Tag Archives: tax law

The donatio mortis causa

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The death is not predictable, but in certain cases we should be aware of the end, for example in cases of high age or severe disease. In Catalonia the law gives us an almost unknown possibility of partitioning our heritage and foreseeing its costs in advance.

This method is called donation mortis causa and it has many advantages compared to a common donation. The donation mortis causa is a kind of donation which could always be used if the object of the donation is real estate in Catalonia. It has many advantages in comparison to a common donation or the regular heritage. But you have to keep certain rules to ensure its acceptance by authorities.

Mainly it is a donation where the transfer of property at first does not occur but it takes effect in the moment of the donator’s death. The Spanish common law (that is the civil law of the regions of Spain with no own law, such as Catalonia) doesn’t really regard it as a donation: it is simply considered parallel to a legacy. But in Catalonia there is an own legal instrument which admits the donatio mortis causa under the following conditions:

  • Free revocability for the donator, which also means that the transfer of property at first doesn’t occur.
  • Its ineffectiveness if the donee predeceases, which means that the expectation is ineffective if the donee dies before the donator. In this case the property remains at the donator without any limitations.

The most important advantage in comparison to the common donation is a fiscal one. In case of the common donation the tax becomes due in the moment of the property transfer. In case of a donatio mortis causa the due date is not before the death of the donator.  And, on the other hand, the common donation is liable to the gift tax. At this kind of tax there is no amount of exemption allowed. But the donatio mortis causa is treated by authorities in the same way as a legacy, which means that it is liable to the inheritance tax. Here we can take profit of the legally alllowed amount of tax exemption.

But there are even more advantages in comparison to other possibilities of property transfers in the occasion of death, especially the simplicity of handling. It is neither necessary to define the successor exactly, nor to constitute who has to pay out for a certain legacy nor has the efficacy of the testament to be confirmed. This is especially important in cases of property transfers in case of heritage by foreigners. Here the law of the foreign country is always applicable. This is a point where foreign authorities come into play and make things more complicated. With the donatio mortis causa we avoid this in the moment of the formation of the contract and also in the moment of the enforcement of the property transfer as well. The title of ownership is created according to the rules to the lifetime of the donator. And for the enforcement  of the property transfer only the death certificate is needed (and no other documents else).

Carlos Prieto Cid, Lawyer

This article in German

The reintroduction of Spanish Wealth Tax

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A few months ago, US President Barack Obama announced to Congress: ”This is not class warfare, it’s math.” If the crisis leads to a fall in revenue for public authorities, spending must either be cut or taxes increased.

If we assume that governments cannot cut back on social services because the social rights they have achieved should not be touched due to the crisis, then new tax increases become necessary. Instead of raising existing taxes, the former Spanish government had preferred to try to maintain the level of revenue it needs by reintroducing a recently-abolished tax: the IMPUESTO DE PATRIMONIO, or Wealth Tax.  This tax was never actually abolished, although the full rate was indeed scrapped in 2009 with a 100% rebate. The government has therefore simply done away with this rebate in order to reintroduce Wealth Tax.

The tax applies from 18 September 2011, although the concession is scheduled to increase once more in 2013. This means that Wealth Tax declarations need only be submitted for the years 2011 and 2012 (due on 31 December each year). It is important to remember that non-residents are also obliged to pay this tax. Declarations must be submitted to the tax office each year together with the income tax declaration.

The most important changes to the rules on Wealth Tax introduced in the Real Decreto-ley 13/2011 are the following:

1. Tax allowance on residences: the maximum rate for tax exemptions on the value of the own residence (for residents) has been raised to €300,000 (previously €150,253.03).

2. General tax allowance: unless the autonomous communities rule otherwise, the general tax threshold is €700,000.-

Whether these new rules and the reintroduction of the tax will have any real impact or affect public authorities’ revenues is debatable. It appears that the Socialist Party intended to make political capital through the reintroduction of a ‘tax on the rich’ (elections took place in a short time after de tax reform and they were a spectacular failure for the Socialist Party anyway ), but the real impact of the tax’s reintroduction will not be able to solve the difficult situation surrounding the public finances.

