Tax Reform Enforced on January 1ST, 2015
09 January 2015
“The Tax Reform does not incentivate Real Estate Investment”
It would be safe to say that no major changes affect the real estate market in the recently enforced Tax Reform. The Reform reflects no significant modification that will motivate or relaunch the market, except for isolated modifications, some of which deal with the elimination of tax benefits. Of special importance here are the limitations imposed on coefficients for tax abatement and the elimination of correction coefficients, related especially with the sale of real estate as we will see further on. Also we will look into changes in the Income Tax rate for non-residents.
Some of the proposals put forth in the Report issued by the Committee of Experts have not been taken into consideration. These ideas would have been hugely beneficial for the second hand home market; for example, the gradual eradication of Stamp Duties.
On the other hand there has been a modification in the Inheritance and Gift Tax Law that may reduce the tax burden for the non-resident. This modification, reflected in point number 4 of the present report, has come about as a result of the ruling of the
European Community Court of Justice dated September 3rd that considers Spain does not comply with article 63 of the treaty for Management of the European Union and article 40 related to the Agreement for Economic European Area.
- Publication in the Official State Bulletin (Boletin oficial del Estado).
In our note dated march 17th, 2014 we informed that the Committee of Experts, created by the government to approach the reform of the Spanish tax system, presented their report to the Council of Ministers on the 14th of March. On November 28th 2014 the Official State Bulletin published the legislation passed and detailed below and that integrate the modifications of the Spanish tax system:
– Law 26/2014 that modifies Law 35/2006, of November 28th, on Income Tax (IRPF), the consolidated text for Non-Resident Income Tax (IRNR) approved by Legislative Royal Decree 5/2004 of March 5th and other tax norms.
– Law 27/2014, of November 27th on Company Tax (IS).
– Law 28/2014, of November 27th, that modifies Law 37/1992, of December 28th, on Value Added Tax (IVA), Law 20/1991, of June 7th, that modifies tax aspects of the Economic Tax System for Canary Islands, Law 38/1992, of December 28th, on Special Taxes, and the Law 16/2013, of October 29th, by which specific measures are established in environmental tax issues and others on tax and financial matters.
As we can see, the first and the third are laws that modify existing legislation, and the second (IS) abolishes the existing norm. With some exceptions, the three Laws have been enforced as of January 1st 2015.
In the following paragraphs we will look into some of the new modifications introduced by the first of the referred norms: Law 26/2014.
- Modification of the Non-Resident Income Tax Law:
Below we will highlight some of the changes introduced by the Law 26/2014 in the IRNR:
2.1. Tax Rates:
The following modifications are introduced to the tax rates:
– The 35% tax rate will no longer be applied to the taxable base of a permanent establishment; the applicable rate will be amongst those in the IS.
– Regarding income obtained without permanent establishment, the law maintains the 24% rate (Note that up to December 31st 2014 the transit rate of 24.75% was applied), but introduces a rate of 19% for those tax payers resident in other member states of the European Union or the European Economic Area with which there is an effective exchange of tax information. This rate is 19% and not 24%. An additional ninth provisdion is added to the Law IRNR, by which, in 2015, the tax rate will be 20%.
– Companies receiving income abroad and with presence in Spanish territory will see a reduction in their tax rate from 35% to 25%.
– The tax rate applicable in 2015 to “dividends and other income resulting from equity; interest and any other income derived from the transfer or assignment of own capital to third parties; and, capital gains that arise from transmission of assets” will be 20% instead of 19%. This, as a result of an additional ninth provision (note that up to December 31st 2014 the transit rate of 21% was applied).
– In the same context as the paragraph above, the complementary rate applied to income resulting from permanent establishments and that is transferred abroad, will be 20% in 2015 instead of 19%.
