Spanish Wealth Tax was introduced as a temporary tax in 1977 and suspended in 2008. It was then reintroduced, supposedly on a temporary basis, from 2012 onwards as an emergency economic measure due to the financial crisis. It has ultimately been extended until the present day and is in force in all the 17 autonomous regions of Spain. It should be noted that Spanish Wealth Tax is a state tax: however, the 17 autonomous regions are authorised to set their own tax rates, reductions, and allowances.
Under this tax, Spanish resident individuals must pay tax on the net value of their worldwide assets regardless of their location, while non-resident individuals are liable for tax on the net value of assets located in Spain. The taxable base is calculated as the difference between the value of the assets and liabilities. Specific valuation rules exist for the assets to be declared. The tax period coincides with the calendar year, with tax accruing on 31 December.
The progressive state wealth tax rates start at 0.2 per cent on assets up to EUR 167,129, rising up to 2.5 per cent on assets over EUR 10,695,996. The autonomous regions can adjust these rates. Currently, Madrid is the only region that provides 100 per cent tax relief: its residents do not have to pay any wealth tax regardless of their total net worth, although they may need to submit a wealth tax return, for information purposes only, when the value of a taxpayer's assets exceeds EUR 2,000,000. This may change in the near future due to the political climate, as the Spanish Government wants to align the tax burden of all the regions.
As previously mentioned, both residents and non-residents with Spanish assets are liable for the wealth tax. Nevertheless, there are some allowances to reduce the taxable amount, which varies from one region to another. The state tax-free allowance is set at the amount of EUR 700,000 per person. Some regions have lowered it to EUR 500,000 including Catalonia, Navarra and Valencia.
Additionally, there are a number of exemptions to reduce the final tax debt, some of which are the following:
Considering the previous exemptions, it is possible to mitigate this tax and reduce the effective tax rate significantly with correct tax planning. The most important exemption for wealthy families is the one referring to family companies. This exemption is significant from a tax planning point of view, if certain requirements are met, as it consists of a 100 per cent exemption in the ownership of a family business. In particular, the requirements that need to be complied with are the following:
The exemption will only be applicable to the value of shares that qualify as being subject to the commercial activity, minus the debts related to it. Therefore, if all the requirements are met, this is a good option to reduce the wealth tax debt.
Additionally, it is important to consider another limit that can reduce the final amount to be paid. There is, in fact, a relevant limit applicable to the wealth tax due. The sum of the individual income tax due and the wealth tax due may not exceed 60 per cent of the tax base of the individual income tax, excluding certain amounts, such as those corresponding to capital gains derived from the disposal of capital assets generated over a period of one year. If the sum exceeds such a limit, the wealth tax due will be reduced accordingly, provided that the reduction is no more than 80 per cent of the corresponding wealth tax due. Consequently, at this point, the type of investment carried out is vital: some tax-efficient investments will allow an individual to reduce both his/her income and wealth tax liabilities in Spain.
Finally, it should be noted that on 28 October 2020, the Spanish Government presented the draft budget for fiscal year 2021 to Parliament; this includes new measures for wealth tax, such as one point increase for tax bases exceeding EUR 10,695,996 from the current 2.5 per cent to 3.5 per cent. In principle, it would only apply to those autonomous regions that have not adopted their respective tax scale.
The Spanish Government has also announced a draft law, to be presented to Parliament, on measures to prevent and combat tax fraud. The measures included in this draft law that affect wealth tax include a new valuation of real estate. The market value of real estate will be presumed to be the market reference value of the General Directorate of the Land Registry provided that it is published as such on its website on the date of accrual. In the event that the reference value has not been published, the market value of the property may be demonstrated by any means of evidence admissible in law. This will mean that the value to be included in this tax base will be increased in several cases because the reference value will be higher than the land registry value, which was the value used up to now.
Another new measure with a significant impact on wealthy families is the valuation of unit-linked insurance and temporary or life annuities. Life insurance will be calculated at the surrender value when the tax is accrued. The new feature is that, if the policyholder does not have the power to exercise the full surrender right on the date on which the tax accrues, the insurance will be calculated at the value of the mathematical provision on that date on the policyholder's taxable income unless the holder of the economic rights is a person other than the policyholder, in which case it will be calculated on the taxable income of the beneficiary or holder of the economic rights. When temporary or life annuities are received from a life insurance policy, they must be calculated at their surrender value at the moment the tax accrues. This is a measure to include the value of policies in the taxable base of the wealth tax, due to it being a tax planning tool to reduce the final tax debt to be paid.
To summarise, it is clear that wealth tax is a cost to consider but with good tax planning, the effective tax rate could be reduced significantly.
Davinia is Team Leader for the Tax Department in Baker McKenzie's Barcelona office. She specialises in Tax / Transfer Pricing, Tax Dispute Resolution, Wealth Management, Tax for M&A and Reorganisations. She is the author of several articles and a regular speaker at conferences and seminars on transfer pricing, business restructurings and wealth management.
Bruno is Partner and head of the Tax practice in Barcelona and Chair of Baker McKenzie's Wealth Management Practice in Europe, Middle East and Africa. He specialises in Tax, Real Estate Tax, Tax Dispute Resolution, Tax for M&A and Reorganisations, Transfer Pricing and Wealth Management. He has written several articles and regularly speaks at conferences and seminars on business restructuring, transfer pricing, wealth management and taxation of family businesses.