SPAIN: MAIN ASPECTS OF INHERITANCE AND GIFT TAX MIAMI JUNE 2016

Transcription

1 SPAIN: MAIN ASPECTS OF INHERITANCE AND GIFT TAX MIAMI JUNE 2016

2 TAXABLE PERSONS AND ACCRUAL The taxable event is the acquisition of property and rights through: Inheritance, bequest or other title Gift or inter vivos transfer Proceeds from a life insurance policy where the beneficiary and the policy holder are not the same individual The taxable persons are those receiving the assets and rights: heirs, donees or beneficiaries of insurance policies. The Spanish inheritance and gift tax applies when the beneficiary is a resident in Spain. Individuals who are tax residents in Spain will be taxed on worldwide assets and rights acquired either through inheritance or donation. Residence is determined according to personal income tax rules. Inheritance and gift tax also applies when assets located in Spain are transferred. Non-residents will only be taxed on property located in Spain and on rights that may be exercised in Spain, as well as on life insurance policies with a Spanish entity or with a non-spanish entity operating in Spain. 2

3 TAXABLE PERSONS AND ACCRUAL Inheritance tax accrues from the time of death and must be paid within six months. Gift tax accrues from the time of donation and must be paid within a month from the date of donation. Spain has only signed inheritance and gift tax treaties with three countries: France, Greece and Sweden. However, Spanish law provides for a tax credit, limited to the tax rate applicable in Spain, for Spanish beneficiaries when inheritance tax has been paid in a foreign jurisdiction. Spanish legislation provides for a tax exemption for capital gains realized at the time of death. The exemption does not apply when assets are transferred as a gift. 3

4 SPANISH RESIDENCY An individual is considered a permanent resident of Spain in any of the following circumstances: The presence test: an individual that spends over 183 days in a calendar year in Spain is deemed a tax resident. Temporary absences are considered time residing in Spain, unless a residence certificate issued by another jurisdiction is provided. When the individual's main centre of business activities or interests is directly or indirectly located in Spanish territory. If the individual s spouse and underage children reside permanently in Spain, residence is presumed, unless sufficient proof is provided to the contrary. For inheritance and gift tax purposes, the 183 days rule refers to the 365 days prior to the death or gift. 4

5 AUTONOMOUS REGIONS Spanish inheritance and gift tax is regulated by national law. However, autonomous regions can regulate the tax rate, deductions and credits for their own territories, making the effective tax rates substantially different from one region to another. National law will apply when the criteria to apply the autonomous region s provisions are not met. In general, the provisions of the autonomous regions are more advantageous than those of national legislation. For example, The autonomous region of Madrid has a tax credit of 99% of the tax due when the beneficiaries are ascendants, descendants or spouses. Catalonia has a tax credit of 99% for the surviving spouse and a tax credit ranging from 99% to 10% for direct ascendants and descendants. For gift tax, Catalonia has approved a tax rate between 5% and 9% for these relatives. 5

6 AUTONOMOUS REGIONS INHERITANCE When the beneficiary is a resident in Spain, the provisions of the autonomous regions apply when the decedent was a resident of that same autonomous region. Under the European provisions for the free movement of capital, the provisions of the autonomous regions will also apply when the decedent was a resident of the UE or of one of the countries of the European Economic Area. Applicable tax law will be that of the autonomous region where the majority of the assets are located or, if no assets are located in Spain, where the beneficiary is a resident. In the case of inheritance subject to tax in Spain because of the location of the assets, the provisions of the autonomous region where the decedent was a resident apply, if the beneficiaries are residents of another EU country or country of the European Economic Area. 6

7 AUTONOMOUS REGIONS GIFTS When the beneficiary is a resident of Spain, the provisions of the autonomous region where the beneficiary resides will apply, except when real estate is gifted. In this case, the provisions of the autonomous regions where the real estate is located will apply. The provisions of the autonomous region where real estate is located will also apply when the beneficiary is a resident of the EU or of a country in the European Economic Area. When the real estate gifted is located in the EU or the European Economic Area, the provisions of the autonomous region where the beneficiary resides apply. When movable assets are gifted to EU or European Economic Area residents, the provisions of the autonomous region where those assets have been for most of the five years prior to the death will apply. 7

8 TAXABLE BASE The fair market value, defined by law as the real value, is generally used when determining the taxable base for inheritance and gifts, from which the following are deducted: (i) liens and encumbrances on the asset (ii) certain debts (iii) other expenses, including medical and funeral costs Debts in favor of the heirs or their direct family members are not deductible. Fair market value: no penalties will be imposed when the values that have to be used for the wealth tax are declared. For real estate, the higher of the acquisition cost or the cadastral value can be used, and no penalty will be imposed if the value is reassessed by the authorities. The law contains some provisions that add to the taxable base assets transferred to the beneficiaries in the years immediately prior to the death without the proper compensation. 8

