Over 30 years ago, advertisements were published in Spain which basically said that the best option to buy a property in Spain was to do it through a offshore company, as payment of transfer tax, inheritance tax etc would thus be avoided in future.
Advertisements were published at the time in Spanish newspaper of the Costa del Sol which literally said “don’t pay taxes in Spain” and at the same time offered an offshore structure whereby the purchaser bought, outside Spain, an offshore company which in turn was the owner of a property in Spain. This way, tax was not paid on the transfer to begin with and it was noted that, should the shares in the company (not the property itself) be transferred in future, payment of the same tax would once again be avoided, and so would the tax on the gain, the inheritance tax, etc.
This “solution” was very well received by numerous foreign and Spanish citizens who wanted to buy a property in Spain, to such an extent that, in certain real estate developments, it was not the house that was on sale, but the shares of an offshore company which already owned the house.
The fiscal authorities’ response at the time was much slower than it is now. This, along with a total lack of transparency in offshore territories, made it impossible to know who the actual owner was, so the “solution” continued to be a good one for as long as it lasted.
However, the Spanish laws started to change and to punish such structures by imposing on them the well-known 5% annual tax, by applying rules on transfer pricing, by making it mandatory to appoint a fiscal representative with residence in Spain, etc.
But nowadays, the high degree of control which IT and the Internet allow, the new fiscal regulations against tax fraud which are focusing on these territories and cooperation with many countries’ inland revenues have caused the situation to change dramatically.
The recent Spanish Companies Tax Act –which came into force on January 1st, 2015 – and the Non-Residents Income Tax Act have an impact on attracting these companies’ taxation to Spain and on the responsibility which non-payment of the relevant taxes entails.
To add to the existing laws on the matter, Article 8 of the new Companies Tax Act provides that:
“The Tax Administration may presume that an entity based in a country or territory with no taxation… measures for the prevention of tax fraud, or classified as a tax haven, … has its residence in the Spanish territory where its main activities directly or indirectly relate to property located, or rights enjoyed or exercised in, the Spanish territory, or where its main activity is carried out therein, unless such an entity shall have provided evidence that its effective direction and management is performed in the former country or territory and that the establishment and operation of the entity is based on valid motives and substantive entrepreneurial reasons other than the management of securities or assets”.
Obviously, tax evasion in Spain may not be regarded as a valid motive and, on the other hand, the activity to which the structure relates is, in principle, the management of securities or assets.
That is, if the offshore company does have an actual business activity (with the exception of managing securities and assets), then the structure may be valid, although such an activity may not be presumed but has to be proved by reason of its being an offshore company, in which case it may have its residence outside Spain unless there is any other reason whereby it can be considered resident in Spain; for instance, if its effective management or the set of its activities are located within the Spanish territory.
All the above is without prejudice to the subjection of the real property located in Spain to the relevant fiscal obligations in the aforementioned cases; a subjection which shall continue to exist even if the property is transferred to a third party, at least during the four years following the deadline by which the taxes should have been paid (statute of limitations), except where payment thereof has already been claimed by the Public Treasury.
The conclusion gathered from the above is not to say that this or any other structure is illegal (because, in itself, it is not), but that the reason to use it must be valid or, if it isn’t (in which case it will be considered resident in Spain), then the applicable taxes must be paid in accordance with the law, because “fiscal optimisation” must not be confused with “tax avoidance”.