Every so often we receive inquiries from clients with properties in Spain about the Inheritance Tax and the ways to limit or improve the exposure that their heirs will have.
On this subject, there is a lot of information on the network, but part of it is confusing, biased or incorrect. This is one of the areas of Law in which word of mouth ends up creating myths that are assumed to be true by the majority but that, in general, are not or are not adapted to the particular circumstances of each client.
The legal and financial advice must be individual and specific for each client, and especially in the case of successions and their planning, since the personal and family circumstances of each client are completely different. Thus, there are no universal solutions or general answers that cover the entire casuistry. It is essential that property owners in Spain analyze their particular situation with their local lawyers to determine the best way to protect the assets they wish to leave their heirs.
Nor should we ignore that the legislation on inheritance and inheritance, foreign investments, taxes, and companies is changing, both in Spain and in the countries of origin of our clients. We must take these changes into account and as far as possible anticipate them since in this field of advice we are working on future situations and not present, so it is necessary to understand that our suggestions may not be effective when it occurs. death.
Some advisors, fundamentally located outside of Spain, suggest that the payment of Inheritance Tax in our country can be avoided by incorporating real estate assets into a foreign company. According to them, in the event that one of the owners of the company dies, its beneficiaries will inherit the shares of the foreign company, assuming that they are not subject to taxation in Spain. To make more attractive the initial expense involved in the transfer of the goods to the company and the costs of maintaining it, they provide a series of data that in most cases are erroneous, incomplete or biased and that, therefore, they offer a distorted image of the reality of the tax.
Thus, for example, it is made to believe that the tax usually exceeds 40% or 50%, that there are very few deductions or exemptions and very conditioned, that since there are no agreements to avoid double taxation, one can not deduct what was paid in Spain, that the tax is paid on the inheritance of the spouse and again for the children upon the death of the spouse, that the values computed are those of the market or that the charges can not be deducted, that the tax must be paid immediately after the death, so that the heirs could be forced to have to pay off quickly, etc.
Let’s go by parts:
1.- Is it possible to avoid the payment of the Inheritance Tax by incorporating the real estate assets to a foreign company?
In Spain, unlike what happens in other legal systems like the British, it is not the inheritance lying that is taxed with the inheritance tax but each and every one of the beneficiaries of the inheritance, in the proportion in which they inherit and with the bonuses and exemptions that correspond to them, due to their relationship with the deceased, their effective residence, their pre-existing assets, etc.
Therefore, those obliged to pay the tax before the Spanish Public Treasury are the heirs, either by personal obligation or by real obligation.
The personal obligation assumes that the Inheritance Tax in Spain will pay all those who are tax residents in this country, regardless of the residence or nationality of the deceased or that he inherited property is located in Spain or anywhere else in the world. Residents in Spain are those who reside in the country more than 183 days a year, those who have here the main nucleus of their activities or economic interests, or those whose spouse and minor children reside in Spain.
The real obligation implies that the Inheritance Tax in Spain will pay all non-residents who inherit property or rights that are located in Spain.
As established in Article 7 of Law 29/1987 of 18 December of the Inheritance Tax, affects those heirs who, without being residents of Spain, acquire by inheritance “property and rights, whatever their nature, which is located, could be exercised or to be fulfilled in Spanish territory, as well as for the collection of amounts derived from life insurance contracts when the contract has been made with Spanish insurance companies or has been concluded in Spain with foreign entities operating in it . “
Article 18.2 of Decree 1629/1991 approving the Regulation of Inheritance and Donations Tax establishes that “the real estate that is in it, as well as the movable property, are considered to be located in Spanish territory. (in this category the shares of a company are included) permanently affected homes, farms, farms or industrial establishments located in Spanish territory … “
Since the approval of Law 10 of April 28, 2010, on the Prevention of Money Laundering, in all public deeds in which a company appears, the data of the ultimate beneficiaries (individuals) of said companies, or of the that may be interposed, that possess at least 25% of the share capital. This means that the Spanish authorities know exactly who are the majority shareholders and beneficiaries after the foreign companies with interests in Spain, can know if any of them has died in Spain and it is not unreasonable to think that if at a certain moment they considered that there is a considerable Tax evasion through this channel agree with the authorities of third countries the remission or collation of relevant information to verify the existence of the taxable event.
Therefore, we can conclude that the incorporation of a real estate property to a foreign company constituted as a mere holder of the securities and whose sole asset or activity is the aforementioned ownership of the real property, does not achieve the purpose of avoiding (legally) the real obligation of the payment of inheritance tax in Spain . As much will achieve, to a greater or lesser extent and depending on the circumstances of death and the present and future possibilities of the Tax Agency in Spain to know the same, a distraction maneuver or concealment of the taxable event that entails death. Or in a clearer way: a form of tax evasion that, in addition, and depending on the amount evaded, could be classified as a fiscal offense according to Article 305 of the Spanish Penal Code, with the very serious consequences that would entail.
