 50,000 (including life assurance policies) must report these assets on Form 720: Declaration of Assets Abroad by the end of the first quarter of each year. This requirement was first introduced in respect of the 2012 tax year. For personal income tax purposes, married couples may choose to file tax returns jointly or separately. Income Tax Spanish residents are subject to Spanish Personal Income Tax ( IRPF ). Individuals and couples benefit from personal allowances which reduce their liability to tax and which increase in line with the number of dependent children. The taxation of income falls into two categories: the general base and the savings base of income. The general base includes salary and other benefits from employment, income from economic activities, and property rental income (either actual or deemed). Such income is reduced by applicable deductions and allowances. It is subject to a progressive scale which is applied to successive portions of taxable income with rates ranging from 24.75% to 52%, the latter applying to a new tax bracket introduced for higher income earners as an austerity measure, for income over 300,000*(2014). The savings base is subject to a 21% withholding tax rate on savings income up to 6000, 25% on the next 18,000 and 27% on savings income above 24000, including interest, dividends, and capital gains/losses paid to residents in Spain, together with life and disability insurance proceeds paid to Spanish residents by a Spanish entity (or an EU insurer operating on a Freedom of Services passport into Spain) where any investment element is limited to Spanish tax compliant funds. These rates apply to income obtained in the 2013 and 2014 tax years. *Some Autonomous Communities have implemented different top rates of income tax with local surcharges added by regions such as Andalucia and Cataluna Taxation of Investment Income Any investment income received will form part of the taxpayer s income tax calculation and any withholding tax deducted will be held as a credit against the final calculation of income tax due. Spanish insurers and EU insurers with a Spanish branch or operating on a Freedom of Services passport in Spain are required to withhold 21% tax on gains on payments from tax compliant insurance policies held by Spanish residents. Foreign insurance policies will be subject to income tax, and can offset losses, on an annual basis. Generally an annual exemption limited to 1,500 is granted to resident individuals in respect of all dividends. Premium Taxes Tax on Property Rental Income Life insurance in Spain is exempt from premium taxes. Property income (provided it is not used for economic activity) is taxed as general base income. The amounts received are the gross income and may be reduced by deducting all expenses necessary to service and repair the property. These can include interest on loans used to acquire the property, depreciation expenses of up to 3% of the purchase price or its cadastral value, excluding the value of the land. There are further reductions that can be made where the property is destined to become the individual s personal residence.

2 Wealth Taxes Wealth tax (Impuesto Sobre el Patrimonio) was reinstated in Spain for tax years 2011 and 2012 as part of Spain s austerity measures by repealing the 100% wealth tax allowance that had been available since This was intended to be a temporary measure but has subsequently been extended to cover both 2013 and The wealth tax is based on the individual s net assets held at 31 December each year, with the rate of wealth tax ranging from 0.2% to 2.5%. The minimum tax exemption amount has been increased to 700,000 so anyone with net assets above this figure will pay wealth tax. The highest marginal rate of 2.5% applies to taxable net worth (after the 700,000 reduction) in excess of 10.7 million. Residents are subject to the wealth tax on their worldwide assets, however the tax exemption amount for a taxpayer s main residence was also increased to 300,000 from the previous limit of approximately 150,253. Non-residents only pay wealth tax on the assets located in Spain and the tax exempt amount of 700,000 still applies. Responsibility for collecting wealth tax has been transferred to each individual Autonomous Community with the authority to apply the change the percentage wealth tax rates and apply the tax as they think appropriate. Capital Gains Tax Capital gains are included in the savings base. There are some capital gains exemptions e.g. the sale of the primary residence of the taxpayer is granted full or partial rollover relief, as are the capital gains for the sale of qualifying collective investments. Capital gains from investment funds are subject to a withholding tax of 21% on savings income up to 6000, 25% on the next 18,000 and 27% on savings income above 24000, unless rollover relief applies. These rates apply to the tax years 2013 and Collective investments from jurisdictions included in the list of tax havens issued by the Spanish tax authorities are deemed to have a minimum net capital gain of 15% of the acquisition value unless otherwise proven. Inheritance and Gift Tax Inheritance and Gift Tax (IGT) is payable by the recipient of the assets at rates of between 7.65% and 34% (2014). Residents are taxed on their worldwide assets and non-residents are only taxed on the assets and/or rights located in Spain. The amount of tax paid depends upon the value of assets received. Tax rates are subject to a further multiplication factor (ranging from 0.5 to 2.4) based on the relationship of the recipient to the donor or deceased, and the existing wealth of the recipient, with the effective maximum rate potentially reaching 81.