Sun sets on undeclared assets

It may come as no surprise that a significant aspect of the property boom in Spain, which ended abruptly in 2008, was that many transactions had a cash element undeclared to the Spanish tax agency. In many cases, those funds were banked outside Spain, invested in foreign ventures, or used to buy real estate and assets in other countries. Not all such investments were the result of shady property deals, but it is widely accepted that they made a significant contribution to the movement of funds abroad.

Spanish residents, including ?foreign nationals, were able to take advantage of a tax amnesty until 30 November 2012. It allowed them to declare any assets held in their name, paying 10 per cent of the amount declared to the Spanish tax agency. A total of €1.2bn was accounted for, less than half of the pre-30 November estimate of €2.5bn.

On 31 October 2012, new primary legislation came into effect in Spain (Law 7/2012 of 29 October 2012), with the express purpose of combating tax fraud. Further to this initiative, subordinate legislation was passed on 1 January 2013 (Royal Decree 1558/2012 of 15 November 2012). It requires all companies and individuals considered to be tax resident in Spain to declare all moveable and immoveable assets either owned by them, or within their control, situated outside Spain. This new legislation gives effect to the Council Directive 2011/16/EU on administrative cooperation in tax, and improves on previous legislation by extending its ambit to the international sphere.

British nationals

Before considering the specific reporting requirements, there are two important issues to note. First, there is the ongoing tax liability that Spanish residents have in respect of their pre-existing wealth; although in certain autonomous regions of Spain, such as Madrid, no wealth ?tax has been payable for some time, ?while other regions, notably the ?Balearic Islands, are now beginning ?to demand payment.

An individual resident in Spain for tax purposes will benefit from a nil rate band, which takes into consideration a family home in Spain and other property up to a maximum value. The value of real property situated outside Spain is based exclusively on its market value. Once declared, the assets owned outside Spain will attract tax annually, although at a modest rate.

Second, British nationals are most likely to be affected by the new rules. Perhaps the only benevolent aspect of this law reform is that those with assets of no more than €50,000 in each category are not subject to the reporting requirements; neither are those whose assets outside Spain do not increase by more than €20,000 year on year. This is a relief for many retirees who may have bank accounts in the UK with modest balances along with possibly a small share portfolio.

That said, there will be many others who are subject to Spanish taxation based on the length of time they spend in the country, but who may not yet have informed HMRC that they are not resident in the UK and, despite having lived in Spain for a few years, have not submitted a Spanish resident tax return. The new rules may be of most concern to those who have significant foreign holdings, particularly important business interests, and trust beneficiaries who, according to the legislation, may be bound to submit information about their interest to the Spanish tax agency, despite not having been resident in Spain when the property was settled.

Tax declaration

The reporting requirements relate to five main categories of assets; in the final four, the relevant date is 31 December in the tax year in question.

• Category one: Funds in banks outside Spain, including funds deposited in current accounts, deposit accounts, and longer-term deposits, as well as credit facilities and any other type of account or deposit. The required information in each case is the date on which the account was opened or closed, the balance as at 31 December in the year in question, as well as the average account balance during the last quarter. Also required, where relevant, is the date on which the declarant was authorised to deal with the funds, or on which that authorisation was withdrawn.

• Category two: Share capital in foreign companies (private or public), the value of any transfer of share capital in those companies to a third party, and the value of any funds transferred to a foreign trust or other pool of assets outside Spain.

• Category three: Life insurance policies, and income received from life insurance companies registered abroad.

• Category four: Interests in ?collective investment schemes ?situated outside Spain.

• Category five: Interests in real property situated outside ?Spain, including timeshare ?and similar interests.

For the first category, those subject to ?the reporting requirement are individuals and companies permanently resident ?in Spain, as well as companies resident abroad but with a permanent presence in Spain. That said, the reporting obligation is far reaching: not only do the account holders have to make the declaration, but so does anyone who represents them, benefits from the account or has at any time during the tax year had power of attorney over the accounts.

The requirement for anyone with power of attorney over funds in bank accounts is relevant to those with authority further to a lasting power of attorney, and those professionals, often Spanish lawyers, who may have failed ?to exclude from a power of attorney ?the authority to deal with assets ?outside Spain.

In the other categories, the legal title holder is responsible for making the declaration. ‘Legal title holder’ (or titular real in Spanish) is defined very broadly in article 4.2 of Law 10/2010 to include those who control 25 per cent or more of any legal entity directly or indirectly, or of the assets of any such entity, as well as the members of a class of beneficiaries when the beneficiaries of such an entity are yet to be determined. This broad definition is designed to include beneficiaries of discretionary trusts. It is important to note that, while the Spanish equivalent of a trust is specifically mentioned in the new rules (a fideicomiso), the word ‘trust’ is also used. This is evidence that trusts were meant ?to be caught by the legislation.

Each person or organisation subject to the reporting requirement must submit a declaration by 31 March following the end of the tax year in question, which in Spain ends on 31 December. In respect of 2013 only, the final date for reporting details of assets has been extended until 30 April. As set out above, those whose assets have not increased by more than €20,000 in any one category will not need to make a subsequent declaration.

Draconian fines

The declaration of assets must be submitted electronically via the ?Spanish tax agency website. There is ?plenty of opportunity for mistakes to be made and errors are unlikely to be pardoned. Indeed, it may make more ?sense to instruct an accountant to ?handle the matter.

If the return is not submitted, or the information is reported incorrectly, the fines are Draconian. The minimum fine is €10,000, with a €5,000 fine being payable in respect of each item, or group of items, not reported correctly. However, if the information is submitted out of time, but before it is requested by the Spanish tax agency, the minimum fine is €1,500, with a minimum fine of €100 per item, or group of items, unreported.

Plainly, the new reporting regime in Spanish law may give many foreign nationals cause to consider leaving Spain’s sunny climes, if only to avoid a liability to tax that would not be payable if they were resident in their home jurisdiction.

The Spanish government cannot be blamed for taking a strict stance on tax fraud. It is a tough reaction at this stage, when there are insufficient funds in the coffers to meet all the state’s obligations to citizens and other residents. But perhaps it highlights the acquiescence ?in the common practice of tax avoidance that has been prevalent in all aspects of Spanish commercial life for some considerable time.

Jonathan Eshkeri is a director at Eshkeri & Grau Solicitors