2.2. Exemptions:
– An additional exemption is added, similar to that applied in the IRPF; capital gains obtained by resident taxpayers in a state member of the European Union or European Economic Area with which there is an effective exchange of tax information in the terms reflected in paragraph 4 of the first additional provision of Law 36/2006, for the transmission of first home in Spain, as long as the amount obtained in said transmission is reinvested in the purchase of another property destined to be the main home. If the amount invested is less than that received in the previous transmission, only the amount reinvested will be exempt from capital gains tax. The 3% withholding tax and its deposit is not excluded and is to be complied with.
– There is a change in the requirements to consider exempt dividends paid to mother companies resident in states of the European Economic Area. If, up to now, the requirement is that the state harboring the mother company is to have an Agreement with Spain to avoid double taxation with the clause of exchange of tax information, from now on it is required that these countries “have an effective exchange of tax information in the terms reflected in paragraph 4 of the first additional provision of Law 36/2006, of November 29th, on measures for the prevention of tax fraud.”
– Similarly to the modification of the IRPF Law, the exemption of 1.500,00€ on dividends obtained without permanent establishment by resident private individuals in another state member of the European Union or in countries or territories with which there is an effective exchange of tax information, is abolished.
2.3. Other Modifications:
– An article 28 bis is added permitting the Tax Administration to offer the taxpayer, when requested and for mere information purposes, drafts of tax returns, referred exclusively to imputed real estate income.
– To calculate the taxable rate for imputed rental income, by remission to the IRPF Law, up to December 2014 a 2% is used. It will be 1.1% for properties located in municipalities where the cadastral values have been revised by a general “Ponencia de Valores” and enforced since January 1st 1994. This way, the rate of 1.1% will only be applied to cadastral values revised in the last 10 tax periods prior to the moment in which the income is to be imputed.
- Modifications to the Income Tax Law.
Detailed below are some of the modifications in the IRPF:
3.1. Elimination of correction coefficients and currency correction and limitations to the application of tax abatement coefficients.
Currency correction coefficients applied to the purchase value for the calculation of capital gains has been canceled and the applications of tax abatement coefficients have been limited.
With legislation up to December 31st 2014, in the IRPF Law, to calculate the capital gain in the transmission of property there are two tax benefits. One is the mentioned correction coefficient which aims to update the value of purchase of the property; and, the other is a right to reduce the capital gain obtained in the transmission of property purchased prior to December 31st 1994. This reduction is obtained by applying the referred abatement coefficients.
Now, the reform eliminates the correction coefficient and limits the application of the abatement coefficients. This way, these coefficients are applied to capital gains resulting from the sale of assets that take place as of January 1st 2015 and that were bought before December 31st 1994, but with a maximum of 400.000€. Also, from the reform we deduce that the referred 400.000€ is not the value of a single transmission but the combination of all assets that are transmitted as of January 1st 2015 and that have resulted of the application of the coefficients, regardless of the fact that the sale may take place at any different moment in time.
3.2. New exemption:
– A third paragraph is added to article 38 by which transmission of assets by taxpayers over 65 are exempt; the total amount received in the said transmission must be destined, in a six month period, to a life annuity in his favor. The maximum for this annuity is 240.000€. If the total amount obtained is not placed in the life annuity, only the amount insured will be exempt from capital gains.
3.3. New case for capital gains.
In cases where the taxpayer has been a resident in Spain for the last 10 years of the 15 tax periods prior to the last in which he must declare his IRPF, and loses his condition as a result of change of domicile, and, some of the circumstances of article 95 bis, which is introduced, concur, the positive difference between the market value of stock or shares in any type of entity and the purchase value will be considered capital gains.
3.4. Civil companies with commercial form will be taxable under the IS
Civil companies with commercial form will be subject to Company Tax Law as of January 1st 2016, and will no longer declare as companies with income allocation under the IRPF. In these cases, a special system for dissolution and liquidation has been established, with tax benefits.
