Investing In Spain And Portugal

THE SPANISH TAX SYSTEM

TAXABLE BASE AND THE UK/IRISH DOUBLE TAXATON

	FISCAL RESIDENT	NON-FISCAL RESIDENT
Income Tax	Worldwide 'Income'	Spanish 'Income' only
CGT	Main Home + resident = 0 2nd homes = 15%	Directly owned = 35% Spanish co. / branch = 15% Offshore company = 0%
Wealth Tax	Worldwide with deductions	Spanish assets no deductions unless owned by a company or branch
Heirship/Inheritance Taxes	Worldwide subject to Tax Treaties	Spanish assets only if directly owned

Fiscal Residence: If an individual is in Spain for over 183 Days in any Fiscal Year (This correlates with the Calendar Year in Spain) he or she will be automatically deemed resident in Spain for tax purposes. There can also be an automatic inference of tax residence on the basis that family members live in Spain (i.e. that children are in school), that one has the intention to permanently reside in Spain or, if a business has been established in Spain that it is the centre of economic interest. Of course, in the case of the tax residence automatically being ascribed despite not having been in Spain for a period greater than 183 days it is possible to rebut the inference/presumption especially if protection is being sought under the UK or Irish Tax Treaties. For example, within the Tax Treaty signed between the UK and Spain on the 21st of November 1975 there are a number of Tie Breaker' clauses used to determine fiscal residence. Thus, where local rules infer tax liability in both countries then the fiscal residence will be deemed to exist in the country where there is a permanent home, if there is a permanent home available in both countries then fiscal residence will be deemed to exist in the country which can be shown to be the centre of vital economic interests. If even the last test is unclear then fiscal residence will be ascribed to the country of which one is a national.

Fiscal Identification Numbers: A Foreigners Identification Number or NIE (Numero de Identificacion de Extranjerosl or, or in some areas a Fiscal Identification Number or NIF (Numero de Identificacion Fiscal), is required by all individuals fiscally resident in Spain. In addition, such identification numbers are also required where non-fiscally resident foreigners directly own property in Spain. Where companies own the Spanish properties of non-fiscally resident individuals it is not necessary to obtain a personal identification number. However, the companies themselves will have their own identification number/code known as a CIF (Codigo de Identificacion Fiscal) or Financial Identification Code.

Income Tax: Individuals deemed to be fiscally resident in Spain are taxed on their worldwide income, individuals not fiscally resident in Spain will - subject to applicable double taxation treaties - be only subject to income tax on their Spanish income such as income derived from property rental. * It should be noted that Spanish income taxes are not incremental but employ what is know as a tiered "Claw Back" system which means that once one has reached a new threshold one will be subject to that rate on all income.

* Spanish law requires that tenants must withhold 25% of any rent paid to a landlord as a credit against any future tax obligations by the landlord. However, when asked, the tenant is required to show proof that such withheld sums have in fact been paid to the Spanish fiscal authorities.

INCOME TAX RATES 2004 (SUBJECT TO "CLAW BACK" PROVISIONS)

	€0 - €4K	€4 - €13.8K	€13.8 - €25.8K	€25.8 - €45K	OVER €45K
Income Tax Rate	9.06%	15.84%	18.68%	24.71%	29.16%
Communal Tax Rate	5.94%	8.16%	9.32%	12.29%	15.84%
Total	15%	24%	28%	37%	45%

It should be noted that whilst non-residents are fully subject to the annual wealth tax on their Spanish assets (as outlined below) fiscally resident individuals are allowed deductions against income tax liabilities to the extent that combined income and wealth tax exposure cannot be greater than 60% of the total tax liability within any fiscal year. The corollary to this is that where wealth tax exposure exists the sum actually paid cannot fall below 20% of what would have had to have been paid if was not for income or other tax concessions.

INHERITANCE & GIFT TAX RATES - 2004 (IN EURO)

0	167,129.00	0.2%
167,129.00	334,253.00	0.3%
334,253.00	668,500.00	0.5%
668,500.00	1,377,000.00	0.9%
1,377,000.00	2,673,999.00	1.3%
2,673,999.00	5,347,998.00	1.7%
5,347,998.00	10,695,996	2.1%
Over 10,695,996		2.5%

Inheritance and Gift Taxes (Impuestos sobre Sucesiones y Donaciones)

These apply, unlike in many countries, even in the case of a deceased husband passing on his wealth to his wife. The recipient pays the tax. Further, the standard rates of tax are subject to a Multiplier varying from 1.00 to 2.40 depending on the Class of the Recipient. For example the lowest rates apply to spouses and children followed by relatives, followed by others. In Spain there is no equivalent to a common law partner so such a partner would be subject to the very maximum Multiplier. There is a standard individual deduction, at the time of writing, of €15,956.87, which means that virtually every Spanish resident person is ostensibly subject to these taxes. The standard rates after taking account of the individual deduction vary from 7.65% to 34% however after the application of the Multiplier the rates can go as high as 81.6%. Thus, if a person gifted their house worth €1,000,000.00 to a spouse the tax payable would be €340,000.00; if on the other hand the gift were to a non-related third party the tax would be €810,600.00!

Main Residence Tax Base Reductions -Where a spouse, child or relative over 65 who previously lived with the deceased for at least 2 years immediately prior to his/her death and continue to live in the said property for at least 10 years from the date of death the taxable base on the Main Residence will be reduced by 95% up to a maximum reduction of up to €122,606.47 for each inheritor. It should be noted that there is a very similar deduction for the transfer of a family business.