%. Different tax rates apply in each Autonomous Community. Various reductions to the tax base on inheritance apply and are dependent on the relationship between the recipient and the deceased, and the age of the recipient. For example, where a recipient is a dependent child over the age of 13 but under 21 the taxable base is reduced by 15, and a further 3, for each year under 21 up to a maximum reduction of 47,858. No reduction is available for more distant relatives or unrelated parties. Additional reductions in each Autonomous Community may apply. The Law also provides reductions to the taxable base for life insurance depending on where the policyholder dies, the inheritance of the habitual dwelling of the deceased and the inheritance and gift of assets and shares of a family business. Although IGT is controlled by each Autonomous Community, there has been a general trend towards full or almost full exemption in recent years for Spanish resident taxpayers making transfers to descendents and spouses. These improvements may be extended to non-residents under pressure from the EU. Regional and Municipal Taxes Property Taxes Stamp Duty/Transfer Tax Sales Tax Social Security Contributions Inheritance and gift tax, capital and property transfer tax, as well as a proportion of income tax, are raised by the Autonomous Community/Region in which the taxpayer is resident. An annual real estate tax is payable to the local municipality. The tax is based upon a percentage of the cadastral value of the property. The value is adjusted every 8 years. The rate varies from 1%-2%. Municipalities may, within certain limits, increase or decrease these rates. If there is a change in land title, a municipal tax ( land appreciation tax or Plus Valia ) is raised based upon the increase in value of the land since it was last sold. The rate is set by the Municipality and varies depending upon the cadastral value and the length of time since the preceding transfer. The general rate of Stamp Duty/Transfer Tax is 0.5% rising to 1% in some autonomous regions and can reach up to 6% for property transactions. It is paid by the purchaser or the beneficiary of the transaction. No Stamp Duty applies if the transaction is subject to VAT. Sales tax (IVA) of 21% is generally added to the sale price of goods. Some items are exempt from sales tax or are taxable at a reduced rate. New build properties capable of being used as dwelling are subject to a sales tax of 10%, which is charged in place of a transfer tax. A temporary cut in this sales tax to 4% was introduced in mid-2011 to stimulate Spain's property market. An employee is liable to pay social security contributions as a percentage of earnings. The rate is generally 6.35%, but contributions are capped at 2,610 for the year Compulsory social security contributions made are deductible from taxable income.

3 Taxation of Expatriates Living in Spain Expatriates living in Spain will be classified as either resident or non-resident. An individual is considered resident if: They spend more than 183 days in Spanish territory in a calendar year (sporadic absences are considered days of presence in Spain unless the individual can prove his/her tax residence status in another country) or, Their business or economic interests are directly or indirectly located within Spanish territory or, Their spouse and/or dependent children are tax resident in a Spanish territory (unless the individual is separated from their family, or can prove tax residence elsewhere) In Spain there is no concept of a part tax-year. An individual will be considered to be resident or non-resident for the whole tax year according to the above rules and taxed accordingly. Income tax is raised in two parts: the majority is raised by the central government, with a smaller percentage being raised at a regional level by the Autonomous Community in which the individual is living. The Autonomous Communities also control inheritance/gift tax rates. If the Autonomous Community does not establish its own tax scales then a default tax scale is applied. Income generated from employment for services rendered in a foreign country is tax exempt up to a limit of 60,100 (2013), provided that the work is performed for a company or entity non-resident in Spain, or for a permanent establishment located in a foreign country and provided that a tax similar to the Spanish Personal Income Tax is applied in the territory where the work is performed. In addition, the territory must not be considered a tax haven by the Spanish tax authorities. At present, the UK Dependent Territories of the Channel Islands and the Isle of Man, as well as Bahrain, Hong Kong and Singapore, are all included on a blacklist of tax havens maintained by the Spanish Tax Authorities. International assignees moving to Spain, may, if certain conditions are