‘The New Spanish Exit Tax On Unrealized Gains Made By Individuals Moving Abroad’, by Mariano Gomariz, Tax Partner at ECIJA.
In 2013, the European Court of Justice (hereinafter, ECJ) released a decision confirming that the Spanish Corporate Income Tax rules imposing immediate taxation on the unrealized gains which had accrued in the Spanish territory prior to an exit to another EU Member State were in breach of EU law. The Court confirmed the existence of an obstacle to the freedom of establishment based on the fact that Spain does not impose immediate taxation in similar situations when the transfer takes place within the Spanish territory.
In response to the ECJ decision, the 2014 Spanish Budget Law established that when a Spanish entity or a Permanent Establishment transfer their residence to an EU country, the exit tax arising therefrom may be deferred until the assets are sold or otherwise transferred by the migrating entity.
A few days ago, and going one step further, the Spanish Government released a draft bill which introduces a totally new provision regarding the taxation of unrealized gains made by Spanish tax resident individuals switching their tax residency.
Most relevant features of this new anti-avoidance measure read as follows:
(i) The anti-avoidance measure applies in all those cases in which the taxpayer changes his/her Spanish tax residency.
(ii) The loss of residency implies that the individual will be taxed on the unrealized gains arising from holdings in all type of companies and collective investment institutions regardless of its location.
(iii) The calculation of the unrealized gain will be determined on the positive difference between the market value of the shares and its acquisition cost.
(iv) The rule will be applicable to all taxpayers which have been Spanish tax residents of Spain at least 5 years within the 10 years prior to their departure from the country provided that any of the following circumstances are met:
1. The market value of the shares held exceeds a joint value of Euro 4MM.
2. The holding percentage in the entity is over 25% and the market value of the shares exceeds an amount of Euro 1MM.
(v) Unrealized gains will be taxed at the flat rate established in the Spanish Personal Income Tax Law (i.e., 27% in 2014, 24% in 2015 and 23% in 2016 and onwards) and will be allocated to the last tax year to be declared.
The new exit tax system encompasses two special regimes for the deferral of the tax liability arising from the application of the anti-avoidance provision. Those regimes are applicable in any of the following situations:
(i) When the change of residency is a consequence of a temporary labor assignment to a non-blacklisted jurisdiction.
(ii) When the residency is moved to another country from the European Union or the European Economic Area with whom an effective exchange of information exists, the gain will only need to be declared if in the subsequent 10 years from the filing of the last Spanish tax return any of the following circumstances exist:
– the shares are sold.
– the individual loses his residency in the EU or in the EEA.
The application of the aforementioned deferral cases is subject to the taxpayer notifying to the Spanish Tax Authorities his choice for this special regime, the unrealized gain which may be subject to taxation, the country of residency and the maintenance of the ownership of the shares.
The new exit tax does not apply to individuals taxed under the special regime for foreign workers posted to Spanish territory (i.e., Expat Status). In this case the computation of the 5-year-period will start from the first year in which the special regime is not applicable.
The Law does not clarify the implications of the new provision in many situations such as, for instance, in case of individuals who already owned the shares at the time of acquiring the Spanish tax residence. In our opinion this may create uncertainty thus jeopardizing the use of Spain as a jurisdiction to canalize international investments and discouraging the re-locations of businesses and high net worth individuals to the Spanish territory.
For those who may be affected by the new provision it is of outmost importance to analyze in detail the potential implications and eventually adopt the appropriate measures. We will closely monitor the legislative proposals within the parliamentary discussions, but special attention should be paid to action that may be advisable to adopt before the new rules enter into force.
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