Inheritance tax in Spain applies to both residents and non-residents. It is commonly referred to as succession tax (impuesto de sucesiones y donaciones or ISD). This progressive tax is triggered when an individual receives an inheritance from a friend or relative, which can include property, money, or any other type of asset.
While national rules regarding inheritance tax are applicable throughout the country, it is important to note that Spanish inheritance tax rules can vary significantly by region. In some cases, the differences between regional regulations can be quite substantial.
Usufruct is a limited real right (or in rem right) that is commonly found in civil law and mixed jurisdictions. It combines two property interests known as usus and fructus: Usus (use) refers to the right to utilize or enjoy a possessed thing directly without altering it.
Fructus (fruit) refers to the right to derive profit from a possessed thing. This can include activities such as selling crops, leasing immovables or attached movables, collecting entry fees, and so on.
A usufruct is either granted in severalty or held in common ownership, as long as the property is not damaged or destroyed. The third civilian property interest is abusus (literally abuse), the right to alienate the thing possessed, either by consuming or destroying it (e.g., for-profit) or by transferring it to someone else (e.g., sale, exchange, gift). Someone enjoying all three rights has full ownership.
The legal concept of trusts does not exist in Spanish law; therefore, it is not recognized by the Spanish tax authorities or the Spanish courts. As a result, the tax treatment of trusts may vary on a case-by-case basis, and the Spanish tax authorities typically analyze the economic reality of the trust rather than its legal nature.
It is important to note that a trust should always take the form of a legal entity recognized by Spanish law. Since Spanish tax law does not specifically regulate the taxation of trusts, the tax treatment of the legal relationships involved in trusts should be determined abstractly based on the general guiding principles of the Spanish tax system. However, this task is further complicated by the scarcity of scientific and administrative doctrine on the subject, which lacks clearly defined criteria.
In practice, this means that the economic relationships between the members of a trust should be regarded as held directly between them, and the tax implications of this should be analyzed accordingly.
Spain doesn’t routinely allow nationals of another country to acquire Spanish citizenship if they intend to retain their original nationality. This means that if you want to become a Spanish citizen, you will usually be obliged to give up the citizenship of your country of origin.
What are the succession laws in Spain? Spanish succession law requires that a certain amount of the estate is left to children. This is often referred to as ‘forced heirship,’ and descendants must inherit two-thirds of their parent’s inheritance. The first third must be distributed equally among all children or other descendants.
In a simplified manner, taking into account the provisions of the agreement between Spain and the United States of America, the taxation for fiscal residents in Spain of the most commonly obtained US source income would be as follows: Pensions are considered as remunerations derived from previous employment and are treated differently based on whether they are public or private.
Public pension (Article 21.2 CDI): A public pension is received due to previous public employment, such as a pension received by a government official. Its treatment is as follows: In general, public pensions will only be taxed in the United States. In Spain, they would be exempt, although the exemption would be applied progressively. This means that if the taxpayer were obliged to file a return for obtaining other income, the exempt pension amount would be taken into account to calculate the tax applicable to the remaining income.
However, if the beneficiary of the public pension is a resident of Spain and also holds Spanish nationality, the aforementioned pensions would only be subject to tax in Spain.
It must be noted that LLCs and LPs are not generally eligible for the application of the benefits granted under most of the DTCs entered by Portugal. For instance, under Article 3, paragraph a) of the Protocol of the US/Portugal DTC, LLCs shall only be deemed residents in the US provided that income obtained by said corporate vehicles is effectively subject to tax in the US, either at the level of the corporation or at the hands of its partners.
This topic has already been brought to the attention of the Portuguese tax authorities, who have already issued several binding rulings stating that: Pursuant to domestic legislation, the allocation of income/profits by an LLC shall be deemed as a distribution of dividends, generally subject to 28% PIT in Portugal.
An LLC, being tax transparent, is not deemed resident in the US for the purpose of the DTC with Portugal. As such, income attributed to LLC’s partners shall not be deemed or treated as dividends for treaty purposes but rather shall be subject to the provisions of Article 24 of the DTC (“other income”), which attributes cumulative taxing rights to the source and residency contracting states.
The look-through approach adopted and the disregard of the LLC for the purpose of applying the DTC provisions does fit entirely with the NHR taxing principles, as the Portuguese tax authorities shall be looking at the nature of the income received by the individual taxpayer rather than the corporate vehicle.
Ultimately, even if the Portuguese tax authorities would deem the LLC/LP eligible for the DTC with the US, the LLC gains could be assimilated to dividends, which, pursuant to Article 10 of the treaty, are also taxable in the US, allowing thus to operate the exemption under the Portuguese legislation.
The British ISA (Individual Savings Account) is not a pension plan because it can be accessed in cases not provided for in pension plans. Therefore, its declaration may vary. The most similar product we have in Spain is the PIAS, whose benefits are also exempt, similar to ISAs.
The British QRPPS (Qualifying Recognized Overseas Pension Scheme) is a fund to which the rights of a pension plan can be transferred. It is designed for UK residents who move abroad. Therefore, it is still considered a pension plan. For the purpose of Form 720, it is not required to be declared. However, for IRPF (Personal Income Tax) purposes, it is considered regular income when redeemed.
