TAXATION OF PENSION PROVISION IN SPAIN

Transcription

1 TAXATION OF PENSION PROVISION IN SPAIN José Manuel TEJERIZO, Ph.D. Professor of Finance and Taxation Law, at the UNED(Madrid). I. INTRODUCTION. A. Preliminary. According to the suggestions made by the General Reporter, I shall aim to present an outline, as simple as possible, of those taxation rules which regulate pension provision in Spain. I must begin by pointing at the fact that, as far as this report is concerned, we will define pensions as the payment received by employees, both private and public, once their productive activity has ceased. As the General Reporter suggests, we will only bear in mind those benefits received by employees once they retire, due to age or illness. Nevertheless, in order to provide a more precise portrayal of Spanish Legislation, it is important to indicate that similar benefits are also provided in the following cases: a.) Benefits will be received by the employee s heirs, when the former has died. b.) Benefits will also be received by businessmen or professionals, the so-called free-lance workers, when they retire. For a convenient approach to the object or our report, I shall explain, as simply as possible, the Retirement Prevision System of our country. It is articulated as follows: 1 st. There is a Public Social Security system which guarantees benefits for all citizens. These benefits are set in accordance with the number of working 1

2 years and with specific amounts of money raised during such years, both by the workers and the employers (these amounts are called Social Security Contributions); but there is a minimum benefit which is granted to all citizens, even if they have never worked, nor, as a consequence to that, contributed with any amount to Social Security. The applicable Taxation System is very simple: contributions to Social Security are deductible expenses in Personal Income Tax (PIT) and Corporation Income Tax (CIT) of both employees and employers. The pensions received are levied by the PIT just like wages and salaries. 2 nd. Since 1987, there is a system of private pensions which is planned to complement the public system just mentioned. I do not need to explain this point further at this very moment, since it will be the main object of our report. 3 rd. Finally, it is possible to get a private life insurance which guarantees retirement pensions. There are many types of life insurance policies, and their analysis cannot be deeply dealt with now, but we shall provide some information concerning their taxation. Paid off premiums do not receive a privileged treatment in terms of PIT. When the life insurance has been agreed by an employer, premiums are deductible from his/her PIT, or CIT, and they are regarded as yielded by the beneficiary s labour and, subsequently, taxed as PIT, unless it is a collective insurance. On the other hand, received services are regarded, within the frame of PIT, as yielded by income from movable capital, and they are taxed allowing for the previous deduction of fixed percentages which are established in accordance with certain variables(especially the duration of the insurance contract, and the way in which services are received, as income or as capital). B. Private Pension Plans. As I have just pointed out, in this report I will focus on the examination of taxation for the Private Pension System. This is regulated by a law 8/1887 on June 8 th, 1987, and known as the Law on Pension Plans and Funds (PPF) and by its derived regulations. This law has been later subjected to numerous modifications, although none of them substantial. The tax normative applicable to these pensions are contained in the Law on PIT (Law 40/1998, December 2

3 9 th ) and the Law on CIT (Law 43/1995, December 27 th ), and in their respective regulations. The Law on PPF regulates the following kinds of institutes: a. PPF. They are the typical institutes of a private pension system, and they will be the object of close examination in this paper. b. Alternative Systems to Pension Plans. With some specifications, they are treated the same as the previously mentioned PPF, so that, unless we state the opposite, everything we say about PPF can also be applied to this second type. c. Transitory Plan. It came up as a attempt to provide a solution for situations existing at the time when the law was passed. Although it posed many problems at first, today it is quite unimportant. PPF s in Spain show the following features: 1 st. The concepts of Pension Plan and Pension Fund must be duly distinguished. A Pension Plan(PP) is designed as a contract between several individuals and it aims at channelling amounts of money contributed by them to be properly managed so that contributors can face future contingencies (retirement, death, etc.). A Pension Fund(PF) is defined as the Estate constituted by contributions and generated income. PF s in Spain do not have a legal personality status, that is why they have to be managed by a company (named Managing Company); Managing Companies are linked either to finance institutions (Banks and Savings Banks) or to Insurance Companies. The management of funds is never in the hands of the company s owner(employer). 2 nd. This is a voluntary system. Joining a PP is never compulsory. Nevertheless, employers could be obliged to the creation of a PP, or to contribute to an existing PP as part of an agreement signed with his/her employees. 3 rd. This is a private system, although some public entities can promote the creation of PPF. In such cases, the public entity will not make economic contributions. 4 th. This is a Contributive and Reserve Capitalization system. Each promoter or participant will make the contributions which, properly managed, will feed their own pensions. 3

