Despite some late-hour belated backtracking on some of its most vicious features, the legislative provisions modifying the tax regime for UK non-domiciliaries are likely to come into force on April 6, 2008. Although the £ 30.000 charge will probably be considered as not too steep by many, as Marshal Langer has pointed out “the camel’s nose is now under the tent” and little prevents future governments from increasing it in coming Finance Bills, ditto for disclosure requirements imposed on non-domiciliaries. Therefore it is hardly surprising that many ‘non-doms’ are seeking alternative tax residences. Apart from well know location (Switzerland, The Caribbean, Malta, Andorra) there is a growing number of entrants in this field (Dubai, Honk Kong, Singapore). In this respect Spain may seen an unlikely challenger with its reputation as a high-tax jurisdiction but as we shall see it may well offer distintc advantages for may ‘non-residents’ specially those able to arrange their financial affairs in a flexible manner. In this article we will consider the following taxes:
inheritance and gift tax
and what tax mitigation and deferral strategies may legitimately be pursued to achieve an acceptable overall result.
2. GENERAL COMMENTS ON THE SPANISH TAX SYSTEM
Spanish tax residents are taxed on the worldwide income (including capital gains) under rules whose level of sophistication and complexity is similar to those found in countries like the Germany and France although still short of the UK and especially the US.Spain has introduced a wide array of anti-avoidance rules among which the most significant being CFC legislation, rules that attribute income to Spanish resident members or partners of unincorporated bodies (partnerships, collective companies, bare trusts) and special rules aimed at tax haven structures (such as the mark to market taxation of gains accumulated by tax heaven funds and investment vehicles. On the other hand it should be pointed out that CFC rules are tightly drafted (income from companies where the taxpayers, together with related personas does not have a > 50% stake is not taxed and income which ultimately derives from participation &Mac179;5% in active companies falls outside their scope) and what is more important they do not apply to EU resident entities (with the sole exception of Gibraltar and Luxembourg exempt companies). Also legislation provides for a number of very powerful tax deferral instruments such as SICAV’s (taxed at the 1% rate), investment funds (capital gains tax does not apply if the proceeds of a sale are immediately reinvested in another investment fund) and insurance unit linked products (tax is deferred until the policy is cashed).
3. INCOME TAX
Starting on Jan 1, 2007 Spain operates a ‘split’ tax system under which employment and business income are taxed at progressive rates ranging from 18% to 43% (for incomes exceeding € 52.360) whereas capital income (dividend, interest, rental income, most capital gains) is taxed at the flat 18% rate when collected by the taxpayer. As to foreign source income it is treated in the same way as domestic one, with a tax credit granted for any withholding or final tax suffered by the same taxpayer abroad. A special taper relief rule applies to capital gains on assets held prior to December 31, 1994, which applies increased tax reductions based on the number of years of holding (with a cut-off date of 31 December 1996). Up to 2006 this system could result in zero taxations (eg: for capital gains on quoted shares acquired prior to 1 Jan 1992 in the case of quoted shares, be they Spanish or EU) but now the part of the gain attributable to the period from Jan 19, 2006 onwards is taxed at the 18% rate while taper-relief rules apply to the rest (special apportionment criteria are used for each class of assets) as a result very attractive tax savings can still result.
The so-called ‘Beckham Regime’ applies to long term foreign residents (any spell of Spanish residence during the previous 10 year period is a bar to the regime) who come to Spain for the purpose of discharging employment duties (including in managerial positions) for a Spanish employer and meet certain criteria. If these conditions are met and duly notified to the Spanish Revenue, the taxpayer is taxed at the flat 24% rate on Spanish source employment income and foreign source income is wholly exempt from Spanish tax. This provision only applies for 6 years (year of arrival + 5) and in the meantime foreign assets also remain outside the scope of Spanish wealth tax. After the said period has elapsed the taxpayer reverts to an ‘ordinary resident status’. It is very doubtful that anybody enrolled under this scheme would be considered as Spanish resident under Spanish Double Taxation Treaties, as it does not conform to the definition of resident included in at 4 of the OECD model. The Spanish Revenue has made clear that it will not tolerate the abuse of this provision by foreign residents which set up their own Spanish company simply to manage their financial or property assets and are hired by it for the sole purpose of benefiting from the regime. On the other hand this regime may be very advantageous for entrepreneurs, hedge fund and private equity managers, who settle in Spain and incorporate their own companies.
4. WEALTH TAX
For many people this is the real bugbear of the Spanish tax system, an it is levied on a very steep progressive scale with a marginal rate which tops 2,5% when taxpayer’s taxable assets exceed € 10.695.996,00. That notwithstanding and irrespective of the fact that both mayor parties have promised to abolish wealth tax after the next election, to be held on March 9, 2008 (no schedule for the phasing out has been announced), there are 3 very important tax reliefs which significantly lighten the burden: