There was a time in which not a single Spanish law firm that prided itself would pass on the opportunity to heartily recommend its affluent non-resident client base (and even foreign residents) to acquire and own property in Spain by means of corporate structures ranging from the simple to the overtly complex often involving a multijurisdictional approach.
It was commonplace in the not-so-distant past to hear socialites in exclusive summer soirées on the coast boasting on how their law firm had devised and set up ingenious structures to the point that tax payment was negated and only a paltry sum was ever paid to the Spanish taxman.
Times change and legislation has moved on both in Spain and internationally since the events that led up to the tragic events of the 11th of September 2001. The war against international terrorism, unwaveringly led by the US, has meant intense pressure is exerted on the sources that finance it. These heartrending events coupled with 2008s financial sub-prime meltdown, and the ensuing world-wide credit-crunch, which left western countries’ coffers bereft, has meant that the once all-powerful and buoyant offshore industry, now under intense scrutiny, has been forced to maintain a low profile in order to survive and accommodate to today’s imposed trends.
But even more fundamentally we have collectively assisted over the last decade not only to a change in laws but to a ground-breaking paradigm shift in social and moral values that no longer hold these structures as socially admissible as they are widely held in contempt by society and media at large i.e. the recent tax campaigns targeting Google and Starbucks amongst others high-profile companies.
You won’t find nowadays many Spanish based law firms or lawyers actively recommending this option, much less clients boasting of their use. In fact, you will find many are even reluctant to the very idea and will likely try to dissuade you. This of course doesn’t rule out that it is still done, far from it, but it is not as widespread and most certainly not as openly publicized as before.
It is mostly foreign companies (which are not even law firms or FSA regulated finance advisers!), located outside Spain, who now peddle a bespoke legal service offering “100% protection” to beneficiaries against Spain’s inheritance tax.
Spanish law firms located in Spain have been forced to take a back seat when it comes to offering and soliciting these legal services after new stringent legislation has been passed and tough obligations and controls have been set up across the board for lawyers and other professionals involved in their set up and administration.
Due to the enormous complexity of the matter, this article endeavours only to give a broad unbiased overview on the overall state of affairs, with particular focus in Spain, weighing in the pros and cons, albeit making no attempt whatsoever to delve in its complexity and most certainly being careful not to take stance on the matter one way or another.
Spanish Property Ownership through Corporate Structures
1. Concealing Ownership
Several reasons may lead owners to conceal who really owns, controls and disposes of assets. Broad examples of such needs:
- high-net-worth individuals (HNWI) have their wealth managed through companies run by family offices
- ongoing marital disputes which in time may lead to an eventual break-up and disposal of assets. Pre-empting such scenarios unfolding
- security reasons
- defaulting on contractual obligations abroad – avoiding asset-hunting through non-asset disclosure
2. Tax Mitigation
One of the traditional reasons that drive clients to seek incorporating structures is to lower their tax bill. From income and wealth tax to Spain’s cumbersome inheritance tax (ISD/IHT) corporate structures may allow at times the means to circumvent, in a legally accepted manner, footing hefty tax bills. The latter is particularly efficient when shareholders are non-residents.
These structures should ideally always be incorporated prior to acquiring the real estate asset, not after for optimum results. Careful forward planning is key from the outset on devising and incorporating them which should be tailored to each client’s particular needs. There are no magical one-size-fits-all schemes as clients’ needs differ widely from one another and even evolve in time with, for example, new family members or changes in their civil status (divorce).
Corporate structures range from the most basic ones to really ingenious ones that border on fiscal engineering. Law firms in Spain will have no qualms incorporating a Spanish or foreign company i.e. a UK limited liability company (as long as not offshore or located in tax haven). This is perfectly legal. They may even offer them off-the-shelf for a reasonable fee and additionally offer bookkeeping services. The company will then be placed on top of the Spanish real estate. They will however, following new legislation, be reluctant (understatement) when it comes to devising and incorporating more complex corporate structures, specifically offshore ones. This fine red line marks the difference between tax avoidance (legally acceptable tax planning) and tax evasion (criminally pursuable).