4 5 th. The most important classification provided by the Law on PPF is the one concerned with constituting persons. There are three kinds of PP: first, the Employment PP System, in which the promoter is an employer and the participants are his/her employees. Two main features which characterize this type are the necessity of an existing labour relation between promoter and participants, and the possibility that promoters make contributions. Second, the Associate PP System, for which the promoter is any kind of association, labour union, professional association(such as the Lawyer s Professional Association, an approximate equivalent of a Bar Association), etc. Third, the Individual PP System, for which the promoter is a finance institution(a Savings Bank, or a Bank, a Credit Company, etc.) and any joining person will be a participant. Contributions to these PP must be fixed. C. Applicable Taxation. Before putting an end to this introduction, we must point out that Taxation for the private pension system is contained within the frame of the PIT, the CIT, and in the case of cross-border pensions, the non-resident Income Tax (NRIT), regulated by Law 41/1998, December 6 th. It is not actually necessary to dwell on the explanation of Spanish CIT and NRIT, in order to understand the Spanish Tax system, but some information concerning Spanish PIT, will be of use. This tax levies, on the whole, on the global income of physical persons, constituted by the yield of production factors(work, capital and mixed factors) as well as capital gains. The Tax tariff, which is progressive, is drawn from an economic magnitude referred to as the payable base(tax-base - reductions). To find out what this tariff amounts to, a series of operations are established by law in the following order: a. The fixing of yields subject to taxation. There are specific rules for each source of income(labour yield, capital from marketable securities, real estate and economic activities). The amount is determined by means of two operations: first, the calculation of net profit (i.e. gross profit minus legally deductible expenses); then, reductions are applied as established by law(in a larger amount in the case labour yield). 4

5 b. The fixing of capital gain or loss. c. Income integration and compensation(long-term capital gains and loss are compensated for and taxed separately). d. The working out of a minimum vital and family amount. e. The resultant amount drawn from the above mentioned operations is called taxable base. When it results in a positive number, legally established deductions are applied. The final result is called, as I have already mentioned, the payable base, and it is to this amount that PIT tariff is applied. There are, besides, some other rules applicable to contributions and services from PP s in the Wealth Tax, and the Succession and Donation Tax, but in order no to go beyond the relevance boundaries established by the General Reporter, these will not be dealt with in this report. II. CONTRIBUTION TO PENSION PLANS. Within the frame of the PIT, contributions to PP are taken into consideration both for the fixing of both net profit (operation a) and the payable base operation e). There are three main rules to be applied in the fixing of the net profit of the PIT: 1 st. Annual contributions to PP s, including participants contributions as well as promoters, cannot surpass, on the whole, the amount of 1,200,000 Pesetas (7, Euro). There are also higher limits in some cases. The first such case is that of participants whose age goes beyond 52, for which the limit is increased in 100,000 Pesetas (601.1 Euro) for each excess year, up to the maximum amount of 2,500,000 Pesetas (15, Euro) for participants who are 65 or older. The second case is that of the handicapped, for whom there can be deductions up to 2,500,000 pesetas (15, Euro). 2 nd. Besides, passive individuals are allowed to make contributions to somebody else s PP in two cases: first, to the PP of spouses whose income is less than 1,200,000 pesetas (7, Euro), with a maximum annual contribution of 300,000 pesetas (1, Euro). Second, to the PP of handicapped close relatives up to 1,200,000 pesetas (7, Euro). 5

6 3 rd. Participants contributions are never to be considered a fiscal expense. 4 th. The contributions of promoters (which are only possible in Employment PP Systems) must be assigned to each participant individually, and then included in their labour yield. Under these circumstances, such contributions constitute a deductible expense when determining the profit levied by the promoters income tax(basically CIT). Exceptionally, within the general norm that rules Spanish Law, promoters who make individual assignations cannot retain or take in any amount of money towards the participant s Personal Income tax. 5. It is possible to change from a Spanish pension scheme/ plan to another. The direct transfer of the accumulated funds that will take place will not disclose any capital gain. Contributions to PP are also considered when establishing the payable base of the PIT. Such contributions are deducted from the taxable base according to some rules which can be summarized as follows: a. Contributions are deducted, including those by participants and also those by promoters when assigned as labour yields. b. Deductions from contribution to own personal PP s take as a limit the smaller of the following amounts: the absolute quantities above mentioned, or the 25% of the sum of labour yield and economic activities. This percentage reaches up to 42% for contributors older than 52. Its worth noticing that among the yields from economic activities are also included those assignations made in the case of transparent professional associations, as long as the individuals actually practice such activities. c. Those deductions from contributions to somebody else s PP(spouses or handicapped relatives) have the absolute limits mentioned above. d. Contributions exceeding the established limits(always keeping with the absolute limits under any circumstances) can be deduced, upon request by passive individuals within the succeeding 5 years. In short, contributions to PP s are free from PIT, and such exemption is produced, for each passive individual, at the highest marginal rate in the scale 6