9 TAXABLE BASE Certain deductible allowances apply when calculating the taxable base of heirs, legatees, and beneficiaries of life insurance policies; the amount depends on the relationship with the deceased. However, these allowances do not apply to inter vivos transfers. Tax free allowances are only applicable to inheritance and range from 15,956 to 47,858 for spouses and direct ascendants or descendants. A tax-free allowance of 7,993 is established for other second and third degree relatives. Additional tax-free allowances are established for impaired taxpayers, up to 150,000, and for beneficiaries of life insurance policies, up to 9,149. While Madrid has not substantially improved these allowances, Catalonia has doubled them all. 9

10 TAX RATES The tax rates range from 7.65%, when the taxable base is below 8,000, to 34%, when the taxable base is above 800,000. Additionally, a multiplier can be applied to the tax rate depending on the wealth of the beneficiary and his or her family ties to the decedent. The multiplier ranges from 1.00 to

11 TAX RATES Applicable tax rates according to the Inheritance and Gift Tax Act Taxable amount (EUR) Tax on lower amount (EUR) Rate on excess (%) up to 7, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , over 199,

12 TAX RATES Multiplier according to the Inheritance and Gift Tax Act Degree of kinship Recipient s net wealth I and II III IV Up to 402, From 402, to 2,007, From 2,007, to 4,020, Over 4,020, Group I: descendants and adopted children under 21 Group II: descendants and adopted children aged 21 or older, spouses, ascendants and adoptees Group III: second- and third-degree relatives, ascendants and descendants by affinity Group IV: others 12

13 CLOSELY HELD FAMILY BUSINESS EXEMPTION Closely held family business exemption (beneficiaries must be close family): 95% exemption when assets inherited are an individual business or a stake in a closely held business Requirements in the case of shareholding: - The decedent s shareholding must be at least 5% individually or 20% with other close family members. - The exemption will only be applicable to assets effectively connected to the business and provided these represent more than 50% of the entity s assets according to their book value. - At least one of the family members must hold an executive position in the company providing more than 50% of his or her income (excluding capital). - For consolidation of the exemption, the value of the assets inherited must be maintained for 10 years. According to the Spanish authorities, there is no need to keep the actual business but assets with an equivalent value. Some autonomous regions have regulated their own exemption with certain variations from the national exemption. 13

14 CLOSELY HELD FAMILY BUSINESS EXEMPTION Closely held family business exemption: Application of the family business exemption requires the decedent to be a resident in Spain or the shareholding to be located in Spain. - If the decedent is a resident in Spain, the exemption will apply regardless of where the companies are located. - If the decedent is not a resident in Spain, the exemption will only apply to the shareholding in Spanish entities. - When the decedent is not a resident in Spain, is it enough if a Spanish beneficiary owns some shares of the foreign entity to grant him or her the exemption in the wealth tax? The problem arises when the beneficiaries of foreign shareholders move to Spain. Alternatives: - Setting up a Spanish holding company to hold the shares. - Transferring 5% of the shareholding to the Spanish beneficiary? 14

15 CLOSELY HELD FAMILY BUSINESS EXEMPTION Assets connected to business Real estate: - Leasing: it requires the activity to be carried out with sufficient staff and material means, with a minimum of one full-time employee. - Buying and selling: no minimum staff and material means to carry out the activity are required. Loans - Loans to third parties are not assets connected to a business, except when they are in favor of affiliates that have invested the proceeds in businessconnected assets. 15

16 FIDEICOMISO Sustitución fideicomisaria or Fideicomiso: A sustitución fideicomisaria can be used by wealthy families to defer and reduce the tax burden of the inheritance tax. Through the sustitución fideicomisaria, the decedent appoints a primary beneficiary in his or her will that will have limited ownership over the estate. To the extent the primary beneficiary s rights are limited to the income produced by the estate, taxation will be imposed on the current value of that income, calculated at a 2% rate per year on life expectancy, which is deemed at 89. The contingent beneficiaries will inherit directly from the primary beneficiary, and taxation will be calculated according to the facts and circumstances at the time of death. 16

17 IÑIGO AGUIRREZABALA 110 EAST 55 TH STREET NY NEW YORK TEL.: FAX: Este documento es meramente expositivo y debe ser interpretado conjuntamente con las explicaciones y, en su caso, con el informe elaborado por Cuatrecasas, Gonçalves Pereira sobre esta cuestión This document is merely a presentation and must be interpreted together with any explanations and opinions drafted by Cuatrecasas, Gonçalves Pereira on this subject Este documento é uma mera exposição, devendo ser interpretado em conjunto com as explicações e quando seja o caso, com o relatório/parecer elaborada pela Cuatrecasas, Gonçalves Pereira sobre esta questão