3. Asset Preservation
Affluent families have a mandate to preserve and accumulate wealth for future generations. Some corporate structures (i.e. trusts, which are not recognised in the Spanish legal system) help to achieve this by ‘protecting’ assets, even from their current beneficiaries, by legally separating the property’s legal ownership and control from its equitable ownership and benefits thus facilitating their transmission to future offspring. Trust dispositions may allow their use but will bar of their disposal as technically they no longer belong to their ‘owners’. We can imagine this as being particularly useful in the event of a divorce settlement (gold digger deterrent) as the assets are effectively locked-up in a corporate structure and cannot be disposed of being jealously guarded by the trustees in compliance with the trust’s dispositions. This is also useful over many generations as it allows keeping significant properties within the family’s control (i.e. Scottish ancestral castle).
1. Concealing Ownership
New laws, most notably Law 10/2010 on Anti-Money Laundering and Finance of Terrorism, have created a vast array of new obligations for all those involved in the setting up of corporate structures, ranging from lawyers, civil servants (notaries), financial advisers to bank employees.
It is now mandatory that the ‘ultimate beneficiary’ of such structures is disclosed and clearly identified not only at the time of setting up new structures post 2010 but also – incredibly – on those that pre-date this 2010 law e.g. banks have been formally requesting to disclose beneficiaries as recently as January 2014 on structures incorporated a decade ago, long before these laws even existed.
So basically this law marked a turning point no longer allowing a fool-proof system that accommodated the warm mantle of anonymity i.e. bearer shares on multi-layered offshore structures. Anonymity is now achieved, yes, but to a certain extent only, at a basic level, as it limits the exposure to third-party information requests. So anyone requesting information from a Land Registry search will turn up with nothing (particularly if you’ve not made the mistake of appointing yourself as company director). However, it will remain glaringly visible to the Tax Office, or a judge, if needed be under this new law.
2. Tax Mitigation
Spanish lawyers and financial advisers are under great scrutiny and face stiff penalties, including severe jail terms, if found guilty on devising and collaborating in the set-up of tax avoidance structures. Every week we are treated with an unpleasant new story on how some prominent law firm or lawyer has been found guilty and charged.
For this reason alone Spanish lawyers and law firms in general are now highly reluctant to devise, assist, create or abet in any manner whatsoever such corporate structures. Much less to accept appointing themselves as administrators of said companies.
From a client’s perspective it is now debatable on whether such structures are able to mitigate or negate income or inheritance tax as efficiently as in the previous decade. It is open to debate.
New treaties, such as the Double Taxation Treaty with Spain dating from 1976 has been recently amended in London on the 14th of March 2013 in an attempt to plug existing holes.
Additionally, and more worryingly, inspired by the US’s successful FATCA agreement, five European countries – including the United Kingdom and Spain – signed in April 2013 a pilot initiative enabling an automatic exchange of fiscal information which overall impact still remains to be seen. Traditionally European countries had the onus of undergoing protracted and expensive multijurisdictional investigations requesting information on a particular individual or company from other European countries to which not all complied with or the information supplied was often scant, incomplete and outdated. This pilot scheme no longer requires the signatory countries to actively pursue the information; it is actually fed back to them on a regular basis automatically on a wide range of companies and individuals falling within certain parameters. The possibilities this leads to on cross-referencing information are significant if done right.
Only this week we’ve learnt that the Spanish Tax office has approved that 40% of a tax inspector’s wage will be contingent upon results going forward. This creates a spectacular perverse incentive as now inspectors have truly a vested interested of their own in targeting tax avoiders. And corporate structures holding real estate assets is always a nice red flag in their eyes, whether true or not, as it has been traditionally considered an “indicator of wealth”.
Some regions now incentivize and are more lenient, specifically on inheritance taxation, on having property under your own personal name rather than through structures which is being increasingly more taxed. In the case of non-resident companies owning property in Spain and located in what the BoS lists as tax havens they attract a special annual tax equating to 3% of the property’s value. Art. 40 et seq. Spain’s Non-Resident Act 5, 2004.