7 of taxation. Contributions by promoters constitute a fiscal expense in their CIT, as long as an individualized assignation for each participant is made. III. BENEFITS FROM PENSION PLANS AND FUNDS. PP s are considered within the frame of Spanish Law as contracts between participants. Hence, they are not regarded as passive in the CIT. PF s are linked to the fulfilment of the assistance which is the aim of PP, lacking legal status. Nevertheless, they are regarded as entitled to rights and obligations and, subsequently, as passive in the CIT. But in order facilitate the accomplishment of its aims their tax is zero. From this circumstance the following consequences are derived; 1 st. Income and capital gains from the management of contributed amounts are not subjected to taxation. 2 nd. They are entitled to the devolution of deductions at the supported sources (withholding tax) (for example, in the case of income from marketable securities). 3 rd. Taxes paid or earned abroad are not subjected to devolution. This rule is attenuated, in practice, when that income is obtained in countries which have signed an agreement with Spain in order to avoid international double taxation, since usually such income is covered by the taxation system of the resident country, that is, Spain, with the application of the above mention zero rate. IV. SERVICES FROM PENSION PLANS. All the services from the PP s are regarded as labour yield and are levied as such in the PIT, no matter what their PP modality is. It is worth pointing out the fact that services are taxed without deducing those amounts that could not be deduced from the taxable base when contributed. From the perspective of the PF from where services are to be paid, they are regarded as a deductible expense in order to establish the profit. Taxation of services by the PIT varies according to the type of materialization (as capital, income or mixed). 7

8 When services are received as capital, the applicable rules are: a. They are regarded as an irregular income and are reduced up to a 40% when they are integrated to the taxable base of the PIT. b. This reduction reaches a 50% when services are provided for people with a disability beyond 65 per cent. c. In order to be regarded as irregular income there must elapse a period of two years from the first contribution, except in case of handicap. d. Reductions are also considered to determine deductions at the supported source, just as any other labour yield. Services paid as income are regarded as regular labour yield and are taxed as such. Exceptionally, when they are provided for people with a disability beyond 65%, they are reduced to a maximum equivalent to twice the minimum professional salary (which nowadays means an amount of 2,019,360 Pesetas or 12, Euro). In the case of mixed services, that is, those which combine periodical income with a single capital collection, each part follows the pattern detailed above(so that only the part corresponding to the service as capital is reduced). V. CROSS-BORDER PENSIONS. A. Preliminary. The following consideration must be taken into account: 1 st. Spanish Law does not contain any norm, neither Tax Law nor a general law, to clearly and expressly regulate cross-border pensions. Applicable rules in such cases are the same that rule within-the-country pensions, although other principles must be applied, both general (nondiscrimination or reciprocity) and analogy principles. 2 nd. In terms of the personal income tax a distinction must be drawn between residents and non-residents. Residence is contingent upon physical permanence in our country, or the existence in Spain of a main centre of economic interests, with some exceptions(actually, it is civil servants working abroad that are still considered residents). Those who do not meet the aforesaid conditions are considered non-residents. 8

9 3 rd. There is in Spain an NRIT which is actually a proportional tax on each of the incomes gained in our country, singularly considered, but in order to avoid double taxation, there are Agreements whose application is preferable. Spain has signed this kind of Agreements with all the countries of the European Unions except Greece), with the U.S.A and with Japan. Complying with the General Reporter s request I shall only refer to the system derived from a single Agreement signed, to avoid double taxation, with France(on May 27 th, 1973, and complemented by another Agreement on December 6 th, 1977). B. Contribution to Pension Plans. There is not a clear normative which allows residents to contribute to foreign PP s (neither as participants nor as promoters within Employment PP Systems). There are no regulations which permit to change from a Foreign pension scheme/ plan to a Spanish one, or viceversa. Furthermore, Spanish Tax Laws seem to prevent this possibility, since legislation of PPF is usually quoted in a precise manner rather that generically. This is the opinion of the Spanish Tax Authorities. In this respect, the Spanish General-Directorate of Taxes has understood, in a ruling issued on June 17 th, 1998, that it is not possible to tax deduct the contributions made to a Dutch pension scheme/ plan. Nevertheless, the application of EU principles of free circulation of capitals and people make me inclined to defend the opinion that contributions to a PP in any of the member countries must be treated just the same as the already detailed contributions to Spanish PP s. It is difficult to reach the same conclusion when talking about contributions to PP s in countries which are not members of the EU, and in such cases the answer is probably bound to be negative. As far as non-residents are concerned I must point out the following facts: a. With Agreement, contributions to PP s have little significance because according to the Agreement with France, non-residents are subjected to Spanish Taxation. 9