There is no tax evasion, or anything illegal or reprehensible, in the fact of buying real property on behalf of a foreign company or contribute to it later. Where there is possible tax evasion is on the assumption that once the owner of the shares of that foreign company has died, those who inherit them do not liquidate the inheritance tax in Spain for the acquisition of the assets located here.
Starting from the basis that the use of a foreign company to avoid the payment of inheritance tax is more a way of hiding the taxable event than a valid legal channel to circumvent said payment and, assuming the risks inherent in said practice, it is necessary to also take into account the following:
a) The purchase of a real estate directly in the name of a foreign company should not carry more costs than the same purchase would have on behalf of a private individual, ignoring the ones generated by the constitution of the company.
However, the transfer of the real estate property to the foreign company, either by purchase or contribution, by the latter’s beneficiaries has costs that in many cases could be higher than the inheritance tax that is intended to be avoided.
b) The deed of the contribution of the immovable property located in Spain to the capital stock of the foreign company must comply with the legal requirements, both in form and in substance, established by the country where its fiscal domicile is located and, in addition, must have transcendent registration. in Spain. Given that our registration regulations are full of precepts that do not exist in other foreign legal systems, the possibility that these deeds or the documents that are contributed therein, contain points of conflict or defects in a way that hinders their registration grows exponentially.
On the other hand, the transfer of the real estate property through sale does not generate registration problems in the Registry but triggers the costs due to the Patrimonial Transfer Tax, which in many cases will be higher than the Inheritance Tax itself. Other drawbacks are the effective accreditation of payment and legislation for the prevention of money laundering since it is necessary that the company actually pay the agreed price to the owners (shareholders).
2.- Is the Inheritance Tax in Spain so burdensome?
There is a lot of contradictory information regarding the numbers of Inheritance Tax. On the one hand, because in itself it is confusing because there is no single regulation. Until last January 1, 2015, there was a state regulation that was applicable to non-residents, and other regional regulations, applicable to residents in each of the regions with legislative autonomy. Today the regional (regional) regulations apply to both residents and non-residents. And on the other hand, by the viral dissemination in forums and Internet pages of information provided by individuals or companies that seek to create some alarm that allows them to promote their services and thus achieve their own economic benefit.
The truth is that, depending on many variables such as the residence of the deceased and the heirs, the relationship between them, the value of the estate, the pre-existing estate, age, etc., an heir may not have to pay absolutely anything (in a large number of cases) or get to pay over 70% of the value of the goods received.
But is there a real risk of ending up paying very high percentages? Do not be alarmed For example, to get to pay a 70% of inheritance tax each of the heirs would have to inherit more than 2,000,000 euros, have no family relationship with the deceased and have a heritage in Spain (prior to inheritance) higher to 4,000,000 euros, that is, a very unlikely case.
Until January 1, 2015, the majority of residents who inherited from another resident in Spain paid very little or absolutely nothing, given the existence of reductions in the taxable base of the value of the habitual residence, allowances in the quota or exemptions of the imposed in local legislation (autonomous communities). NOW, THESE REDUCTIONS, BONUSES, AND EXEMPTIONS ALSO APPLY TO NON-RESIDENTS.
Let’s see how it works in the 17 autonomous communities for the heirs of group I and II (ascendants, descendants, and spouses) resident in the European Economic Area :
There are many communities where the ascendants, descendants, and spouses of the deceased resident pay almost nothing.
In Cantabria, there is a bonus in the final quota of 100% for groups I and II.
In the Canary Islands, the fee is 99.9%.
In Andalusia, there is a reduction of the tax base of € 1,000,000. And the resulting quota is 99% bonded
In Madrid, there is a bonus in the final fee of 99%
In Extremadura, there is a bonus in the final fee of 99%
In Murcia, there is a bonus in the final fee of 99%
In La Rioja, there is a bonus in the final quota of 99% if the tax base is less than € 500,000 and 98% if the taxable base exceeds € 500,000.
In the Basque Country the first € 400,000 that each heir receives is exempt from payment. The rest is taxed only 1.5%
In Navarra , the rate applied is a very low 0.8% for the spouse from € 250,000. The ascendants and descendants are taxed at 2% from € 250,000 to € 500,000; to 4% from € 500,001 up to € 1,000,000; to 8% from € 1,000,001 to € 1,800,000; 12% from € 1,800,000 to € 3,000,000; and 16% from € 3,000,000.