In light of the ongoing recession and high levels of unemployment some European countries, i.e. Spain, are cash-strapped and have become increasingly more aggressive pursuing tax offenders. Not exactly the best of times to be setting up structures to mitigate taxes really.
3. Running Costs
Depending on the structure chosen this can range from several hundred euros a year for basic bookkeeping services to raking up dozens of thousands on more complex structures. You really have to ask yourself, given your wealth level and coupled with the value of the underlying asset, if you can actually afford or even if it is worth your while engaging in huge annual running costs on the long run that may even come to negate altogether any tax mitigation sought.
4. Who’s really in Control?
So many scary stories over the years it is hard to list them all. When you relinquish control of your asset through a power of attorney in favour of a physical person or a company abroad you better be sure of what you are doing and ensure you are fully aware of the risks this entails that may lead your beneficiaries to lose control of the asset upon your death.
Dispelling Spanish Inheritance Tax Myths
Scaremongering: a time-proven sales tactic. Car and insurance salesmen, in my experience, have always been top of the game at this because they know exactly what makes a customer tick. You will read plenty of scary stuff on ex-pat newspapers and internet on inheritance taxation in Spain which aims to prey on the gullible and harp on people’s inbred prejudices. I will try to cast away some of these widely held misconceptions. Examples of such are:
- “Spanish Inheritance tax legal fees can be at least 40 to 50%.”
False Fact: On average inheritors pay in Spain 15% in inheritance tax. Only in the most extreme cases would you pay such a high amount. To give an idea, a single beneficiary that inherits over €800,000 would stand to pay 34%. Normally there are multiple beneficiaries to an estate; it’s not just one person that inherits all. Also the beneficiaries of the bulk of the estate are normally children, not non-relatives (which do not qualify for tax allowances). The significance this has is that the taxable base (the 800k) would then be split amongst the heirs dramatically reducing the IHT liability as it follows a sliding scale. To this you must also add the legal and family allowances (both national and regional) which reduce the percentage to be paid even further. Also worth mentioning is the fact that the taxable base for property is well-below the true market value.
I’ll put this in perspective with the most common example on British nationals inheriting in Spain. In my experience expatriates have second homes in Spain worth on average €400k. This property is normally owned in joint names meaning each spouse owns 50% of the property. On average couples have two children. So when one parent passes away, his 50% (the €200,000) is normally inherited by his two children. Therefore the taxable base of each child would be €100,000 (as the €200,000 is split equally between them). The surviving spouse naturally still owns his 50%. The state inheritance tax on a taxable base of 100k would be approximately €10,000 (10%). Children are classified in Group I for inheritance taxation purposes. The state tax-free allowance amounts to almost €16,000 for each child. In other words, the state allowance completely offsets the inheritance tax liability (meaning they pay nothing on inheriting in Spain in this example). Additionally children under 21 years old have further annual reductions with a maximum cap of €48,000. On top of this there are autonomous regional allowances that children may benefit from. So in this particular example, which in my professional experience I dare say is the most common, each children would stand to pay zero on inheriting a taxable base of €100,000 each. When the surviving spouse passes away the same result will unfold again providing the laws are not changed. So basically each child will have paid almost nothing on inheriting €200,000 each when both parents are dead.
On the other side of the spectrum, we can imagine a parent passing away bequeathing a €3,000,000 property to a single child or to a friend. In this particular case the inheritance liability would indeed sky rocket (over a million). For this particular case I strongly advise obtaining an estimation on the inheritance tax the beneficiary stands to pay. In this example it is definitely worthwhile looking into corporate structures to mitigate exposure to ISD/IHT as much as possible.
- “Heirs will be forced to sell the property in Spain to pay off Spain’s extreme inheritance tax”
False Fact: Same as previous point. Selling a property would be exceptional. In fact I’ve never come across a single client in over a decade that has been forced to sell to pay Spain’s ISD/IHT on inheriting. Moreover, you cannot inherit anything until you have first paid inheritance tax. So no-one can sell the property they are inheriting to then pay off the tax as the property is technically not theirs to sell as it is still under the deceased’s name. Only once the tax duties have been settled and the property is lodged under the name of the beneficiary at the Land Registry is he free to sell on if he wishes as the property is now legally under his name to do with it as he pleases.