3.5. Special tax regime to be applied to expatriates employed in Spain.
As already explained in our Note dated March 17th, in the Lagares Report, a modification to this regime was proposed, known as “for non-habitual residents” with the purpose of it being applied not only (as is the case with the norm under modification)to expatriates on Spanish territory under a labor contract. This regime, as was established in the norm that is now modified, was not applicable, for example to a foreign pensioner, director or administrator with a higher level of income. In this respect and with a view to boosting foreign real estate investment in Spain and also enable high-rent pensioners and workers to establish their tax residence in Spain, the Commission of Experts proposed, amongst others, the following modifications:
– Broaden the scope of the “tax regime for foreign non-habitual residents” to all those who have expatriated to Spain, not only under a labor contract, but also those who deal in economic activities without permanent establishment; such as directors, shareholders, pensioners and those entitled to dividends from stock or real estate.
– Eliminate the requirement that the annual retribution not surpass 600.000€ per year.
– Cancel the tax imputation to those taxpayers under this system.
It is clear that this proposal wishes to enable administrators and directors of large companies to spend more time in Spain and, therefore, be considered tax residents but without an excessive tax burden for them.
The reform broadens the scope to administrators or directors for companies of which they are not shareholders or, if they are, it cannot be inferred that the company is linked in the terms of the IS Law. The limitation of income below 600.000€ is canceled.
- Modifications to the Inheritance and Gift Tax Law
On September 3rd 2014, the European Community Court of Justice ruled
considering Spain did not comply with article 63 of the treaty for Management of the European Union and article 40 related to the Agreement for Economic European Area in that the tax reductions applicable under the Inheritance and Gift Tax Law (ISD) by the Autonomous Communities in Spain are not made extensive to non- residents.
As a result of this court ruling, the second additional provision of the Inheritance and Gift Tax Law has been modified, by which each Autonomous Community may apply its own tax regime when the deceased or taxpayer (in the case of inheritance, legacy or any other title) are residents in a member state of the European Union or Economic European Area. This implies the application of tax deductions of each Autonomous Community.
This Autonomous Community regime is also applicable to any gift or other legal activity of gratuitous nature, “intervivos” of assets when the non-resident taxpayer is a resident in a member state of the European Union or Economic European Area. This tax regime is also applicable to resident taxpayers in Spain who obtain assets in a member state of the European Union or Economic European Area.
- Modification to the Estate Tax law.
An additional provision is added to the Estate Tax Law by which non- resident taxpayers resident in a member state of the European Union or Economic European Area will be entitled to declare under the regime of the Autonomous Community that harbors the greatest value of assets of which he holds title and for which he must declare because they are located, may be exercised or must be complied with in Spain.
.
TAX REFORM ENFORCED ON JANUARY 1ST, 2015
THE TAX REFORM DOES NOT INCENTIVATE REAL ESTATE INVESTMENT
It would be safe to say that no major changes affect the real estate market in the recently enforced Tax Reform. The Reform reflects no significant modification that will motivate or relaunch the market, except for isolated modifications, some of which deal with the elimination of tax benefits. Of special importance here are the limitations imposed on coefficients for tax abatement and the elimination of correction coefficients, related especially with the sale of real estate as we will see further on. Also we will look into changes in the Income Tax rate for non-residents.
Some of the proposals put forth in the Report issued by the Committee of Experts have not been taken into consideration. These ideas would have been hugely beneficial for the second hand home market; for example, the gradual eradication of Stamp Duties.
On the other hand there has been a modification in the Inheritance and Gift Tax Law that may reduce the tax burden for the non-resident. This modification, reflected in point number 4 of the present report, has come about as a result of the ruling of the
European Community Court of Justice dated September 3rd that considers Spain does not comply with article 63 of the treaty for Management of the European Union and article 40 related to the Agreement for Economic European Area.
- Publication in the Official State Bulletin (Boletin oficial del Estado).