Castilla la Mancha the bonus is 100% for taxable bases of less than € 175,000, of 95% for those between € 175,001 and € 225,000, of 90% for those between € 225,001 and € 275,000, of 85% for which are between € 275,001 and € 300,000, and 80% for those that exceed € 300,000.
In Catalonia, there is a bonus for the spouse of 99%. The children have a bonus that starts at 99% and decreases as the tax base increases. Even so, the bonus for example with a tax base of € 1,000,000 is 84.60%. In addition, the habitual residence is exempt by 95% up to a maximum of € 500,000
In the Valencian Community, the fee is reduced to 75% for group I (children under 21 years of age) and 50% for group II (spouse, ascendants, and descendants over 21 years of age). There are reductions in the tax base for the acquisition of the habitual residence.
In the Balearic Islands, there is a 99% bonus on the fee for children under 21 years of age. There is a reduction in the tax base of € 25,000 for each beneficiary of group II (spouse, ascendants, and descendants over 21 years of age); the amount that increases for children under 21 years. Both groups (I and II) are taxed at 1% up to € 700,000; to 8% from € 700,001 up to € 1,000,000; to 11% from € 1,000,001 up to € 2,000,000; to 15% from 2,000,001 € to 3,000,000 €; and 20% from € 3,000.001. 100% of the habitual residence is deducted from the tax base up to a maximum of € 180,000 per heir (children, parents, and spouse) who have lived with the deceased.
In Galicia, the heirs under the age of 25 pay practically nothing thanks to the reductions in the taxable base and bonuses in the quota. The bonus in the quota is 99% for children under 21 years. There is a reduction in the tax base of € 400,000 for group II. Both groups (I and II) are taxed at 5% up to € 50,000; to 7% from € 50,001 up to € 125,000; to 9% from € 125,001 to € 300,000; to 11% from € 300,001 to € 800,000; to 15% from € 800,001 up to € 1,600,000; and to 18% from € 1,600,001. In addition, the habitual residence benefits from a reduction of 100% in the case of the spouse and of 95% as a minimum for ascendants and descendants up to a maximum of 600,000 euros.
In Castilla León, there was a 99% bonus on the quota, but it was abolished. Currently, a reduction of the tax base of 60,000 euros is applied for each heir of group II (descendants over 21 years of age, ascendants, and spouse) and for an amount higher in descendants of group I (descendants under 21 years of age). There is also a variable reduction of 400,000 euros to which the previous ones are subtracted.
In Aragon, children under 18 have a reduction of 100% taxable income with a limit of € 3,000,000. Children over 18 years of age and the spouse have a reduction of the 100% tax base with a limit of € 500,000.
In Asturias, the autonomous reduction for spouses, ascendants, and descendants when the value of the assets and rights acquired (regardless of the habitual residence) does not exceed € 300,000, the base amount will be zero. Both groups (I and II) are taxed at 21.25% to € 56,000; at 25.50% from € 56,001 to € 216,000; at 31.25% from € 216,001 to € 616,000; and at 36.50% from € 616,001. The acquisition of the habitual residence has a reduction that goes from 99% to 95% depending on the value.
In summary, in a good number of communities, those owners who have taken the precaution of granting a Spanish will be in the vast majority of cases that their heirs will not have to pay Inheritance Tax in Spain or that this, if to pay it, normally it should not be too burdensome.
Therefore, the reasons that some companies allege for the real property to be contributed to a company located outside of Spain, namely, that otherwise the Inheritance Tax will be disproportionate, that the heirs must have the property in their name during a good number of years to qualify for bonuses or reductions, etc. they are wrong in the vast majority of cases.
3.- European Commission and a lawsuit against discriminatory legislation
Before January 1, 2015, the regional regulations (applicable to residents in those regions) were much more beneficial for the taxpayer than the state regulations (applicable to non-residents), which meant obvious discrimination between European residents and non-residents. residents. Therefore, the European Commission asked in 2010 and 2011 to the Spanish Government to change the legislation to avoid such discrimination. Failing to do so, he sued the Spanish State before the Court of Justice of the European Union. This proceeding had its oral hearing in Luxembourg in January 2014 and the judgment was heard on September 3, 2014.
Which it was the result?
The European Court ruled against the Spanish State , for violation of Article 63 of the Treaty on the Functioning of the European Union, as well as Article 40 of the Agreement on the European Economic Area, as it also did in its day in relation to the Increase in Patrimony in the sale of real estate and inheritance tax in Germany, for which the Spanish State has been forced to modify the legislation so that there is no discrimination between residents and non-residents. In this way, spouses, descendants and ascendants not resident or who inherit from non-residents in Spain now pay the same as residents, which, as we have seen, is little or nothing in most of the autonomous communities, thanks to the reductions, bonuses, and exemptions that they enjoy.
