Law in Spain

The Government has introduced an amendment to add a Third Additional Provision to a pending law reform of various tax laws affecting nheritance and Gift Tax and their approval is expected before the end of the year.

Following the recent ruling on 3^rd September 2014 of the Court of Justice of the European Communities concerning the discrimination of Inheritance and Gift tax against non-resident taxpayers and those deceased compared to Spanish residents in Spain, that legislation of the Autonomous Community can be applied, and is often much more favourable, the government was forced to introduce, through its parliamentary group (PP) an amendment to add a Third Additional Provision to a pending law reform of various tax laws (income tax for residents and non-residents), whereby Inheritance and Gift tax are reformed and this is expected to be passed before the end of the year.

To give equal treatment to non-residents as to residents as determined by the judgment, the proposed ruling is threefold:

 

First it narrows its application to residents of the European Economic Area (the 28 EU countries plus Iceland, Liechtenstein and Norway).

 

It further provides the option for non-residents to apply the State or Regional rule when considering which is more favourable to them.

Finally, it establishes what are called "points of connection" between a non-resident and an Autonomous Community, in order to determine which regional legislation can be applied to their tax. However, unlike what happens with residents whose key "connection point" is, for probate, the habitual residence of the deceased in a particular Autonomous Community and in the case of donations, the tax residence of the donee or where the property is situated, in the case of non-residents, it is necessary to determine other ‘’points of connection’’ that would prevent discrimination taking place.

The rule establishes the following ‘’points of connection’’:

In the case of inheritance in Spain:

- Where the deceased was not resident in Spain, in the community where the highest value of the assets and rights of the estate are located in Spain.
- Where the deceased was resident in Spain, in the Autonomous Community in which they were resident.

 

If the case of a Gift

- Where the recipient was not resident in Spain, in the Autonomous Community where their moveable assets have been located mostly ( based on the number of days) during the immediately preceding five years. Or in the case of life insurance in the Autonomous Community in which the head office of the Spanish insurer is or where the contract was signed for a foreign insurer.

- Where the recipient was resident in Spain, in the Autonomous Community where he was resident for the acquisition of property located in a European Union State or the European Economic Area.

In short, the proposed amendments will add more complexity to a community that already has 20 tax regimes for Inheritance/Gift tax, which are continually changing and which a non-resident is obliged to be aware of if they want to plan their investment in Spain, and additionally it will increase tax disputes ,consequently increasing the legal costs of carrying them out.

This makes it even more important that a non-resident consults an expert on matters of taxation of non-residents, if they want to properly plan the tax consequences of a gift or inheritance.

The Bill which amongst other things, amends the Law of Income Tax for non-residents, should come into force on the 1^st of January 2015, and contains an advantageous reduction of the income tax rate for non-residents.

Non-residents’ Income Tax is calculated based on the ‘’income’’(imputed rent) that the Spanish tax office deems could be made from renting out the property, multiplied by a factor of 1.1% or 2% depending on whether the property ‘s rateable value (Valor Catastral) has been revised by the local Council or not, and this is then multiplied by a rate of 24.75%.

From 2015 the general rate will be 24% instead of the current rate of 24.75%, but what is most important to residents of EU or EEA member states with exchange of information agreements in place, the rate will be reduced to 20% in 2015 and 19% from 2016.

If you own a property in Spain and you are non resident at tax purposes here, you are obliged to present and pay the Non Resident Tax Return, which must be filed and presented before the 31^st of December each year.

The Spanish Tax Office has announced a campaign against all the non residents who are not declaring this tax. The process is quite simple for them due to the fact that the Tax Office has recorded all the Public Deeds and it is stated that the purchaser is non resident at tax purposes, so with a minor computer effort they will be able to recover a lot of money of the Spanish Government.

That will mean that if you haven´t presented and paid the tax return you could be asked for the corresponding payment, plus interest, plus a fine that could be until 300% of the initial tax. If you don´t receive the notifications from the Tax Office the consequencies are even worse because the process will finish with much more money to pay and an Embargo on the Land Registry on your property, and who knows, even with your property to be sold on a Public Auction…

So if you haven´t presented yet your Tax Return, contact urgently your tax advisor and have piece of mind because times are changing, and Spanish Tax Authorities will enforce harder the tax rules with non residents. We advise you to contact your Non Resident Tax Department or your tax advisor as soon as possible.