The SIPP (Self-Invested Personal Pension) is a British pension plan itself and does not need to be declared in Form 720.
The Spain Residence by Investment Program requires that a foreign individual fulfills one of the following investments in the country:
- The acquisition of real estate with a minimum value of EUR 500,000 (one or several properties).
- Investment funds, bank deposits, or listed company shares in Spanish financial institutions with a minimum value of EUR 1 million.
- A government bond investment with a minimum value of EUR 2 million.
- Documentary evidence of the investment must be provided as part of the application process.
1. In summary, you would ordinarily still include the IRA distributions (from PRIVATE PENSIONS) as taxable income in Spain.
2. Given that they are Spanish income, you may be able to apply any excess foreign tax credits against taxes due to the IRS.
3. So, from a tax planning perspective, there may be an opportunity to:
- Offset taxes paid in Spain against what is due in the US.
- But keep in mind that there are generally two (2) different baskets of foreign tax credits, and they cannot be mixed.
- Foreign tax credits are only useful if you have foreign (non-US) income that is taxable in the US.
4. If a taxpayer only has US source income, there may be an opportunity to take a treaty position on Form 8833 to re-categorize US income as foreign income.
“In Spain, Spanish law applies. However, for funds within an IRA, when there is a distribution, you are taxed in the USA. But in Spain, you will pay for the profits within the fund. In other words, you would need to bifurcate the contributions from the return on this capital invested. Furthermore, you would only need to match sales (assuming equity positions needed to be liquidated to facilitate withdrawals) and distributions within the present tax year so that only these gains are taxed at the appropriate tax rates in Spain, which range from 19% to 45%.”
Is pre-immigration tax planning needed before moving to Spain?
Foreign individuals who become Spanish residents are subject to Spanish Personal Income Tax (PIT) on a worldwide basis. Non-residents will be subject to PIT, but only on income arising and capital gains obtained from Spanish sources. An individual may be taxed as part of a family unit, usually consisting of two spouses and children under the age of 18 (except those living independently with parental consent). The members of a family unit may choose to file separate tax returns. If one member of the family unit chooses to file a separate return, then the other members of the family unit must, in general, also file separately. Specific Personal Income Tax regulations, scales of rates, and special regimes for inbound assignees apply in the territories of the Basque Country (Vizcaya, Guipuzcoa, and Alava) and Navarra, and advice on the specific tax treatment applicable therein should be sought.
When it comes to rental income tax in Spain, there are different rules for tax residents and non-residents. The key differences are in the tax rates, rental property tax deductions, and the frequency of declaring your rental. But regardless of your residency status, if you earn rental income in Spain, you’ll need to make a tax declaration.
Rental income tax in Spain for Non-Residents: For non-residents, the tax you’ll pay is called the flat non-resident Income Tax (IRNR, Impuesto Sobre la Renta de personas No Residentes), and it’s a flat rate of 19% if you live in the EU or EAA countries. If you’re from outside these areas, the flat tax rate is 24%.
Rental income tax in Spain for Tax Residents: For tax residents, the tax on rental income is called the IRPF (Impuesto sobre la Renta de Personas Físicas). It’s a tax on the income you earn in a year, and it applies to all natural persons living in Spain, regardless of their nationality. This is a progressive and direct tax, with rates ranging from 19% to 47%, so the more you earn, the more you’ll pay. It’s worth noting that the property owner, not the renter, is responsible for paying the rental
The wealth tax and Modelo 720 are filed annually. The 720 is just for informational purposes, but the huge penalties and the wealth tax might actually make you pay something. The 720 is designed to be a superset of the wealth tax. Therefore, if you file a 720 and later file wealth tax with smaller numbers, you will probably get a letter from the tax department.
Pension plans do not ordinarily have to be declared in the declaration of assets abroad. But what foreign products can be considered pension plans?
The problem arises because, colloquially, we refer to any financial product for old-age retirement as a pension plan. However, it is important to emphasize what requirements a pension product must have so that, according to Spanish regulations, it does not have to be declared in Form 720.
The regulations on pension plans are included in the revised text of the Law on the Regulation of Pension Plans and Funds, Royal Legislative Decree 1/2002. Article 1 explains the nature of pension plans.
Wealth Tax is levied on the worldwide net assets of Spanish tax residents and on goods and rights located, exercised, or complied with in Spain by Spanish non-residents. The tax is assessed based on the assets held by the taxpayer as of the assessment date, which is December 31.
Law 38/2022, established on December 27, introduces temporary energy taxes and taxes on credit institutions and financial credit establishments. It also creates a temporary solidarity tax on large fortunes and modifies certain tax regulations, thereby extending the individuals to whom Wealth Tax applies.
Beginning with the 2022 tax period, shareholdings will be subject to Wealth Tax if at least 50% of the company’s total assets consist, directly or indirectly, of Spanish real estate assets. For this purpose, the value of the real estate assets will not be based on the book value reported for accounting purposes by the company but rather on the value specified in specific Wealth Tax rules for real estate assets. This value will be the higher of the acquisition value, the cadastral value, and any other value assessed by the tax authorities for tax purposes.