In our note dated march 17th, 2014 we informed that the Committee of Experts, created by the government to approach the reform of the Spanish tax system, presented their report to the Council of Ministers on the 14th of March. On November 28th 2014 the Official State Bulletin published the legislation passed and detailed below and that integrate the modifications of the Spanish tax system:
– Law 26/2014 that modifies Law 35/2006, of November 28th, on Income Tax (IRPF), the consolidated text for Non-Resident Income Tax (IRNR) approved by Legislative Royal Decree 5/2004 of March 5th and other tax norms.
– Law 27/2014, of November 27th on Company Tax (IS).
– Law 28/2014, of November 27th, that modifies Law 37/1992, of December 28th, on Value Added Tax (IVA), Law 20/1991, of June 7th, that modifies tax aspects of the Economic Tax System for Canary Islands, Law 38/1992, of December 28th, on Special Taxes, and the Law 16/2013, of October 29th, by which specific measures are established in environmental tax issues and others on tax and financial matters.
As we can see, the first and the third are laws that modify existing legislation, and the second (IS) abolishes the existing norm. With some exceptions, the three Laws have been enforced as of January 1st 2015.
In the following paragraphs we will look into some of the new modifications introduced by the first of the referred norms: Law 26/2014.
- Modification of the Non-Resident Income Tax Law:
Below we will highlight some of the changes introduced by the Law 26/2014 in the IRNR:
2.1. Tax Rates:
The following modifications are introduced to the tax rates:
– The 35% tax rate will no longer be applied to the taxable base of a permanent establishment; the applicable rate will be amongst those in the IS.
– Regarding income obtained without permanent establishment, the law maintains the 24% rate (Note that up to December 31st 2014 the transit rate of 24.75% was applied), but introduces a rate of 19% for those tax payers resident in other member states of the European Union or the European Economic Area with which there is an effective exchange of tax information. This rate is 19% and not 24%. An additional ninth provisdion is added to the Law IRNR, by which, in 2015, the tax rate will be 20%.
– Companies receiving income abroad and with presence in Spanish territory will see a reduction in their tax rate from 35% to 25%.
– The tax rate applicable in 2015 to “dividends and other income resulting from equity; interest and any other income derived from the transfer or assignment of own capital to third parties; and, capital gains that arise from transmission of assets” will be 20% instead of 19%. This, as a result of an additional ninth provision (note that up to December 31st 2014 the transit rate of 21% was applied).
– In the same context as the paragraph above, the complementary rate applied to income resulting from permanent establishments and that is transferred abroad, will be 20% in 2015 instead of 19%.
2.2. Exemptions:
– An additional exemption is added, similar to that applied in the IRPF; capital gains obtained by resident taxpayers in a state member of the European Union or European Economic Area with which there is an effective exchange of tax information in the terms reflected in paragraph 4 of the first additional provision of Law 36/2006, for the transmission of first home in Spain, as long as the amount obtained in said transmission is reinvested in the purchase of another property destined to be the main home. If the amount invested is less than that received in the previous transmission, only the amount reinvested will be exempt from capital gains tax. The 3% withholding tax and its deposit is not excluded and is to be complied with.
– There is a change in the requirements to consider exempt dividends paid to mother companies resident in states of the European Economic Area. If, up to now, the requirement is that the state harboring the mother company is to have an Agreement with Spain to avoid double taxation with the clause of exchange of tax information, from now on it is required that these countries “have an effective exchange of tax information in the terms reflected in paragraph 4 of the first additional provision of Law 36/2006, of November 29th, on measures for the prevention of tax fraud.”
– Similarly to the modification of the IRPF Law, the exemption of 1.500,00€ on dividends obtained without permanent establishment by resident private individuals in another state member of the European Union or in countries or territories with which there is an effective exchange of tax information, is abolished.
2.3. Other Modifications:
– An article 28 bis is added permitting the Tax Administration to offer the taxpayer, when requested and for mere information purposes, drafts of tax returns, referred exclusively to imputed real estate income.
