Avoiding Tax in Spain

By James Baker ACA

Originally published as a series of posts at Spanish Insight, a blog about Spanish business
and life.

Part 1 - why?

Foreigners in Spain are often very keen to avoid local taxes wherever
possible and indeed to keep out of the system in its entirety if they can
help it. This may partly be because tax avoidance by the locals is a
national sport and also because everyone seems to get away with it. It's
not often you hear about the law catching up with anyone.

Also there may be some double standards operating: perhaps people who
paid taxes meticulously in their home country do so reluctantly in their
adopted country because they don't see themselves as part of the society
being financed by those taxes. At some level they are still on holiday in
Spain and don't feel the need to become full citizens, for example by
signing up for Spanish social security.

Of course the main reason, as ever in matters of human motivation,

comes down to opportunity and thus temptation. In your home country
you cannot help but become enmeshed in the state system and avoidance
opportunities are few (unless you are an MP with homes to flip). By
moving states, EU or otherwise, the chance to cut all ties and start over
again often brings an opportunity. It's down to you to put yourself in the
system and start paying and declaring. For some people it's like being a
kid in the sweet shop when the owner has to go out the back to get
something leaving the counter undefended. There is a massive invitation
to stuff your pockets with confectionery and many succumb.

Most of us ordinary folk wouldn't ordinarily think much about going "off-
shore". Indeed it's a phrase with a slightly pejorative ring; something that
drug-dealers and rakish bounders might consider or at least something
that only the rich need concern themselves with. But if you sell up in one
country (e.g. the UK) and move to another (e.g. Spain) the thought of
going offshore suddenly seems worth a look. After all you are soon to be
non-resident for taxes in your own country, you're not yet resident in
your adopted country and you have liquidated your assets. Consequently
a lot of ordinary folk have opened offshore bank accounts, including
myself. My experience of offshore banking was pretty uneventful -
deposited some money for a while, took it out a bit later to invest in
Spain, closed the account. But lots of people go a lot further and there
can be dangers. Two basic ones - they are very obvious - could be
avoided by following the "just because it's offshore" rules:

1. Just because it's offshore doesn't mean it's a good investmemt - once
seduced into the world of offshore finance some of us start hatching
exotic plans for our money. A few clicks of the mouse and you can find a
host of funds, trusts and bonds linked to all manner of asset classes like
Hedge Funds and currencies. Nothing inherently wrong there as long as
you weigh up the risks in the same way as you would ordinarily. There
are tight rules in the UK about how different products can be sold to
retail investors which won't necessarily apply offshore i.e. they will focus
more on the benefits (expect to hear a lot about "tax efficiency" and "tax
free") than the possible risks. Look at currency risk for example. Also
what about the charges? The headline charges might be low but are there
charges buried in the product. A good example would be a hedge fund -
linked unit trust; the trust may charge a reasonable % fee but the
underlying hedge funds which drive the funds can be subject to charges
of 20% (of gains). Often offshore products are called "bonds", "wraps",
"trusts", "portfolios" which may sound reassuringly familiar but, as they
are really tax-efficient vehicles for holding funds and other investments
which may have all kinds of risk (and charges) associated with them, you
need to dig deeper and understand exactly what underlies them.

2. Just because it's offshore doesn't mean it is invisible. I don't think

there are many people out there that aren't aware of the noose closing
around people "hiding" money offshore. It isn't the placing of money
offshore that is the problem of course, it's the non-declaration of the
income. Wherever you are resident you should report your income and
gains from offshore investments. With tighter and tighter information-
sharing rules (where offshore operators have to disclose who's got what
with them to any government that wants to know) you are always at risk
of penalties and prosecution. That's why so many people have taken
advantage of the UK's two offshore amnesties and come clean about
offshore income and paid the tax. At the moment the UK has information
sharing agreements with:

• Jersey (PDF 187K)

• Gibraltar (PDF 280K)
• Guernsey (PDF 187K)
• Isle of Man (PDF 189K)
 • Montserrat (PDF 149K)
• British Virgin Islands (PDF 167K)
• Netherlands Antilles (PDF 124K)
• Aruba (PDF 107K)

• Anguilla (PDF 117K)

• Cayman Islands (PDF 217K)
• Turks and Caicos Islands (PDF 219K)

• Bermuda (PDF 68K)

• Isle of Man (PDF 80K)

Of course for those with Spanish residency for tax, the Spanish
tax authorities have their own agreements and there are EU wide
directives.

Keeping the tax man's hands off your money is a preoccupation almost as old as
money itself (I am sure taxes were proposed soon after money's invention). Today
I want to touch upon two important and substantial tax savings available to us
foreign residents of Spain. They are both entirely above board and sound very
enticing but are not quite as attractive as they seem when you dig a little deeper.

Tax saving no 1: Application to be taxed as a non-resident

("Beckham's Law")

As I am sure all you well-informed readers know, a Spanish resident tax payer
has to declare all their worldwide income. But there is an exception for foreigners
newly tax resident in Spain: they can apply to be treated as non-residents for tax
purposes i.e. only have to declare Spanish income and once more at the low rate
of 24% (the top rate for residents is 43%). This is what David Beckham did when
playing forMadrid, hence the nickname for the law. If your application is
successful then you can take advantage of this attractive option for 5 years. There
are conditions (see this good explanation here) but it is great on the face of it;
certainly foreign footballers have benefited greatly.

Reservations: Two really. One is that you have to read the small print in the
conditions which will make a lot of people ineligible, particularly the stipulation
that you have to have moved to Spain to begin an employment contract with a
Spanish entity and perform most of your duties in Spain. Secondly non-residents
don't get the tax allowances and exemptions that residents get so although the
rate is lower you may lose out in total because of the lost allowances (depends
how much you earn and what sort of allowances you are entitled to).
Tax saving no 2. : €60.000 overseas earnings tax free

Another eye-catching tax allowance which applies if you are resident in Spain but
go abroad to work e.g. doing contracts back in the UK or elsewhere in Europe.
The problem here is very fundamental: you need to have paid the tax in the
country where you worked so it isn't tax free as such although could be very
useful if you often work in a country with low income taxes.

Conclusion: depending on your circumstances there are often allowances and

benefits available so it's worth getting a tax adviser to look at your Spanish tax
position when your tax situation changes. On that self-serving note I will leave
you with a link to Advoco's tax services page:

http://www.advoco.es/home/22-latest/35-spanish-tax-advice.html

Non resident tax payers might also be interested in a recent article of mine
called "Making sense of Spanish tax form 210"