- “The financial debt of your heirs is maybe as much as 50% of the value of your property”
False Fact: Everyone inheriting in Spain would then be broke. Same as the previous two bullet points, on average inheritors (beneficiaries) pay 15% for IHT/ISD in Spain.
- “Yours husband or wife will not be exempt from Spanish Inheritance Tax.”
Misleading Fact: Spouses indeed are not exempt from paying inheritance tax in Spain but they qualify for legal tax allowances. If resident in Spain then the surviving spouse is entitled to further autonomous regional tax allowances. These allowances, both from the state and from the autonomous region where the property is located, may greatly reduce the burden. Additionally if the surviving spouse is resident in Spain they may qualify for a 95% reduction on the main home providing they have lived in it the previous two years and keep it the following ten years (with a maximum reduction of €122,000).
- “Want to avoid up to 81% of Spanish Inheritance Tax?”
Misleading Fact: Scaremongers love quoting the extreme 81.6% tax rate for IHT as if this were the norm on inheriting in Spain. While it’s true that Spain’s inheritance tax can be as high as 81.6 pc – in the most extreme case – this only applies to the following case:
a) the beneficiary inherits > €800,000 b) the beneficiary is already well-off (his pre-existing wealth before inheriting > €4,000,000 or £3,000,000) c) is a non-relative of the deceased classified in Group IV (no family ties to him i.e. a friend)
Clearly a problem affecting only a privileged few. Not a problem that the vast majority of beneficiaries inheriting in Spain will have to contend with unless they are already multimillionaires.
- “If you incorporate a UK Limited Liability company and place the Spanish real estate inside you will be 100% shielded against Spain’s ISD/IHT. After death, only the shares are reorganised, the company owns the asset, and so it doesn’t change hands. This falls outside Spanish inheritance tax. Win-win”
False Fact: Resident beneficiaries are obliged to pay inheritance tax under article 17 of Spain’s Inheritance and Gift Tax Royal on inheriting real estate within Spanish territory; regardless on whether the property is locked up or not within a holding company structure and regardless of whether you inherit the property itself or the shares. Likewise non-resident beneficiaries of a property located in Spanish territory also stand to pay Spanish inheritance tax (ex art. 18 of same decree) regardless if it’s in a holding structure or not. Moreover, I believe in the latter you may even be liable to attract UKs IHT beside Spain’s if the beneficiary happens to be a UK national.
Additionally Spain’s Non-Resident Act 5, 2004 clearly states that any re-arrangement of company shares (regardless of company’s nationality) which main asset is real estate located in Spain is taxable in Spain (CGT).
Depending on how clumsily this tax avoidance scheme is carried out it may be labelled as tax evasion (criminally pursuable for defrauded amounts above €120,000 ex art. 305 et seq. Spanish Criminal Code).
And to close I would like to take the opportunity to dispel a malicious misunderstanding on misreading one of my articles: Making a Spanish will. Making a Spanish will does not reduce or mitigate your beneficiaries’ inheritance tax bill in any way whatsoever (as highlighted in the article itself). But it is extremely useful to save your beneficiaries time, money and hassle at a time of bereavement.
Without a Spanish will a beneficiary will normally incur in penalties and surcharges for late payment on inheritance in Spain. The reason for this is because there’s a deadline of 6 months as from the time of the testator’s demise to file and pay Spanish Inheritance Tax. UK probate, in my professional experience, always exceeds the six months deadline if there is no Spanish will. In which case penalties and surcharges are accrued and added to the inheritance tax for late payment. So ‘in a way’, making a Spanish will helps to mitigate or reduce the inheritance tax bill by way of helping not to attract said surcharges and penalties as the beneficiary is able to pay in time within the six-month deadline thus avoiding a lengthy procedure. I hope this clarifies the misunderstanding.