– To calculate the taxable rate for imputed rental income, by remission to the IRPF Law, up to December 2014 a 2% is used. It will be 1.1% for properties located in municipalities where the cadastral values have been revised by a general “Ponencia de Valores” and enforced since January 1st 1994. This way, the rate of 1.1% will only be applied to cadastral values revised in the last 10 tax periods prior to the moment in which the income is to be imputed.
- Modifications to the Income Tax Law.
Detailed below are some of the modifications in the IRPF:
3.1. Elimination of correction coefficients and currency correction and limitations to the application of tax abatement coefficients.
Currency correction coefficients applied to the purchase value for the calculation of capital gains has been canceled and the applications of tax abatement coefficients have been limited.
With legislation up to December 31st 2014, in the IRPF Law, to calculate the capital gain in the transmission of property there are two tax benefits. One is the mentioned correction coefficient which aims to update the value of purchase of the property; and, the other is a right to reduce the capital gain obtained in the transmission of property purchased prior to December 31st 1994. This reduction is obtained by applying the referred abatement coefficients.
Now, the reform eliminates the correction coefficient and limits the application of the abatement coefficients. This way, these coefficients are applied to capital gains resulting from the sale of assets that take place as of January 1st 2015 and that were bought before December 31st 1994, but with a maximum of 400.000€. Also, from the reform we deduce that the referred 400.000€ is not the value of a single transmission but the combination of all assets that are transmitted as of January 1st 2015 and that have resulted of the application of the coefficients, regardless of the fact that the sale may take place at any different moment in time.
3.2. New exemption:
– A third paragraph is added to article 38 by which transmission of assets by taxpayers over 65 are exempt; the total amount received in the said transmission must be destined, in a six month period, to a life annuity in his favor. The maximum for this annuity is 240.000€. If the total amount obtained is not placed in the life annuity, only the amount insured will be exempt from capital gains.
3.3. New case for capital gains.
In cases where the taxpayer has been a resident in Spain for the last 10 years of the 15 tax periods prior to the last in which he must declare his IRPF, and loses his condition as a result of change of domicile, and, some of the circumstances of article 95 bis, which is introduced, concur, the positive difference between the market value of stock or shares in any type of entity and the purchase value will be considered capital gains.
3.4. Civil companies with commercial form will be taxable under the IS
Civil companies with commercial form will be subject to Company Tax Law as of January 1st 2016, and will no longer declare as companies with income allocation under the IRPF. In these cases, a special system for dissolution and liquidation has been established, with tax benefits.
3.5. Special tax regime to be applied to expatriates employed in Spain.
As already explained in our Note dated March 17th, in the Lagares Report, a modification to this regime was proposed, known as “for non-habitual residents” with the purpose of it being applied not only (as is the case with the norm under modification)to expatriates on Spanish territory under a labor contract. This regime, as was established in the norm that is now modified, was not applicable, for example to a foreign pensioner, director or administrator with a higher level of income. In this respect and with a view to boosting foreign real estate investment in Spain and also enable high-rent pensioners and workers to establish their tax residence in Spain, the Commission of Experts proposed, amongst others, the following modifications:
– Broaden the scope of the “tax regime for foreign non-habitual residents” to all those who have expatriated to Spain, not only under a labor contract, but also those who deal in economic activities without permanent establishment; such as directors, shareholders, pensioners and those entitled to dividends from stock or real estate.
– Eliminate the requirement that the annual retribution not surpass 600.000€ per year.
– Cancel the tax imputation to those taxpayers under this system.
It is clear that this proposal wishes to enable administrators and directors of large companies to spend more time in Spain and, therefore, be considered tax residents but without an excessive tax burden for them.
The reform broadens the scope to administrators or directors for companies of which they are not shareholders or, if they are, it cannot be inferred that the company is linked in the terms of the IS Law. The limitation of income below 600.000€ is canceled.
