FOREIGNERS’ INHERITANCE IN SPAIN: FALSE MYTHS AND PLATITUDES (I) 

In the first article of this series (article posted on this Blog on 25 March, 2013), we commented on certain beliefs which, albeit sometimes based on true facts, are often wrong in relation to non-residents’ inheritances in Spain.

In this second instalment, we will comment on <<the solution> which has been advertised in printed and digital newspapers by at least two legal and fiscal consultancy companies as if a magic potion had been discovered.

Those advertisements propose to all British residents, as a general formula, that they would be well advised to transfer their house or any other property in Spain to a British company so as to “avoid” payment of the Spanish Inheritance Tax upon the decease of the current owner.- My opinion is that this advice is misleading and is intended to provide the advertiser with long-term work which will make them an important profit.

I know it’s harsh to talk about misleading advertising, but I do believe it is, especially as its purpose is not the lawful planning of the best and most favourable option for the client in taxation terms, but to “dodge” a tax under the assumption that the Spanish Tax Authorities will not find out about it; that is, the goal is not to find the most favourable application of law in order to minimise the taxes payable or to be granted exemption from a tax, but not to pay it even if the obligation exists. The latter –obviously, if the tax administration finds out- could constitute a serious administrative breach or even a crime.

Such campaigns to not pay were certainly carried out in the past and were successful at the beginning but, following many an amendment to the tax legislation, they eventually became truly detrimental to the client.

On the other hand, when it comes to solutions “for everyone” under a more or less certain legal loophole, the tax administrations now react almost immediately by amending the law in order to close such a legal loophole. If you wish to avoid payment of inheritance tax this way, and the decease of the relevant person is not impending, the legal loophole will have disappeared when the time comes.

If the idea is to AVOID PAYING A TAX by concealing certain situations beyond the control of the Spanish Tax Administration (as would otherwise happen in other countries), I think that this is en extremely unlikely possibility at this time, as the various tax administrations of various countries have resort to the information technology instruments of a “big brother” and they are very pleased to collaborate with each other to crack down on tax fraud.

 The opinions expressed so far are very general and, therefore, questionable, so I believe that it is important to draw some conclusions from a legal-taxation point of view, where such opinions may be put in question –as may any interpretation of law- based on actual grounds, not on a magical solution advertisement.

The advertisements promoting the transfer of properties owned by British citizens in Spain are, in some cases, based on true facts which I believe must be legislated for in order to correct the situation and which, basically, are as follows:

  1.- There is certainly a national-scoping law in Spain whereby the highest taxation    rates are fixed    according to the value of the inherited estate and the degree of  kinship between the deceased and the  legatee.

However, there are 17 autonomous regions in Spain which have their own different rates for this tax, different total or partial exemptions and, in conclusion, the amount of tax due can greatly differ depending on whether the taxpayer resides in one place or another.

Since non-residents are liable for this tax to the State’s administration in accordance with the general taxation rates, the amount payable in this regard by residents may be lower in certain regions, or even zero, where the value of the estate is small. And it is true in this case that there may be an actual discrimination between residents and non-residents in that specific region of Spain (which is already being discussed within the EU and is therefore likely to be corrected in the short term), just as there exist unconceivable discriminations between Spanish citizens depending on the region in which they reside.

But, in most cases, this is not prevented by the magical formula we are commenting on in this article, which may in fact be much more burdensome as we will explain below.

   2. The other advertisement I have seen advising that the property be simply  transferred to a British    company in order to avoid the Inheritance Tax is only    based on the untrue statement –insomuch as it    is deliberately incomplete- that:

  “Since there is no agreement in place between the UK and Spain to prevent double taxation in terms of the inheritance tax, a British citizen who doesn’t have residency in Spain but does own a property here will have to pay Inheritance Tax on that property and will also have to pay the same tax in the UK, where the whole value of the property in Spain will be taken into account again for calculation of the amount to be paid even though the same or a similar tax has already been paid, there being no possibility of deducting all or part of the tax paid in Spain from the amount payable as Inheritance Tax in the UK”.

While it is true that the Agreement to prevent double taxation between the UK and Spain does not include the British Inheritance Tax or the Spanish Impuesto de Sucesiones, IT IS UNTRUE THAT THE DOUBLE TAXATION CAN’T IN MOST CASES BE AVOIDED AS THERE ARE BRITISH AND SPANISH INTERNAL REGULATIONS THAT ALLOW THIS”.

The Spanish Inheritance Tax Act (Section 23) and its set of Regulations (Article 46) establish mechanisms to avoid double international taxation,

in whole or in part, where a resident in Spain (Spanish or otherwise) has to pay tax abroad in respect of a personal obligation, or where a non-resident (Spanish or otherwise) has to pay tax in Spain in respect of an in-rem obligation (i.e. as a result of owning assets in Spain) as well as abroad in respect of a personal obligation.

