Sun and beach for foreign high-net-worth individuals
AUTHOR: Andreu Bové. Tax Adviser at Bové Montero y Asociados
It is true that with the changes made to the “Beckham Law” in 2015, the fiscal attractiveness of Spain as a destination for wealthy individuals was reduced in favour of other jurisdictions such as Portugal, Italy, UK, Switzerland or Andorra. However, despite these changes and the current economic and social situation, it should be noted that Spain continues to be a country that attracts foreigners as a place to establish their residence.
When a wealthy individual decides to transfer his or her tax residence to Spain, the first thing we need to know is in which region of this country he or she will want to reside. In the current Spanish situation, sunny and coastal regions can be a real tax hell, while others can be a small tax haven. Many people who would like to live in Spain, want to do so in a coastal region and, if possible, in a fiscally efficient way. Well, these families should be given the good news that, at present, wealthy people can live in highly taxed regions in Spain. Yes, as surprising as it may seem, high-net-worth individuals still live in regions with the highest tax burden in Spain. And the key to understanding how these families and their assets cope with high taxation is to understand how they have structured their personal and business wealth.
As far as banking assets (i.e. listed shares, investment funds, ETFs and bonds, among others) are concerned, over the last decade, for example, the unit-linked life insurance has been widely used as an asset protection and succession planning tool. In addition to its flexibility and adaptability to changes in residence, the use of this instrument can bring significant savings in Personal Income Tax, Net Wealth Tax, and Inheritance and Gift Tax. Consequently, compared with other instruments such as SICAVs (collective investment vehicles with variable capital), the special transfer regime of funds or pension schemes, life insurance was and is – pending the entry into force of some planned measures – a very successful tool for banking assets and their tax treatment.
As for real estate investments and holdings in active companies (industrial, trading and services), high-net-worth individuals benefit from the family business regime. This regime is what is known in the tax area as the set of tax measures that reduce the taxation arising from the holding and transfer of shares in “family businesses”. The idea behind this regime, as explained below, is that taxation should not hinder or be likely to hinder the proper functioning of a family business.
The main benefits of the family business regime are as follows: Total or partial exemption under the Net Wealth Tax when holding such shares; total or partial reduction in the Inheritance and Gift Tax on donations, inheritances or bequests of the above-mentioned holdings; and no taxation at all under the Personal Income Tax for the profit derived from the donation of such shares.
However, certain number of conditions must be met to benefit from this regime: The taxpayer must individually own at least 5% of the company or 20% jointly with other family members (family group); the taxpayer, or one of the members of the family group, must effectively exercise management functions in the aforementioned entity and receive a compensation representing more than 50% of his/her total business and labour income; and the company must carry out an economic activity.
On this last point, it is important to highlight that (i) for the property leasing activity to be considered an economic activity, the existence of a full-time employee engaged exclusively in the leasing activity is required, and (ii) that holding entities and foreign entities can also benefit from the family business regime.
Therefore, before relocating and transferring the tax residence to Spain, it is highly advisable that the wealth structure and income of each family be reviewed to determine what the tax cost to be borne in Spain may be and to analyse whether there are any mechanisms or specific actions to be taken in order to benefit from the family business regime provided for in the Spanish legal system.
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