- Modifications to the Inheritance and Gift Tax Law
On September 3rd 2014, the European Community Court of Justice ruled
considering Spain did not comply with article 63 of the treaty for Management of the European Union and article 40 related to the Agreement for Economic European Area in that the tax reductions applicable under the Inheritance and Gift Tax Law (ISD) by the Autonomous Communities in Spain are not made extensive to non- residents.
As a result of this court ruling, the second additional provision of the Inheritance and Gift Tax Law has been modified, by which each Autonomous Community may apply its own tax regime when the deceased or taxpayer (in the case of inheritance, legacy or any other title) are residents in a member state of the European Union or Economic European Area. This implies the application of tax deductions of each Autonomous Community.
This Autonomous Community regime is also applicable to any gift or other legal activity of gratuitous nature, “intervivos” of assets when the non-resident taxpayer is a resident in a member state of the European Union or Economic European Area. This tax regime is also applicable to resident taxpayers in Spain who obtain assets in a member state of the European Union or Economic European Area.
- Modification to the Estate Tax law.
An additional provision is added to the Estate Tax Law by which non- resident taxpayers resident in a member state of the European Union or Economic European Area will be entitled to declare under the regime of the Autonomous Community that harbors the greatest value of assets of which he holds title and for which he must declare because they are located, may be exercised or must be complied with in Spain.
THE TAX REFORM DOES NOT INCENTIVATE REAL ESTATE INVESTMENT
It would be safe to say that no major changes affect the real estate market in the recently enforced Tax Reform. The Reform reflects no significant modification that will motivate or relaunch the market, except for isolated modifications, some of which deal with the elimination of tax benefits. Of special importance here are the limitations imposed on coefficients for tax abatement and the elimination of correction coefficients, related especially with the sale of real estate as we will see further on. Also we will look into changes in the Income Tax rate for non-residents.
Some of the proposals put forth in the Report issued by the Committee of Experts have not been taken into consideration. These ideas would have been hugely beneficial for the second hand home market; for example, the gradual eradication of Stamp Duties.
On the other hand there has been a modification in the Inheritance and Gift Tax Law that may reduce the tax burden for the non-resident. This modification, reflected in point number 4 of the present report, has come about as a result of the ruling of the
European Community Court of Justice dated September 3rd that considers Spain does not comply with article 63 of the treaty for Management of the European Union and article 40 related to the Agreement for Economic European Area.
- Publication in the Official State Bulletin (Boletin oficial del Estado).
In our note dated march 17th, 2014 we informed that the Committee of Experts, created by the government to approach the reform of the Spanish tax system, presented their report to the Council of Ministers on the 14th of March. On November 28th 2014 the Official State Bulletin published the legislation passed and detailed below and that integrate the modifications of the Spanish tax system:
– Law 26/2014 that modifies Law 35/2006, of November 28th, on Income Tax (IRPF), the consolidated text for Non-Resident Income Tax (IRNR) approved by Legislative Royal Decree 5/2004 of March 5th and other tax norms.
– Law 27/2014, of November 27th on Company Tax (IS).
– Law 28/2014, of November 27th, that modifies Law 37/1992, of December 28th, on Value Added Tax (IVA), Law 20/1991, of June 7th, that modifies tax aspects of the Economic Tax System for Canary Islands, Law 38/1992, of December 28th, on Special Taxes, and the Law 16/2013, of October 29th, by which specific measures are established in environmental tax issues and others on tax and financial matters.
As we can see, the first and the third are laws that modify existing legislation, and the second (IS) abolishes the existing norm. With some exceptions, the three Laws have been enforced as of January 1st 2015.
In the following paragraphs we will look into some of the new modifications introduced by the first of the referred norms: Law 26/2014.
- Modification of the Non-Resident Income Tax Law:
Below we will highlight some of the changes introduced by the Law 26/2014 in the IRNR:
2.1. Tax Rates:
The following modifications are introduced to the tax rates:
– The 35% tax rate will no longer be applied to the taxable base of a permanent establishment; the applicable rate will be amongst those in the IS.