Carlos Prieto Cid, Lawyer

This article in German

Income Tax for foreign property owners

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Foreign nationals who are not registered for tax in Spain but own property in the country must submit a tax declaration for their income tax to the state tax office every year. This involves the so-called Impuesto de la Renta de No Residentes (Income Tax for Non-residents).

Many property owners do not understand why they must declare and pay tax in Spain even though they earn no income here because they only come here for holidays and therefore neither work nor are involved in any economic activities or receive interest from banks on financial investments. There is usually no rental income from property either. Despite this, in Spain (much like in other European countries), simply owning a property is regarded as income, even when the property is not let or leased out. The state tax system assumes that a profit is made from the property even if it is not rented out, it is not the own home or if the property is not dedicated to economic activity, which for non-residents can never be the case.

How is this fictitious return calculated? Spanish law stipulates that income earned from the simple possession of a property equates to a certain percentage of its cadastral value. This percentage is either 2% or 1.1%, depending on the year in which the Spanish Land Registry (or rather, the respective municipality), updated its property values. The Land Registry (Catastro) is a national register of properties, answerable to the Spanish tax office, which gives the authorities information about these properties (owners, size, use, year of construction, boundaries, etc.). The information stored at the Land Registry can be submitted by Land Registry officials themselves, the municipalities or the owners of the property. One of the most important pieces of information on every property is in fact the cadastral value. This value is dependent on many other objective details and here on the coast can generally be a lot lower than the market price that we would set for the property.

Despite this, this objective value is decisive for almost all authorities and provides the basis for many taxes, including income tax for non-residents. This percentage of the cadastral value is therefore the basis for income tax for non-residents, which is currently 24%. Every year, the owners must pay the resulting sum by 31 December the following year. This means that foreigners who own a property in 2011 must submit their tax declaration to the tax office and pay the tax by 31 December, 2012. In 2008, the tax office changed the forms for this declaration, which caused problems for many foreigners who did not hear about this amendment in time. Until then, Form 214 was used, but now Form 210 must be completed. The change was a consequence of recent tax reforms, which saw the abolition of property tax. However, the tax for non-residents was retained because it is regarded as a form of income tax rather than a property tax.

Otherwise, for non-residents there are only the local rates, the so-called IBI, which are paid as a municipal tax that every municipality demands from property owners each year and which is calculated and demanded by the local authority itself.

Carlos Prieto Cid, Lawyer

This article in german

Save taxes by planning your inheritance

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After years giving advice to foreign residents with property in Spain, we can offer our experience to those with a little forethought who want to save their loved ones a lot of problems and, above all, a lot of money, by planning the inheritance. A good tax planning can significantly reduce expenses and taxes payable by the heirs. This is true in all cases, but especially when dealing with a legacy of non-residents, that is, assets in Spain who are or have to be registered to the name of people without tax residence.

If you have property in Spain (real estate or personal property, such as deposits in banks or cars) you must expect that your descendants or the people you have appointed in a will as heirs, will have to arrange various legalizations after your death to officially become ownerships of the inherited assets (so that the heirs of these estates can actually take profit of them, that is, sell them or obtain a mortgage). Each of these instruments is taxed. If we want to avoid problems to our heirs, we can plan a few things so that our heirs can simplify everything at the moment of the acceptance of inheritance.

A possibility is to try to transfer the property during our life to save taxes: but we must be sure which taxes are also to be paid in the case of a free transfer or a donation of real estate, to avoid that this transfer of ownership in lifetime does result more expensive than the acceptance of inheritance in case of death. In a purchase contract, there is another tax, but it can have also as a result a very significant amount. As a rule, in case of non-residents who have purchased the property many years ago, the sales tax can be cheaper than the gift or inheritance, but each case must be examined separately.

