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Gerard Associates Ltd
Gerard Associates Ltd
Global Wealth Managers and Independent Financial Advisers
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SPANISH TAXATION OF QROPS

Important Notice

Gerard Associates Ltd. Financial Advisory Services does not provide individual Spanish tax advice, and nothing contained in this briefing should be construed as such. We make every effort to ensure the accuracy of the information but cannot be held responsible for any liability arising.

It is essential that all clients seek tax advice specific to their own personal circumstances with the relevant tax professional of the jurisdiction(s) in which you are liable to tax.

This has been prepared based on our understanding of current Spanish legislation and tax practice as at the date above. However, these are subject to change, and may result in income tax consequences different from those detailed below.

We cannot accept responsibility for its interpretation or any future changes to law.

The following information is based on our understanding of current Spanish legislation and taxation practice which has been confirmed by unofficial enquiries at the Agencia Tributaria (Spanish Tax Agency).

Further Contributions

From a strict legal standpoint, there would appear to be no law or regulation in Spain specifically dealing with the fiscal treatment received by premiums made into an international pension scheme outside the European Union, that is, a pension scheme in which the provider has its legal residence outside of the European Union. Therefore, and until new specific legislation is enacted in Spain, contributions made into an international pension scheme are not deductible from an individual’s personal income tax declaration in Spain.

In addition, contributions to a pension scheme are not seen as a disposal for IHT purposes but treated as a bona fide commercial transaction as the member expects to benefit from the scheme at some time in the future.

Fiscal Obligations

The QROPS would not be deemed to operate its pension business in Spanish territory from a Spanish regulatory or tax perspective, and therefore should not have any obligation to file tax returns with the Spanish tax administration declaring the contributions received or the benefits paid, nor to withhold any Spanish tax from the benefits paid to Spanish resident investors.

However, any Spanish credit institution (or Spanish branch of a non-Spanish credit institution) intervening as paying agent for you would have reporting obligations to the Bank of Spain regarding payments made to, and received from a QROPS on your behalf. They may be subject to fiscal reporting and withholding tax obligations on the payments made to Spanish beneficiaries (although it could be argued that such fiscal obligations are not applicable because the rights under the Plan are not “securities” (valores o activos financieros)).

Taxation of Funds within the Scheme

Income tax

All funds within the scheme will grow free of any Spanish income tax, because the Member (you):-

• should not be regarded as the owner of the underlying assets within the Scheme (i.e. the Member has irrevocably transferred the funds to the Pension Trustees, and does not retain the power to manage and dispose of the assets),

• cannot claim any consolidated right under the Scheme until the benefit date.

In addition, we understand that the member should not be taxed on these funds before the benefit date pursuant to Spanish anti-avoidance income tax rules, because the Scheme is not an insurance product and the Member would not own any shareholding or interest in a company, partnership or collective investment scheme (fondo de inversion) domiciled abroad, but you own a potential right via Pension Trustees to claim certain benefits at the benefit date.

Wealth tax

As you, the member, does not own the assets within the fund nor any consolidated right under the QROPS scheme until the benefit date (as long as there is a pre-determined retirement age, set at the outset of the scheme, without the right to surrender the Plan before such date), it is our understanding that there is no need for reporting with regards to Spanish Wealth Tax.

Segmentation

At any time you may request that the underlying funds be segmented, this enables you to draw an income from one or more segments without affecting the tax position of the remaining segments. Once you reach retirement age and elects to take an annuity (from one or more segments) then the capital element required to provide the annuity may be classed as being owned by the member for Spanish taxation purposes, including Wealth Tax.

Liquidity before the Benefit Date

As mentioned above, in order to support the desired tax treatment, you should not have the right to redeem or surrender the scheme before the benefit date.
To compensate for this lack of liquidity, you might wish to consider the possibility of taking loans during the lifetime of the scheme, on a commercial basis.