On the other hand, there are internal regulations in Great Britain affecting its residents whereby, in many cases, the amount paid in Spain in respect of an in-rem obligation can be offset against that payable in Great Britain as a result of a personal obligation.

On the other hand, there are internal regulations in Great Britain affecting its residents whereby, in many cases, the amount paid in Spain in respect of an in-rem obligation can be offset against that payable in Great Britain as a result of a personal obligation.

I believe that the above allows us to reach the conclusion that the premise to <<transfer>> the property to a British entity in all cases in order to avoid the Impuesto de Sucesiones in Spain or to prevent a double taxation in the UK in respect of the same inheritance is, owing to its generality, fundamentally untrue.

But if we were to contemplate the possibility (which may in some cases be more favourable to the taxpayer, not necessarily as a result of “tax evasion” but simply based on better tax planning), this should be done on the basis of a study of the fiscal and operational costs involved, to which end it is necessary to take into account the transfer costs which, not intending to be thorough but merely as an example, could be as follows:

 TRANSFER COSTS:

 1.- If the transfer is made by virtue of a price paid by the British company to the non-resident British citizen, it must be taken into account that: (i) the parties are not completely at liberty to set the price as the price has to be consistent with actual market prices; (ii) the purchaser (the company) has to pay Transfer Tax –Impuesto de Transmisiones– which, depending on the Spanish region, ranges from 7% to 10%; (iii) the buyer also has to pay registration fees to the Land Registry; and (iv) the seller has to pay tax on the profit obtained from the transfer (21%), plus (v) the Municipal Tax on the Capital Appreciation of Urban Property and (vi) almost 100% of the fees charged by the Notary Public witnessing the execution of the Deed of Conveyance.

2.- If the transfer is made by virtue of a “contribution” to the British company, then the latter will be exempt from payment of Transfer Tax, but it will have to pay (i) Tax on the profit (21%) based on the difference between the acquisition value of the property and its current actual market value –even if the “contributor” has valued the property at a lower amount- and (ii) the Municipal Tax on the Capital Appreciation of Urban Property; (iii) the company receiving the contribution, on its part, will have to pay the cost of the public instruments recording the contribution, plus; (iv) the registration fees payable to the Land Registry for the property to be registered to the name of the new owner.

In the advertisement we are commenting on proposing that the property could be “transferred as a contribution a British company”, published on a website, it was basically stated that such a transfer did not involve any taxation costs which, as mentioned above <especially in respect of the tax payable on the profit obtained from the transfer>, is not true, to such an extent that the company receiving the property must (in exchange for the increased capital) withhold an amount equivalent to 3% of the value of the said property and lodge it with the Public Treasury on account of the transferor’s tax (i.e. the current non-resident owner transferring the property), such a lien remaining on the property if this is not done. This leads us to conclude that if the intention behind it is to “evade” the tax in hopes that it will not be discovered, the truth is that this is virtually impossible in this case.

 ANNUAL TAXES: 

The owning company, which is always regarded as a “commercial” company in Spain, will have to pay Corporate Tax on the actual rent paid to it by a person using the property where applicable, but if the property is used by a shareholder or director of the company, or by any of their relatives, the latter shall be deemed to be paying a rent to the company which would be freely agreed upon between independent parties.- That is, even if the latter do not actually pay any rent, the company shall be deemed to be obtaining a rent as if the property had been actually rented out.

SUBSEQUENT TRANSFER OF THE “SHARES” OF A COMPANY WHERE A PROPERTY IN SPAIN CONSTITUTES MORE THAN 50% OF ALL ITS ASSETS (100% IN THIS CASE).

• Where more than 50% of the shares are sold –directly or indirectly- to a person or to another company, Transfer Tax will be payable in Spain (7% to 10%) on the actual market value at the time of the transfer of shares.

• In the same case, if the same percentage is transferred as an inheritance, the Spanish Treasury –if it comes to their “knowledge”- may consider (and this can be controversial) that Inheritance Tax is payable in Spain.

ASSOCIATED COSTS: 

There is obviously the fees and costs initially charged by the “advisors” who execute these transactions, but also the costs and administration fees of the company, registered office fee, accounting charges, etc, which are payable on a yearly basis.

 These amounts alone may be more expensive than the taxes intended to be avoided.

 Certainly not all the possible cases have been studied –which can vary according to the “planning”, not the “evasion”, one intends to implement-, so just as it isn’t possible to apply a magical formula to all cases in general, we also shouldn’t say that this isn’t an acceptable option.

I would therefore advise not to consider the possibility of “not being caught”, but to carry out a lawful, transparent transaction and always take into careful consideration all the current costs and taxes, as well as those which may be generated upon the property owner’s decease, the costs and taxes of the new structure and its maintenance (advisors included) and the end to which all of it is being done.

Lizarza Abogados.- October 2014