The Inheritance Tax is a tremendously unpopular tax and it is likely that the future objective will be to deepen in a slight way the acquisitions by inheritance within the family nucleus, this being the model adopted by most of the countries in our environment, where exceptions, the spouses and children are not subject to the tax, or where they enjoy reductions and exemptions that greatly soften their amount.
Those taxpayers who have paid the Inheritance Tax and who consider that they have suffered discrimination based on their residence, can already legally claim the return of the amounts paid in excess.
4.- Double international taxation. Can I end up paying the inheritance tax in Spain and in my country of residence?
Today, thanks to the freedom of movement of people and capital within the EU, there are many successions in which an international element intervenes, either because the assets that make up the relict flow are located in several countries or the causes and successors have a fiscal residence in different states. In these cases the lack of coordination between the different countries, the result of the fiscal sovereignty of each of them, can generate an international double taxation event, that is, that both seek to tax the same taxable event.
Obviously, international double taxation is a phenomenon contrary to the principles of tax justice, as well as a serious obstacle to the free movement of people and capital, which is why states try to correct or mitigate it through unilateral internal regulations or through international treaties (bilateral or multilateral) signed for that purpose. The problem is that while in relation to income tax there are many bilateral treaties between the different states, there is no such coverage in terms of taxation by inheritance. There are few treaties in this regard within the EU and, specifically, in the case of Spain, there is only an agreement to avoid double taxation in succession matters with Greece, France, and Sweden.
The European Commission issued a recommendation in December 2011 regarding the measures that Member States should implement in their domestic legislation in order to avoid international double taxation (OJEU of December 20, 2011).
In this recommendation, the Commission echoes the problem posed by the existence of hundreds of thousands of cross-border heritages per year and the limited impact of international conventions in this regard and proposes the adoption of a series of measures to solve this problem and that The purpose of this summary is to achieve “that the general tax burden of a specific succession does not exceed the burden that would be applied if only the Member State with the highest tax burden of the member states involved had tax jurisdiction over the succession in its entirety . “
However, even if this is not the final solution and has gaps and flaws in its application, it is common that there is internal and unilateral regulation to regulate the situation with regard to personal obligation. That is, the states usually articulate mechanisms in their domestic legislation so that those who contribute by personal obligation can deduct the amounts paid in another country by real obligation.
The United Kingdom, for example, has bilateral agreements with the Republic of Ireland, the USA, South Africa, France, the Netherlands, Sweden, Switzerland, Italy, India, and Pakistan. For other countries, a unilateral deduction is applied to the amounts paid in them, which will be equal to the maximum that the good or right would pay in the United Kingdom.
An individual residing in the United Kingdom dies and leaves an inheritance of 1,000,000 pounds. Included in that inheritance is a property located in Spain valued at 230,000 pounds. His two heirs pay in Spain in the concept of Inheritance Tax the equivalent of 26,000 pounds.
The base amount would be £ 1,000,000
The exempt amount is £ 325,000
Tax base: £ 675,000
Inheritance tax at 40%: £ 270,000
The part that would correspond to the property in Spain is calculated with the formula:
Value of the property / (Total value of the hereditary estate x Inheritance Tax)
In this way, the part of Inheritance Tax payable in the United Kingdom that corresponds to housing in Spain would be £ 77,050. As this figure is higher than the amount of tax paid in Spain (£ 26,000), the amount that can be deducted in the United Kingdom is limited to the amount actually paid in Spain.
In the case of the Republic of Ireland, the regulations are similar. It maintains bilateral agreements in this matter with the United Kingdom and with the United States and with the rest of countries, a unilateral deduction is applied to the amounts paid for an equivalent tax in them. Said deduction will be the amount paid in that other country, with the limit of the amount that that good or right would pay in Ireland, for which the smallest of the quantities will be deducted.
Therefore, it is not true that the non-existence of a bilateral double taxation agreement in matters of succession means that the tax must be paid in full in both countries.
In fact, in the specific case of the British, as the tax rate is equal to 40%, higher than the Spanish in the vast majority of cases, it is highly probable that whatever the amount paid in Spain may be deducted from the amount payable in the United Kingdom. Thus, the calculation of the tax in the United Kingdom would not be affected by the contribution of the immovable property to the company, since the shares that the heirs were awarded would be valued, in any case, taking into account the existing assets.
5.- Is it true that, if the surviving spouse inherits now, the children will again pay the tax on his death, multiplying the amount to be paid?