Spain’s Statutory Four-Year Tax Limitation
Another matter is if Spanish authorities do not get wind on the death of an owner who holds company shares, property or other assets. The statutory limitation of 4 years on inheritance tax may kick in timing out the obligation to pay inheritance tax altogether – there is nothing the tax office can do after said time has elapsed to claim payment of inheritance tax from the beneficiaries. In the particular case of a non-resident in Spain it is extremely difficult for the Spanish tax office (understatement) to know if and when they have passed away; unless of course his beneficiaries take to pro-actively inform the Spanish tax authorities… (or for that matter their bank in Spain; which also has the legal obligation to disclose the death to the tax office).
Pros and Cons of Owning Property in Spain through Corporate Structures – Conclusion
Generalisations are often dangerous and even more so on this delicate matter. The only sound advice that can be given is that a case-by-case study is required before any decision can reasonably be taken. Each client has different needs which evolve over time so structures may need to be changed to accommodate their changing needs i.e. post-divorce, new heirs, change in tax laws.
Different experts will give you different amounts or thresholds based on different reasons on whether it’s worthwhile or not to incorporate a company (or string of companies) for tax mitigation purposes. I would generally recommend only looking into corporate structures, for tax mitigation purposes, on a taxable base of €600,000 or above (£500,000). Note the use of the term ‘taxable base’. It is not referring to the value of the underlying real estate, but the amount that each beneficiary stands to inherit from the estate. Also note that the taxable base, when referring to property itself, is normally well-below the current market value of the property; it is not an up-to-date property appraisal.
So, for example, on inheriting an estate of €800,000 located in one of Spain’s seventeen autonomous regions that actually do tax inheritance tax and there is only one inheritor (beneficiary) then in this particular case I think it may be worth looking at getting quotations on setting up a structure to mitigate exposure to ISD/IHT. In Catalonia for example you would pay €350 in taxes (as resident) and if this estate were located in Andalucía the beneficiary would pay €164,000. This whopping difference that makes a beneficiary pay 469 times more in one region than another on the same estate is explained because autonomous regions in Spain are empowered to rule on inheritance tax.
Following on the same example set above, if instead we had three children (three beneficiaries) to inherit the €800,000 estate my answer would change and I think it would no longer be worthwhile. Because the taxable base would now be split between the three of them, thus reducing the attraction of the IHT rate band which follows a sliding scale. After legal and family allowances kick in there will be very little IHT to pay by each beneficiary not making it really worthwhile to incorporate a structure and to pay annual running maintenance fees for bookkeeping services and tax compliance purposes.
Not to mention that potential buyers normally refuse buying real estate locked up in holding structures out of fear of non-disclosed debts and hidden liabilities. A due diligence must normally be carried out prior to acquiring a company holding real estate to rule off such legal risks. To sell on a property, the vendor is normally required to first unwind the holding company (inheritors stand to pay for this) at a great expense to actually sell the underlying real estate itself.
Non-resident beneficiaries unfortunately do not benefit as much as those holding resident status when it comes to legal allowances to reduce the IHT taxable base as the applicable law is the state law (which is less lenient than regional tax allowances available only to residents). Admittedly non-residents unfortunately, and unjustly, still do not qualify to opt for the full range of tax allowances that residents are entitled to. The EU is looking into this as it is tantamount to discrimination with fellow EU member nationals – unacceptable.
Inheritance tax planning in Spain is a complex matter, so please seek legal advice from a qualified lawyer and be wary of anyone advocating property ownership through corporate structures is “always beneficial” – not the case and in fact may be even be counter-productive and a complete waste of money. Beware of companies offering bespoke one-trick-ponies to circumvent Spanish inheritance tax by offering “100% protection” against it.
If you fear Spain’s inheritance tax (IHT/ISD) you should first ask for en estimation from a gestoría or law firm before you do anything rash such as setting up a Spanish company or UK limited company to place it on top of the Spanish real estate. Inheritance tax varies widely within Spain’s seventeen autonomous regions (in some it’s not even taxed!). Truth is that corporate structures are neither needed nor recommended for the vast majority of people.
“We don’t pay taxes. Only the little people pay taxes” Leona Helmsley, US billionaire hotelier.