Taxation of income upon the Benefit Date

At the benefit date, you would be taxed on the benefits that can be claimed under the Scheme (regardless of whether they are actually taken or not). In our view such benefits should be included in your income tax return as “investment income” (rendimientos del capital mobiliario) in the general part of the income tax base, which is taxed at the progressive income tax rates. The amount of taxable income to be included in your Income Tax return would depend on how the benefits of the scheme are paid:

(a) Deferred life annuity:
The amount of taxable income will be calculated as a result of multiplying each annuity by one of these percentages, which would be determined at the moment the annuity is constituted and should not vary during the life of the annuitant:
  • 35%, when the beneficiary is between 50 and 59 years old;
  • 25%, when the beneficiary is between 60 and 69 years old;
  • 20%, when the beneficiary is more than 69 years old;

This taxable income should be increased by the yield obtained until the payment of the annuity. This yield is determined as the difference between the financial-actuarial present value of the annuity and the amount of the “contributions” made. Such yield would be added to the taxable income under a straight-line method during the first ten years of the life annuity.

(b) Deferred temporary annuity:
The amount of taxable income will be calculated as a result of multiplying each annuity by one of these percentages, which would be determined at the moment the annuity is constituted and should not vary during the life of the annuitant:

  • 15% when the annuity has a term of less than, or equal to, five years;
  • 25% when the annuity has a term of more than five and less than, or equal to, ten years;
  • 35% when the annuity has a term of more than ten and less than, or equal to fifteen years;
  • 42% when the annuity has a term of more than fifteen years.

This taxable income should be increased by the yield obtained until the payment of the annuity. This yield is determined as the difference between the financial-actuarial present value of the annuity and the amount of the “contributions” made. Such yield would be added to the taxable income under a straight-line method during the term of the temporary annuity, with a maximum of ten years.

(c) Capital payment (as a lump sum):

The taxable income will be calculated as the difference between the capital received and the contributions made by the member. This income will be included in the general part of the Income Tax base after a reduction of 40% (e.g. only 60% of the income is taxed) if the income has been generated during a period of more than two years (irregular income).

Annual Wealth Tax

Within the plan you do not own, nor has the right to dispose of, any of the assets, as they are owned and held by the Trustees. You only has the potential right to claim an income at some predetermined date in the future. Therefore in the lifetime of the Scheme there is nothing for you to declare until you become entitled to claim the benefits from the Scheme. At that stage much would depend on the actual level of income/annuity which is required and the period for which the income/annuity is required.

As a general rule, in the case of annuities, the amount to be declared in the taxable base for Wealth Tax purposes is the present value of the annuity at the end of the year, at a capitalization rate equal to the basic interest of the Bank of Spain, weighted by a percentage depending on your age when the annuity is constituted, if a life annuity, or on the term of the annuity, if a temporary annuity. Therefore it is the level of funds, the way the benefits are taken (capital payment, annuity, life or temporary) and your age at the benefit date which could have an effect on any annual Wealth Tax liability.

Inheritance Tax

Even if it could be argued that the underlying assets within the Scheme are outside the member’s estate, in our view any asset or right received by the member’s heirs would be taxable under the Spanish Inheritance Tax if the heir is tax resident in Spain (or in respect of Spanish assets or rights if the beneficiary is non-resident in Spain).

This would be the case even if the benefit is to be received as deferred income or as an annuity, to the extent that it can be concluded that the beneficiary is receiving a consolidated right (e.g. if the beneficiary has the right to surrender or take the benefits of the scheme at his discretion).

However, if the benefit were subject to a condition precedent (e.g. the beneficiary reaching a certain age), in our view, the Inheritance Tax would not be triggered until this condition is fulfilled.

Spanish Income Tax Reform
According to the terms of this draft income tax bill, the income tax treatment of the benefits received from the Plan should not substantially change, and in fact could even be improved (i.e. the percentages applicable to the annuities are slightly reduced, and the benefits from the Plan would fall within the definition of “savings income”, which is taxable at a flat 18% rate, instead of at the progressive rates).

In any case, you must seek tax advice as to the impact that both existing tax laws and the new Income Tax bill may have in this specific tax situation.

 



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