For non-residents it is a typical procedure to pass the net property to the younger during the life of the older ones. We recommend to formalize a transfer of bare ownership, because despite the age of the parents it is a bit cheaper anyway than to sell the whole property (nuda proprietas or bare ownership plus usufruct) and much cheaper than a gift or an inheritance of the object (pay attention: we are talking exclusively about non-resident: for the resident, thanks to the recent tax reforms, the inheritance is seen as the best mode of transmission as a rule). If we formalize a sale of the bare ownership to the eventual heir, the taxable return for the transfer (that means the purchase price declared in the deed), is the value of this bare ownership, actually the result of the full value of the property minus the value of the usufruct, because the older ones just maintain this usufruct on and what the purchaser gets then is only the bare ownership (ownership without usufruct). We save taxes because the value of the usufruct is deducted, although this value is usually very low due to the age. The usufruct, which is not transferred in this moment, can be deleted after the death of the parents without tax costs.

In any case, it is highly recommended to get advice from a lawyer, as only he can provide proper advice and legal assistance when translating the will of the parties in the legal and technical language, formalizing the definitive agreements, preparing the deed of the notary and foreseeing the fiscal implications of the business. We want to reiterate that the role of lawyer and notary in Spain is totally disconnected (unlike in other countries). Here in Spain, the notary must never represent the interests of a party, even consultation is not allowed. He is only one official, who certifies the businesses that are already negotiated, accepted and formalized and who controls that all required taxes are properly paid by the parties. For this very reason, the involvement of a lawyer is so important, because he represents only your interests and gives you independent advice.

Carlos Prieto Cid, Lawyer

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Spain reported to the European Court of Justice because of the tax discrimination against foreigners

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The European commission has brought the Kingdom of Spain to the Court of the European Union on 27.10.2011, because the Spanish tax regulations generally  discriminate foreigners with no official residence when acquiring properties in Spain through an inheritance or a gift; they have to pay much more tax on an inheritance or a gift acceptance than the residents.

The European Commission had requested Spain to amend its provisions on inheritance and gift tax, which allow for a higher tax burden on non-residents and foreign assets.  The commission sent Spain a reasoned opinion on 5 May 2010 (IP/10/513).  Spanish legislation was amended, but was considered still not compatible with EU law.  The commission has therefore decided to send Spain a complementary reasoned opinion, in which it requests further amendments to be made in order to achieve full compliance with EU law. As can be seen from the European Commission’s request in February 2011, provisions in the various Comunidades Autonomas (Spanish regions with their own legislative powers) are incompatible with the free movement of workers and capital under the terms of the Treaty on the Functioning of the European Union.  The commission’s request was sent in the form of a complementary reasoned opinion.  The Kingdom of Spain had two months to send the Commission a satisfactory response, but the Commission has finally decided to bring Spain to the European Court of Justice.

Since the founding of the Single Market, the European Union has protected the so-called “four freedoms”: the free movement of goods, capital, services and people.  This means that in principle, trade between member states is therefore free from any restrictions, and EU citizens can enjoy the free movement of workers and right of residence.   It also guarantees that any businessperson residing in an EU member state may also offer and provide their services in other member states, and that the transfer of any amount of funds and securities is not only permitted between member states, but also between member states and countries outside the EU.  However, the exercising of the latter, the free movement of capital, can be affected when the regulations on capital tax within the EU (and even within member states) differ so greatly.  This also applies to regulations on inheritance tax.  In Spain, inheritance and gift tax is regulated both at national level and by the autonomous communities.  In practice, regulations set by the autonomous communities mean that tax is considerably lower than under national regulations.  If a gift or inheritance does not come under the jurisdiction of an autonomous community, only national regulations apply.  This is particularly the case if the recipient of the inheritance or gift lives abroad or it involves foreign assets.  Taxes on non-residents and foreign assets are accordingly higher.  The European Commission views this as a breach of the freedom of movement of workers and capital, which are guaranteed under the terms of the Treaty on the Functioning of the European Union (Articles 45 and 63 respectively).

Carlos Prieto Cid, Lawyer

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