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Musings from Mallorca. Some on Financial Advice. Some on how to legitimately reduce your Spanish tax bill. Plus some Life Stories from our fabulous Island.

Spectacular Tax Savings for Expats Using Spanish Compliant Investments!
02 November 2015 @ 17:06

Hacienda, part of the Ministerio de Economica y Hacienda, or the Spanish taxman to you and me, has granted significant tax advantages for investment plans (both lump sum and monthly funded) held by Spanish residents, if those plans meet certain conditions.

The advantages are considerable, and this is further emphasised by the fact that the Hacienda treat non-Spanish compliant investments negatively with extra reporting and punitive taxation on an annual basis. Consider first of all what investments you already have that may not be tax efficient in Spain.

What needs to be declared?

Declaration of Assets (Modelo 720 Form)

Under the current rules, Spanish Residents (are you certain you are not considered resident in Spain? (see below)) must declare overseas assets worth more than €50,000 on the Modelo 720 Tax Form. This includes:

  • Property (your old home you kept and now let out in the UK perhaps).
  • ISA’s, PEP's, Investment Bonds both Onshore and Offshore etc. (the Spanish Government looks straight through the tax wrapper as if it was not there and only sees the cash).
  • Bank accounts both onshore and offshore.
  • National Savings and Premium Bonds.
  • Protection policies.

Are you a Spanish Resident?

Whilst it seems complicated, establishing whether you are a resident in Spain is actually relative simple. You are a Spanish resident if:

  • You live in Spain for more than half a year (not necessarily in one sitting). Or;
  • You have your ‘centre of vital interest’ in Spain. These rules have been tightened up to make sure those who deliberately spend less than 183 days a year in Spain to avoid tax.

What can be done to avoid this?

Spanish Compliant Investment plans on the other hand offer a direct tax advantage. Specifically designed plans for Expatriates in Spain will offer income tax and succession tax advantages. They have the added advantage that the Hacienda recognises them as tax-efficient. Probably the best way to illustrate this is by a direct comparison.

Taxation comparison between non-compliant investments and Spanish compliant investments

Non-compliant taxation

Mr Expat invests 100000€ in a non-compliant offshore investment bond on 1st Jan 2014 and a year later the bond has grown by 10% to 110000€. Good news so far until the taxation is considered as followed:

  • No withdrawals have been taken at all.
  • The Gain is 110000€ - 100000€ original investment = 10000€.
  • The first 6000€ is taxed at 19.5% and the remaining 4000€ is taxed at 21.5%. The calculation needs to be made by Mr Expat (or he could pay a Gestor or Accountant to do it) and the appropriate tax withheld for payment to the Hacienda on his tax return.
  • The total investment tax bill would be 1170€ + 860€ = 2030€ which would reduce the value of the bond to 107970€.

Had Mr Expat invested in a Spanish Tax Compliant Bond instead, no investment tax would be payable and he would not even need to declare the plan to the Hacienda.

Spanish compliant bond taxation

First of all if no withdrawal is made there is no tax to pay, a huge saving in tax. Let's take it a stage further and assume that the full 10000€ gain is withdrawn from the Spanish compliant bond. The important consideration here is that partial withdrawals are apportioned between "redemption of capital" (part of the original investment) and part from the profit or gain.

You might assume that the withdrawal would be subject to the same calculation as a non-compliant investment and a tax bill of 2030€ (20.3% of the investment) the result. But this is not the case at all. The tax due would in fact be calculated in three stages as follows:

First calculation

  • New value 110000€ - original investment 100000€ = Gain 10000€, straightforward so far.

Second calculation

  • New value 110000€ / Gain 10000€ = 9.09% of the current value gain. Therefore 10000€ x 9.09% = 909€. Slightly confusing but bear with me.

Third calculation

  • The 909€ from calculation two is actually the taxable gain as the Hacienda sees it, therefore 909€ taxed at 19.5% = 177.26€ or 1.77% of the investment.

To summarise this

So Mr Expat would be taxed 2030€ if he had invested in a non-compliant investment even if no withdrawals had been made, whereas in a Spanish tax compliant bond he would only have had to suffer a tax bill of 177.26€ when taking the full 10000€ as withdrawal.

This is a spectacular difference in a country's treatment of an investment where tax is concerned.

Further advantages

If the dramatic tax savings have not convinced you to contact one of our Mallorca Team to carry out a full review of your current investments and current plans then consider the following additional advantages of Spanish compliant investments:

  • They do not need to be declared on Modelo 720.
  • The structure of the Bond is such that they are “compliant” as seen by the Hacienda.
  • Any tax liability due is calculated by the bond provider and paid direct to the Hacienda on your behalf with no need for you to do any calculations or to pay someone else to do it.
  • They avoid the need for probate on death.
  • Multi currencies available €, £, $ and some others if needed.
  • They are Inheritance Tax efficient.
  • There is a very large range of investments, asset classes, different risk profile investments available within the bond including some capital protected funds for low risk investors.

The use of Spanish Compliant Investment Bond products created specifically for Expats in Spain enables you to save tax and have the peace of mind needed for a comfortable retirement. They can offer investment accounts and savings opportunities from private banks or from household names such as Prudential, Friends Life International, Old Mutual International, Generali Pan Europe and SEB International amongst others.

Sandy Paterson DipFA, CeMAP

Independent Financial Adviser


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