SPANISH ANTI-AVOIDANCE PROVISIONS & STARTING UP A BUSINESS

The key point to note is that Spain has developed a range of tax anti-avoidance provisions every bit as sophisticated as those employed in the United Kingdom and Republic of Ireland (see Article 25 of the Spanish General Tax Code). This means that whilst it is perfectly acceptable to use double taxation treaty provisions and EU directives and regulations to mitigate or legitimately transfer profits in or outside of Spain, it is certainly not acceptable or legal to insert in artificial fax haven companies (see Law 31/19901 or to siphon off surplus funds. Nevertheless, as will be shown the dynamics of many business activities carried out in Spain do present significant tax mitigation possibilities.

Transactions should be at "Arms Length": The thrust behind this principle is that intra-company transactions should only be deemed to be valid where the terms of such transactions are considered to be at market rates. Thus, creating artificially high interest rate levels between related companies la related company is deemed to be one where there is a direct or indirect common beneficial ownership of over 25% between the pertinent firms) would not be deemed acceptable.

Controlled Foreign Companies (CFC's):  Spanish CFC legislation is covered by Articles 2 and 10 of Law 42/1994. Basically it means that where a Spanish company owns or controls 50%, or more, of a foreign company and such foreign company is located in a jurisdiction where -subject to specific tax treaty provisions - the overall effective tax rate is less than 75% of the Spanish tax rate (i.e. in the case of corporate tax this would mean 75% of the 35% Spanish rate or 26.25%) then any passive income or capital gains must be imputed even if not distributed within the taxable base. Obviously, the point here is that reference is made only to passive income and such legislation does not apply to bona fide transactions carried out as part of genuine day-to-day business where there is a sound economic reason.

Example of legally avoiding exposure to unnecessary Spanish tax exposure: If one had bought a number of Spanish villas, or a hotel, in Spain specifically with the intention of attracting visitors from the United Kingdom or Ireland then it would be perfectly legitimate to establish a UK or Irish marketing company to exploit the British Isles market. Notwithstanding the significantly lower taxes in these countries (a universal 12.5% corporate tax applies in Ireland and a small company tax rate of 19% applies in the UK), the veracity of the business logic - i.e. the location of the customer base, EU membership and the existence of suitable double taxation treaties - would mean that such structures would be perfectly valid. Of course, the above is predicated on the assumption that there would be a genuine UK/Irish presence

Diagram 3: This shows how an Irish limited liability company could be set up to act as the booking/travel agency division of a company based in Spain owning a number of Spanish villas purchased for summer rental. It should be noted, that if the villas were not actually owned then of course CFC would not apply. For this structure to work there must be real management and control in Ireland and the fees charged must be roughly in keeping with the industry norm

COUNTRY OF RESIDENCE	DIVIDEND WITHHOLDING TAXES	INTEREST WITHHOLDING TAXES	ROYALITY WITHHOLDING TAXES
Argentina	10% to 15%	12.5% to 14%	3%.5% and 10%
Australia	15%	10%	10%
Austria	10% to 15%	5%	5%
Belgium	15%	15%	5%
Brazil	15%	10% to 15%	10% to 15%
Bulgaria	5% to 15%	NA	NA
Canada	15%	15%	10%
China	10%	10%	10%
Czech Republic	5% to 15%	0% to 10%	5%
Denmark	10% to 15%	10%	6%
Ecuador	15%	5% to 10%	5% to 10%
Finland	10% to 15%	10%	5%
France	10% to 15%	10%	6%
Germany	10% to 15%	10%	5%
Hungary	5% t0 15%	NA	NA
India	15%	12%	4% to 8%
Ireland (Republic)	0% to 15%	NA	5%, 8% or 10%
Italy	15%	12%	4% to 8%
Japan	10% to 15%	10%	10%
Korea (South)	10% to 15%	0% to 10%	10%
Luxembourg	5% to 15%	10%	10%
Mexico	15%	0%, 10% or 15%	10%
Morocco	10% to 15%	10%	5% to 10%
The Netherlands	10% to 15%	10%	5% to 10%
Norway	10% to 15%	10%	5%
The Philippines	10% to 15%	10% to 15%	10%, 15% or 20%
Poland	10% to 15%	0% to 12%	10%
Portugal	10% to 15%	15%	5%
Romania	10% to 15%	10%	10%
Russia	18%	NA	5%
Sweden	10% to 15%	15%	10%
Switzerland	10% to 15%	10%	5%
United Kingdom	10% to 15%	12%	10%
United States of America	10% to 15%	10%	5%, 8% or 10%

Notes on the Spanish Double Taxation Treaty

1. Where no tax treaty exists then the withholding tax rate is a ubiquitous 25%
2. Variable rates may exist depending on the nature of the services/goods.
3. EU Member States Conditional Exemption from Withholding Taxes relating to Dividends: EU Parent/Subsidiary Directive 90/435 states that no withholding faxes shall be paid in respect to dividend distributions where:

• At least 25% of the equity of the subsidiary firm is owned by the parent.
• The subsidiary company is fully taxable in its country of domicile. It should be noted that
this definition would include territories approved by the EU to fully or partly exempt local
companies from corporate tax. Territories with such beneficial status would include Madeira and theoretically Gibraltar.
• The 25% or higher equity stake has been held by the parent company for at least 2 years