NEW YEAR NEW RULES… WITH DISCOUNTS!
First of all I would like to congratulate to all our clients and readers of our blog for the new year so, happy new year!
During the month of January I use to write all our clients to let them know the most important changes for the New Year. These changes are always introduced at the end of the year in a specific Law passed by the Spanish Government.
This time the Law introducing the tax modifications for 2015 brings a lot of changes but also brings the new rules in relation with the Spanish Inheritance tax to adapt it to the recent ruling of the E.U. Justice Tribunal since the Kingdom of Spain has been found guilty of discrimination towards citizens of the E.U.
General Tax modifications
This year I am very glad typing this letter. I have more good news tan in the last 7 years. I don’t know if this may be a coincidence but perhaps the current favourable economic climate and more important the general elections in Spain scheduled for the 14th November 2015 may have may have something to do.
That’s how it is. This year we have good news to tell our clients. Several taxes have been modified but this time for good, reducing the tax burden instead of to multiply it. Interestingly enough the reduction of taxes has been designed to complete it in 2 years. This year’s taxes (tax year 2015) are reduced and will be more reduced for 2016. I will provide more details later on.
The modifications have been quite numerous but I will include in this post only the changes in the taxation for non-domiciled in Spain for tax purposes (non residents as we use to say):
A) Capital gains tax (C.G.T.) & Exemption for reinvestment.
During my career I was many times questioned why? Why it’s not possible for a European partner to have an exemption for reinvestment if they sell their Spanish property, same as Spanish citizen have.
I could not give a reason why. I used to say – and that is how it was may it be fair or not – that such advantage is only related to the permanent or main domicile which by nature can only be at the personal country but now it seems we use a different definition: habitual residence in Spain. This subtle change at the term / word used makes a big difference.
The exemption will work as long as all that is collected from the sale (original purchase price + profit made in the sale) is reinvested in a new habitual domicile. If only a part of said sum is reinvested then the saving on the CGT will be proportional to the amount invested.
This advantage is submitted to the same requirements as for Spanish tax residents meaning:
– That will be understood that the property is the habitual residence in Spain as long as it has been used for a minimum of 3 years.
– That there are 2 years upon the sale of the habitual residence in Spain to reinvest in order to avoid the payment of the CGT. In a different case the profit made on the sale will be subject to the C.G.T.
Please note that still there will be the usual 3% withholding tax. Very possibly – we still need to see how the Spanish Inaldn revenue will hold this – if there is any intention to reinvest the CGT it will be necessary to bring into the 3% refund process a certificate of tax residence in the home country as well as any evidence that the property sold has been the real habitual residence in Spain to which purposes it may be very helpful to register at the local Spanish Town hall.
B) Non-residents income tax (NRIT)
I refer here to the property tax that must be paid ever year by property owners in Spain. This is not the council tax (IBI in Andalusia – Suma in Costa Blanca) but it’s neither related to “incomes” as such.
Today the tax quote of this tax (NRIT) is the 24,75 % (of the 1,1% from the rateable value, roughly speaking). As from this Tax modification, the tax quote will be the 24 % from 2015 the though a discount is added here being that the effective tax quote for 2015 will be the 20% and the 19% for 2016. This is indeed a good tax saving for all foreign property owners!
C) Modifications related with the Spanish inheritance tax
During the last years I have been informing our clients about the existence of a case against the Kingdom of Spain at the European Tribunal of Justice for discrimination a the Spanish Inheritance tax, towards our European non resident partners. The case started in April 2013 and concluded with the verdict in September 2014.
At the ruling where the Kingdom of Spain is found guilty of discrimination it is ordered by the Tribunal that the necessary measures are taken to modify the Spanish Laws in accordance with the ruling. Precisely at the same Law where all the before explained modifications are put in place, also the Inheritance Tax is modified.
This is something that had to happen. It already happened in the past with the CGT when EEC citizens where paying a higher CGT than Spanish nationals (funny enough today is the opposite).
With this modification EEC partners can have the benefits at the regional Laws of each autonomous community in Spain. The discrimination was precisely this. Before we had in Spain a national or general inheritance Tax where the different Autonomous communities (Andalusia, Madrid, Valencia, etc.) where allowed to include discounts. In the case of Madrid the discount was the 99,99% so virtually there is no inheritance tax in Madrid.
Though the real good new would have been that the Inheritance tax disappears, it’s quite a good advantage because all autonomous regions include tasty discounts.
Still we need to see how the local Tax offices will deal with this matter. In Andalusia, where I am based, the survival spouse has a 99.99% discount of the tax over the “permanent residence” so does it mean that in this case the Inheritance tax disappears for survival spouses leaving it for the children that will inherit could be a really interesting advantage being, in this case, in a similar situation as it happens in the UK when the I.T is paid only on the second decease. Unfortunately we do not have in Spain the 325.000 Sterling Pound threshold at the tax… maybe we see something similar in 2016, who knows, so far all this sounds like very good news.
Jose F. Criado Sánchez
Senior partner at Criado & Kraus