– Regarding income obtained without permanent establishment, the law maintains the 24% rate (Note that up to December 31st 2014 the transit rate of 24.75% was applied), but introduces a rate of 19% for those tax payers resident in other member states of the European Union or the European Economic Area with which there is an effective exchange of tax information. This rate is 19% and not 24%. An additional ninth provisdion is added to the Law IRNR, by which, in 2015, the tax rate will be 20%.
– Companies receiving income abroad and with presence in Spanish territory will see a reduction in their tax rate from 35% to 25%.
– The tax rate applicable in 2015 to “dividends and other income resulting from equity; interest and any other income derived from the transfer or assignment of own capital to third parties; and, capital gains that arise from transmission of assets” will be 20% instead of 19%. This, as a result of an additional ninth provision (note that up to December 31st 2014 the transit rate of 21% was applied).
– In the same context as the paragraph above, the complementary rate applied to income resulting from permanent establishments and that is transferred abroad, will be 20% in 2015 instead of 19%.
2.2. Exemptions:
– An additional exemption is added, similar to that applied in the IRPF; capital gains obtained by resident taxpayers in a state member of the European Union or European Economic Area with which there is an effective exchange of tax information in the terms reflected in paragraph 4 of the first additional provision of Law 36/2006, for the transmission of first home in Spain, as long as the amount obtained in said transmission is reinvested in the purchase of another property destined to be the main home. If the amount invested is less than that received in the previous transmission, only the amount reinvested will be exempt from capital gains tax. The 3% withholding tax and its deposit is not excluded and is to be complied with.
– There is a change in the requirements to consider exempt dividends paid to mother companies resident in states of the European Economic Area. If, up to now, the requirement is that the state harboring the mother company is to have an Agreement with Spain to avoid double taxation with the clause of exchange of tax information, from now on it is required that these countries “have an effective exchange of tax information in the terms reflected in paragraph 4 of the first additional provision of Law 36/2006, of November 29th, on measures for the prevention of tax fraud.”
– Similarly to the modification of the IRPF Law, the exemption of 1.500,00€ on dividends obtained without permanent establishment by resident private individuals in another state member of the European Union or in countries or territories with which there is an effective exchange of tax information, is abolished.
2.3. Other Modifications:
– An article 28 bis is added permitting the Tax Administration to offer the taxpayer, when requested and for mere information purposes, drafts of tax returns, referred exclusively to imputed real estate income.
– To calculate the taxable rate for imputed rental income, by remission to the IRPF Law, up to December 2014 a 2% is used. It will be 1.1% for properties located in municipalities where the cadastral values have been revised by a general “Ponencia de Valores” and enforced since January 1st 1994. This way, the rate of 1.1% will only be applied to cadastral values revised in the last 10 tax periods prior to the moment in which the income is to be imputed.
- Modifications to the Income Tax Law.
Detailed below are some of the modifications in the IRPF:
3.1. Elimination of correction coefficients and currency correction and limitations to the application of tax abatement coefficients.
Currency correction coefficients applied to the purchase value for the calculation of capital gains has been canceled and the applications of tax abatement coefficients have been limited.
With legislation up to December 31st 2014, in the IRPF Law, to calculate the capital gain in the transmission of property there are two tax benefits. One is the mentioned correction coefficient which aims to update the value of purchase of the property; and, the other is a right to reduce the capital gain obtained in the transmission of property purchased prior to December 31st 1994. This reduction is obtained by applying the referred abatement coefficients.
Now, the reform eliminates the correction coefficient and limits the application of the abatement coefficients. This way, these coefficients are applied to capital gains resulting from the sale of assets that take place as of January 1st 2015 and that were bought before December 31st 1994, but with a maximum of 400.000€. Also, from the reform we deduce that the referred 400.000€ is not the value of a single transmission but the combination of all assets that are transmitted as of January 1st 2015 and that have resulted of the application of the coefficients, regardless of the fact that the sale may take place at any different moment in time.