10 b. Without Agreement, if contributions to PP s are made by one participant, they do not imply any favourable tax treatment; i.e., there will be no deduction, for this concept, of any amount within the NRIT to levy the labour yield gained in Spain. Contributions to a PP made by a non-resident promoter have little significance within the Spanish fiscal system; but if the contribution is made by a resident promoter with an individualized assignment to a participant, then it is considered as labour yield of the latter and consequently taxed in Spain(with a tax rate of 25%). C. Benefits from Pension Plans and Funds. As far as residents PF s are concerned, it is worth pointing out that they do not have any limitation as to the investment of available amounts, although regulations tend to favour investment in Spain since, having a zero tax rate, as we have seen, taxes paid abroad cannot be deducted from their instalment. Nevertheless, as we have also seen, this regulation is attenuated in practice when incomes are obtained in countries with which Spain has signed an agreement to avoid international double taxation, since it is common practice that, in such cases, incomes are subject to taxation in the residence country, that is, in Spain, with the above mentioned zero tax rate. As for non-residents PF s, we must draw a distinction between countries with Agreement and countries without Agreement. a. With Agreement. Generally, benefits from PF s in Spain are not subjected to taxation because, in accordance with the Agreement with France, they must be subjected to French regulation, although in some cases there must be a deduction at the source(withholding tax). b. Without Agreement. Incomes earned in Spain from PF are taxed in the Personal Income Tax, with tax rates that oscillate, usually between 25%(from the yield of marketable securities) and 35%(from capital gains). D. Pension Plan Services. 10

11 As far as services from foreign PP s received by residents are concerned, it could be argued that they have the same treatment as those from Spanish PP s, which we have already explained. The main argument states that Personal Income Tax Law regards such services as labour yield without having to take their origin into account. To this we must add, for PP s in EU countries, the same considerations we have just mentioned in relation to contributions. That is, the application of principles concerning the free circulation of people and capitals within the EU leads me to considering that services received from PP s in member countries must be treated just the same as those received from PP s in Spain. As for services received by non-residents, two cases must be distinguished: a. Countries with Agreement. According to the ruling issued by the Spanish General-Directorate of Taxes on December 3 rd, 1997, the benefit regime will be as follows: if they come from an Employment System Pension Plan, the services have no consequence because, according to the Agreement with France, this contributors are subjected to taxation in the residence country. If they come from other systems (say private or public), their interests will be treated, which means that they will be under spanish taxation at a rate of 10%. b. Countries without Agreement. Services provided for non-residents by foreign PP s are not taxed in Spain. On the other hand, those provided by Spanish are subjected to NRIT without specifications whatever the way is in which the service is provided. This tax is progressive, within a scale which oscillates between 8% for annual pensions up to 1,600,000 Pesetas, or 9, Euro), and 40% (for annual pensions beyond 2,500,000 Pesetas, that is, 15, Euro). VI. RECAPITULATION. The Spanish fiscal system in relation to private pensions, explained in this report, can be summarized, as suggested by the General Reporter, in the following outline: 1 st. Within-the-country Pensions: a. Contributions: Exempt (E) 11

12 b. Reserves: Exempt (E) c. Services: Fully taxable (T) 2 nd. Cross-border Pensions(residents): a. Contributions: Exempt (E) b. Reserves: Exempt (E) c. Services: Fully taxable (T) 3 rd. Cross-border Pensions(non-residents with Agreement): a. Contributions: Exempt (E) b. Reserves: Exempt (E) c. Services: Exempt (E) 4 th. Cross-border Pensions(non-residents without Agreement): a. Contributions: Fully Taxable (T) b. Reserves: Fully Taxable (T) c. Services: Fully taxable(t) VII. BIBLIOGRAPHY. Spanish bibliography dealing with PPF is plentiful, and it is not possible to offer an exhaustive relation here. Among the most recent works, the following should be mention: - ALONSO MURILLO, F.: Tributación de los Planes y fondos de Pensiones, Mc Graw Hill, Madrid, ID: Los sistemas privados de pensiones en la imposición estatal sobre la renta, Lex Nova, Valladolid, BAUZÁ, Mª. A.: Planes de Pensiones, en Comentarios al Impuesto sobre Sociedades, Cívitas Madrid, LÓPEZ DÍAZ, A.: Régimen tributario de las percepciones derivadas de Planes de Pensiones, en presente y futuro de la imposición directa en 12

13 España, Asociación Española de Asesores Fiscales- Lex Nova, Valladolid, MALVAREZ PASCUAL, L.A.: El régimen jurídico- tributario de los sistemas de previsión social (I y II), Quincena Fiscal, 1998 (números 2 y 3). - RAMIREZ MEDINA, E.: Régimen fiscal de los Planes y demás sistemas de previsión social, Actualidad Tributaria; 1992 (número 3). - SANCHEZ- MORENO GOMEZ, J.: El régimen fiscal de los sistemas empresariales de previsión social privada, Impuestos, 2000 (número 8). - SANZ GADEA, E.: Fondos de Pensiones, Revista de Estudios Financieros, 1989 (número 73). 13