High-Tax Country Resident Planning To Stay Put: Spain

If you are resident and domiciled in Spain (which will be the normal situation for a native-born Spanish individual) then you are taxable on your world-wide income and capital gains. Wealth tax was abolished in 2008, but inheritance tax applies.

Residence applies to individuals who:

• spend more than 183 days in the country;
• possess a permanent home in the country;
• make Spain their main base or center of economic activities, directly or indirectly; or
• have a spouse and/or dependent children who are permanent residents in Spain.

Resident individuals are taxed on their worldwide income. For residents, the basic tax rate for of 15.66% applies to the first EUR17,707 of taxable income; higher rates are 18.27%, 24.14% and 27.13%, which applies to income above EUR53,407.

There are local taxes, applying only to residents, usually at 15.87%. A special rate of 19% applies to some types of savings investment income. There is personal allowances of EUR5,151 and additional allowances for dependants.

Employed individuals pay social security taxes of 4.7%; the employer pays 23.6%. Contributions made to pension plans are deductible expenses for tax purposes.

There is no Alternative Minimum Tax in Spain.

Capital gains tax applies to a wide range of investment assets at a rate of 19% on gains up to EUR6,000 and 21% thereafter. Prior to January 1, 2010, capital gains were taxed at a flat rate of 18%. There used to be a wealth tax, but it was abolished in 2008.

Inheritance tax applies at rates up to 34%; there are exemptions and lower rates for family members. There is a real estate transfer tax, usually applied at 6%.

NB: The Spanish tax rules are considerably more complicated than the above simplified summary, and professional advice on the situation of any particular individual is a necessity.

Although some revenue protection measures apply to countries having "preferential" tax regimes, general anti-avoidance legislation has not progressed far in Spain, and offshore trusts are generally speaking quite effective at sheltering many types of asset. Inheritance tax does not apply to trust assets, which pass directly to family heirs without the need for probate.

The availability of domestic tax-privileged investment instruments in Spain, means that for many individuals it will be necessary to balance the advantages of domestic investment against the superior returns that may be achievable offshore.

Pensions investment can also include an offshore element, although the tax advantages of pensions have been steadily eroded vis-à-vis other tax-efficient investments, which are more flexible. In particular, for high earners, the pension provisions over and above that allowed for tax purposes have often been invested in offshore Funded Unrecognised Retirement Benefit Schemes (FURBS). The foreign (offshore) life assurance sector has been particularly innovative in these types of product.

Spain is now one of the 8 main European jurisdictions in which it is fiscally attractive to locate a holding company. A Spanish holding company is known as an "ETVE" (Entidad de Tenencia de Valores Extranjeros). Spain's extensive and growing double taxation treaty network means that it exercises substantial leverage in reducing withholding taxes on dividends remitted to a Spanish holding company by a foreign subsidiary located in a double taxation treaty country.

An ETVE is a regular Spanish company subject to a 30% tax on its income, but exempt from taxation on qualified foreign-source dividends and capital gains. As such, the ETVE is protected by EU Directives such as the Parent-Subsidiary Directive and the Merger Directive and is regarded as a Spanish resident for tax purposes pursuant to Spain's 50 tax treaties. The broad tax treaty network with Latin America and the European character of the ETVE make it an interesting vehicle for channelling capital investments towards Latin America, as well as a tax-efficient exit route for EU capital investments by non-EU companies.

For an individual wishing to explore the investment opportunities further afield, www.lowtax.net contains details of the investment and tax regimes for 50 offshore jurisdictions.

NB: The suggestions given above do not constitute investment advice. They are intended only to assist individuals in finding appropriate professional advice, which is essential for anyone planning offshore investment.