3.2. New exemption:
– A third paragraph is added to article 38 by which transmission of assets by taxpayers over 65 are exempt; the total amount received in the said transmission must be destined, in a six month period, to a life annuity in his favor. The maximum for this annuity is 240.000€. If the total amount obtained is not placed in the life annuity, only the amount insured will be exempt from capital gains.
3.3. New case for capital gains.
In cases where the taxpayer has been a resident in Spain for the last 10 years of the 15 tax periods prior to the last in which he must declare his IRPF, and loses his condition as a result of change of domicile, and, some of the circumstances of article 95 bis, which is introduced, concur, the positive difference between the market value of stock or shares in any type of entity and the purchase value will be considered capital gains.
3.4. Civil companies with commercial form will be taxable under the IS
Civil companies with commercial form will be subject to Company Tax Law as of January 1st 2016, and will no longer declare as companies with income allocation under the IRPF. In these cases, a special system for dissolution and liquidation has been established, with tax benefits.
3.5. Special tax regime to be applied to expatriates employed in Spain.
As already explained in our Note dated March 17th, in the Lagares Report, a modification to this regime was proposed, known as “for non-habitual residents” with the purpose of it being applied not only (as is the case with the norm under modification)to expatriates on Spanish territory under a labor contract. This regime, as was established in the norm that is now modified, was not applicable, for example to a foreign pensioner, director or administrator with a higher level of income. In this respect and with a view to boosting foreign real estate investment in Spain and also enable high-rent pensioners and workers to establish their tax residence in Spain, the Commission of Experts proposed, amongst others, the following modifications:
– Broaden the scope of the “tax regime for foreign non-habitual residents” to all those who have expatriated to Spain, not only under a labor contract, but also those who deal in economic activities without permanent establishment; such as directors, shareholders, pensioners and those entitled to dividends from stock or real estate.
– Eliminate the requirement that the annual retribution not surpass 600.000€ per year.
– Cancel the tax imputation to those taxpayers under this system.
It is clear that this proposal wishes to enable administrators and directors of large companies to spend more time in Spain and, therefore, be considered tax residents but without an excessive tax burden for them.
The reform broadens the scope to administrators or directors for companies of which they are not shareholders or, if they are, it cannot be inferred that the company is linked in the terms of the IS Law. The limitation of income below 600.000€ is canceled.
- Modifications to the Inheritance and Gift Tax Law
On September 3rd 2014, the European Community Court of Justice ruled
considering Spain did not comply with article 63 of the treaty for Management of the European Union and article 40 related to the Agreement for Economic European Area in that the tax reductions applicable under the Inheritance and Gift Tax Law (ISD) by the Autonomous Communities in Spain are not made extensive to non- residents.
As a result of this court ruling, the second additional provision of the Inheritance and Gift Tax Law has been modified, by which each Autonomous Community may apply its own tax regime when the deceased or taxpayer (in the case of inheritance, legacy or any other title) are residents in a member state of the European Union or Economic European Area. This implies the application of tax deductions of each Autonomous Community.
This Autonomous Community regime is also applicable to any gift or other legal activity of gratuitous nature, “intervivos” of assets when the non-resident taxpayer is a resident in a member state of the European Union or Economic European Area. This tax regime is also applicable to resident taxpayers in Spain who obtain assets in a member state of the European Union or Economic European Area.
- Modification to the Estate Tax law.
An additional provision is added to the Estate Tax Law by which non- resident taxpayers resident in a member state of the European Union or Economic European Area will be entitled to declare under the regime of the Autonomous Community that harbors the greatest value of assets of which he holds title and for which he must declare because they are located, may be exercised or must be complied with in Spain.
.
.
Written by