met, choose to be taxed under the special taxation regime for expatriates described below. Taxation of Non-Residents Living in Spain From 1 January 2004 individuals who acquire tax residence in Spain as a result of their transfer to Spain may opt to pay Non- Resident Income Tax in the tax period in which the change of residence takes place and for the following five tax years when the following conditions are met: The taxpayer cannot be considered tax resident in Spain in the 10 years prior to their assignment to Spain. Their transfer to Spain results from an employment contract. The individual needs to have a local contract with a Spanish company. In case of a group of companies, an employee can maintain a home country employment contract and be seconded to work for a Spanish entity. The work is effectively carried out in Spain. The work must be performed physically in Spain. This requirement will not be met if the employee works out of Spain and the income related to the duties performed out of Spain exceeds 15% of their annual employment income. In case of employees who work for other foreign entities of the group, the above percentage will be 30%. The work is for a company or entity resident in Spain, or for a permanent establishment located in Spain of an entity not resident in a Spanish territory. The earned income derived from the employment contract is not exempt from Non-Resident Income Tax. As from 1 January 2010, the expected remuneration of the employee does not have to exceed the annual amount of 600,000 in each of the tax years in which this regime will apply Expatriates living in Spain who choose to be taxed under the Non-Resident Income Tax regime are taxed only on income and gains obtained or generated in a Spanish territory, compared to worldwide income and gains for residents. Non-residents may only file individual tax returns, unlike residents who may file joint returns in respect of a married couple. The tax rates applicable to non-residents were amended with effect from 1 January 2007 in line with those applicable to residents. For the 2013 and 2014 tax years non-resident taxpayers will be generally taxed at the rate of 24.75% on income obtained in Spain or which arises from Spanish sources, and at the rate of 21% on capital gains and investment income arising from Spanish sources. A non-resident does not normally benefit from tax free allowances/deductions but expenses can be deducted which relate directly to the generation of the taxable income for residents of other EU member states. However, certain exemptions may apply to non-residents, in particular residents of other EU countries are not normally subject to Spanish tax on Spanish sourced interest income, or capital gains realised on the sale of certain personal property. Property rental income, after the deduction of certain expenses, forms part of taxable income and is taxed at 24.75%. Property which is not used for rental or economic activity and is not the taxpayer s permanent residence will be taxed at 24.75% on a deemed income basis of 2% of the cadastral value (equivalent to a rateable value in the UK). For capital gains arising from the transfer of real property from non-residents, the purchaser is required to withhold 3% of the agreed consideration which is paid to the Spanish authorities on account against the seller s potential liability to capital gains tax. In addition, dividends and interest are paid to non-residents net of withholding tax. Dividends paid to non-residents are exempt up to 1,500 pa, but withholding tax applies and a refund must be requested. The amount of the tax withheld will depend on the terms of any double taxation treaty with the payee s country of residence. Spain has negotiated over 50 double taxation treaties. Inheritance tax applies to non-residents only in receipt of assets and/or rights located in Spain, but many IGT exemptions are not applicable to non-residents. This position may alter following the issue of a reasoned opinion by the European Commission requesting that Spain makes available the same exemptions to both Spanish residents and non-residents.

4 Expatriate Financial Planning The approach to an expatriate s financial planning will be determined by whether the individual becomes resident in Spain or can qualify as a non-resident for tax purposes. While, as a whole, the Spanish tax regime for non-residents is less onerous than the regime for residents, with only Spanish sourced income and gains being subject to tax, an expatriate should take care over the number of days spent in Spain during any tax year, although under certain conditions some individuals can elect to be taxed as Non-Residents even if they become Resident in Spain. If you are an expatriate currently living in Spain, you should review your finances with a suitably qualified financial adviser who is either authorised directly by the Spanish regulator or is based in another EU market and recognised by the Spanish regulator following prior notification by the adviser under the Insurance Mediation Directive. If you are planning a move to Spain, you should review your finances with a suitably qualified and experienced financial adviser and/or tax adviser who is familiar with Spanish tax matters before making the move.

5 Expatriate Financial Planning - Offshore Bond Benefits Whilst the specific benefits of offshore life products will depend upon an individual s circumstances, they do offer a number of potential benefits to expatriates in Spain. Tax-efficient Investments Non-Spanish Situs Assets Your independent financial adviser can help you ensure that you maximise the financial benefits of your expatriate status and help you to assess if offshore life products are right for your individual circumstances. Further information about offshore life products and their use in financial planning can be found on AILO s website at This document has been prepared on behalf of the members of the Association of International Life Offices ( AILO ) and relies on information and technical analysis provided by third party professionally qualified tax advisers. Whilst AILO has used its best endeavours in selecting its advisers to ensure the accuracy of the information contained in this document, AILO cannot be held responsible for any errors and omissions. This document has been prepared for general information purposes only. The information contained in this document is a summary of the law relating to taxation that is generally applicable in Spain and is intended for guidance only. The information contained in this document reflects the law as at February Tax legislation is complex and subject to frequent change. This document cannot be relied upon as a specific analysis of the current law as it applies to each individual. Individuals should seek detailed tax advice from a suitably qualified and regulated professional adviser in their country of origin as well as eventual residence before making any decision in relation to their tax planning. The information contained in this document does not and is not intended to amount to investment advice and anyone reading it should consult their professional adviser before making an investment into any investment product of a type mentioned in this document. February 2014 Investments in a tax compliant offshore life product grow virtually free of tax throughout the time the product is held, suffering only a small amount of irrecoverable withholding tax on investment funds located in certain countries Whilst the tax treatment of tax compliant offshore bonds and mutual funds is on a level footing in Spain, expatriates who become tax resident may wish to consider offshore investments to manage their tax liability and/or control when tax charges are made. For instance, benefits can potentially be deferred to a period that may be more advantageous from a taxation perspective A tax compliant offshore bond provides a particularly effective way of housing and switching multiple collective investments in a tax efficient manner without triggering annual tax liabilities Expatriates who are non-resident in Spain for tax purposes may be advised to use offshore investments, including offshore life products, rather than domestic Spanish investments, to keep their assets outside of Spain to avoid creating Spanish-sourced investment income and to avoid future inheritance tax liabilities Estate Planning With Spanish residents liable to inheritance tax on their worldwide assets, tax resident expatriates may also wish to consider estate planning options, such as an offshore bond held in an appropriate trust or foundation. Spain does not recognise trusts therefore care must be exercised over the use of trusts, although trusts may still be effective for UK domiciled individuals looking to mitigate UK inheritance tax. An alternative option which may be effective is to use nominations to non-spanish resident beneficiaries Investment Choice Designed for Expatriates Offshore bonds generally feature a wide range of offshore funds specifically tailored to fit with expatriate clients preferences and attitude to risk. They also offer access to international and specialist fund managers which may not be available in domestic fund and insurance markets Spanish residents need to ensure that their investment choices conform to Spanish tax rules from the outset of their offshore bond to ensure its tax efficiency (summarised as: a) only internal life company funds (such as with-profits); or b) UCITS compliant funds or internal life company funds (including cash funds) which meet specific regulatory requirements, e.g. diversification and dispersion of investment rules, and which are named in the policy terms and conditions Most companies offering offshore life products are subsidiaries of global financial services companies specialising in dealing with expatriates on a multi-lingual, multi-currency basis Offshore products can offer significant benefits over and above what might be available in the Spanish domestic market, particularly in relation to product features and investment choice An offshore product has the flexibility to adapt to changes in your individual circumstances, including changes in your residency status The offshore life companies comply with Spanish domestic regulations and are regulated in first class home jurisdictions which benefit from strong regulatory controls Expatriates resident in Spain investing in an offshore bond will generally find it beneficial to obtain a tax compliant policy issued by an EU life insurance company with a Spanish branch or operating under EU Freedom of Services rules rather than a foreign policy. A foreign policy is a non-tax compliant policy issued by an EU insurer or a policy issued by a life insurance company which is located in a third country. A foreign policy will be subject to Spanish income tax on an annual basis. Expatriates resident in Spain taking out an offshore bond while outside Spain, for example in the UK before becoming an expatriate or on a subsequent visit to the UK), are not restricted to the bonds of EU-based life companies. Such bonds, for example from an Isle of Man or Guernsey life company, can be held while resident in Spain. However, as such bonds are regarded as foreign policies, Spanish income tax is payable on an annual basis whilst the policyholder is Spanish tax resident.