When calculating the supposed tax cost of the inheritance, the advisors who recommend the use of foreign companies usually include the tax of a first inheritance to the spouse to whom they subsequently add the tax that would be paid by subsequent beneficiaries. However, when making these calculations, they are interested in the content of Article 20.3 of the Law, which is improved in terms of deadlines in some communities, and therefore has a swollen cost that, in many cases, does not correspond to reality.
6.- How are properties that are going to be inherited valued?
Given that in a mortis causa acquisition there is no agreed price between the parties, the valuation that will have to be used will be determined by the Ministries of Economy and Finance of the Autonomous Communities where the assets are located. These assessments will coincide with the cadastral value of the property in those municipalities where the revision of the cadastral values is recent and will have a multiplying coefficient for the updating of those others where the revision of cadastral values has not been carried out in recent years.
In any case, the reference values are usually almost always lower than the values of the real estate market in the area. It is not necessary for an expert to assess the real estate, unless the real value of the home is much lower than the minimum established by the administration or if the state of conservation of the home is very poor or dilapidated.
In addition, it must be taken into account, that the charges and debts of the house are deductible from the tax, so that the debts that may have contracted with the community of owners, the town hall, etc., and the mortgage loans, can reduce drastically the tax base and, therefore, the amount to be paid.
7.- Do I have to pay the tax immediately after the death?
The tax is accrued on the day of the death of the deceased and must be settled within a period of 6 months from that date. During the first five months from the date of death, you can request an extension of the term for six more months. In this case, default interest must be paid for the extended days.
It will also be possible to agree on the fractionation of the payment, upon request and before five months have elapsed since the death, in a maximum of five annuities, provided payment to the administration is guaranteed.
Finally, you can request the postponement of the payment, with the same conditions already seen, until it is determined who or who are the beneficiaries of the inheritance.
What happens if I do not request a deferment, or is not granted, and I do not complete the settlement within 6 months?
- If it is settled the sixth month and before it is nine months from death, there will be an increase of 5% in the quota.
- If it is settled on the ninth month and before twelve months have elapsed since the death, there will be an increase of 10% in the quota.
- If it is settled after the expiration of the year and before fifteen months have elapsed since the death, there will be an increase of 15% in the quota.
- If it is settled on the fifteenth month and before eighteen months have elapsed since the death, there will be an increase of 20% in the quota.
- If it is settled after a year and a half after the death, the fee increased by 20% will be paid, in addition to the late payment interest generated from that moment until the effective payment date.
The tax prescribes at 4 years, 6 months and one day from the dead, except action by the administration that interrupts this term
1.- It is impossible to give a single, general and universal answer for all clients and assumptions and a detailed study of all the circumstances of each family is necessary in order to recommend one solution or another. The solution can not be to avoid paying the tax by concealing the taxable event after a partnership. Buying a property in the name of a foreign company can be interesting or advisable if the company is going to dedicate itself to the rental or the sale of real estate or if the real estate has a very high value (for the saving in income and property taxes) , but avoiding the payment of inheritance tax should not be the reason for such practice.
risky advice2.- Any solution that is given must be aimed not only to reduce, as far as possible, the future tax, but also to mitigate the direct cost of that solution, as well as the way in which it affects our legal position, because As we have seen, it is quite possible that the tax, as we know it today, does not exist when we perish.
You can change the community, state and regional legislation, reducing, eliminating or limiting the exposure that our assets will have to the tax. You can change state or autonomous legislation in relation to the treatment or taxation of foreign companies holding real estate. That is something that happens with some assiduity and as an example, you can see our publication on the blog about the controversial Andalusian law that affects the companies that own real estate in the community. You can also sign bilateral or multilateral agreements in this regard that radically change the way these taxes affect us.
Therefore, any solution that arises is to a certain extent provisional, so it is not advisable to rush to make costly decisions. Transferring our assets in Spain to a foreign company and in order to avoid the payment of Inheritance Tax, may be a case of tax evasion, which in itself should be sufficient reason not to consider it, but it is also in many cases it is not profitable with the current rules of the game, and nobody can guarantee that in cases where it can be profitable today for the cost/savings ratio (and assuming the risk that it entails) it will continue to be so in the future .
The current situation, in the great majority of the autonomous communities, is that the spouses, ascendants and descendants who inherit do not pay Inheritance Tax; that in the few communities where these taxpayers pay, there are considerable reductions in the tax base; that there are no longer differences between residents and non-residents; and that the tendency, at least in Europe, is for the tax to disappear, especially as regards the acquisition by inheritance of family assets among the members of that family nucleus.