In this article Mauro De Santis Bo, pictured above, Partner at GSB Wealth outlines what financial matters expats need to know about before moving to Spain.
Spain is one of the most attractive countries in the world for expats – especially retirees who leave the behind their home country for sun, sea and a great lifestyle.
In this article, we discuss some financial strategies for expats considering moving to the European country.
What happens with offshore investments?
When moving to Spain, understanding the tax implications of holding investments in offshore private bank accounts or investment platforms is crucial. Tax residents in Spain are taxed on their worldwide income, which includes income from offshore investments.
Spain offers numerous opportunities for Spanish nationals and expats alike, especially from a financial and tax perspective. Partnering with a tax lawyer and a financial planner ensures that the transition is smooth and efficient.
By holding investments in offshore investment platforms or private banks while clients move to Spain, it will attract the below tax rates each year on the account growth.
TAXABLE INCOME TAX RATES
€0 – €6,000 19%
€6,001 – €50,000 21%
€50,001 – €200,000 23%
€200,001 – €300,000 27%
€300,001 – Onwards 28%
Income from these investments, including dividends, interest, and capital gains, is taxable in Spain. The tax rates for savings income (e.g. dividends and interest) are progressive and will be payable every year based on the growth of the account.
Life Assurance Policy – Tax-Efficient Investing
Utilising Spanish tax-compliant investment vehicles can significantly improve tax efficiency. One of the most effective options is the Spanish Collective Investment Bond, a type of life assurance policy that offers numerous advantages if clients are looking to relocate to Spain.
A Spanish-compliant policy is a single premium investment-linked life assurance policy issued under the EU Freedom of Services regulations. It is designed to hold an investment portfolio within a Spanish tax-efficient structure.
A tax-compliant policy has to meet a number of technical conditions as established by Spanish personal income tax law.
Benefits and advantages of using life assurance policies in Spain
a. Optimal Wealth Transmission Planning
Is an ideal instrument to optimise the transfer of assets to the next generations.
- Life Insurance Policies as Trust Alternatives:
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- Can be used similarly to trusts but without legal uncertainties.
- Fully regulated and accepted in Spain.
- Maturity Date for Asset Transfer:
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- Set a specific maturity date for benefit payment.
- Ensures assets are transferred on a specific date.
- Independence from Estate:
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- Life insurance benefits do not form part of the estate.
- Payment is made directly to beneficiaries immediately.
- Controlled Tax Obligation Timing:
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- Policyholders or advisers can determine when tax obligations are triggered in Spain.
b. Tax Efficiency
- Tax Deferral on Gains:
- Gains on underlying investments are deferred until a partial or total surrender occurs.
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- Significant advantage over direct investments, which are taxed annually.
- Beneficiary Payments:
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- Payments to beneficiaries (other than the policyholder) are not subject to Spanish personal income tax (IRPF).
- Ideal for making lifetime gifts.
- Lifetime Gift Treatment:
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- Benefits paid to beneficiaries can be treated as lifetime gifts, even after the policyholder’s death.
- Potential significant tax reduction in regions with low gift tax rates.
- Fee Deductions:
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- Charges such as asset management, custody, or trade execution fees are deducted from policy value.
- Exempt from VAT, providing double savings compared to direct investments.
- Exemption from Exit Tax:
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- Falls outside the scope of “exit tax” (Art. 95 bis of the IRPF Act).
- Ideal for internationally mobile individuals.
Growth within a Spanish tax-compliant policy is not taxed until funds are withdrawn. This means that as long as the policy remains intact and no withdrawals are made, no annual tax is due on the gains.
To illustrate the potential tax savings, consider an investment of $1,000,000 in:
- Offshore Investment Platform or Offshore Private Bank
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- Annual Growth: Assuming a 5% annual growth, the investment would yield $50,000 in the first year.
- Taxable Amount: The entire $50,000 would be subject to Spanish income tax at rates ranging from 19% to 28%.
- Tax Payable: At a 23% rate (average for significant investments), the tax would be $11,500 annually.
- Spanish Tax-Compliant Bond/Life Assurance Policy
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- Tax Deferral: The same $1,000,000 investment with 5% growth would yield $50,000, but no tax is payable until funds are withdrawn.
- Withdrawal Scenario: No personal income tax is due on the $50,000 growth if no withdrawals are made. If a partial withdrawal is made, only a portion of the withdrawal is taxable, significantly reducing the taxable amount and thus the tax payable.
Example Calculation for Tax Savings:
- Non-Compliant Policy:
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- Yearly growth: $50,000
- Taxable amount: $50,000
- Tax rate: 23%
- Annual Tax: $11,500
- Compliant Policy with No Withdrawals:
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- Yearly growth: $50,000
- Taxable amount: $0 (deferred until withdrawal)
- Annual Tax: $0
- Compliant Policy with Partial Withdrawals:
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- Assume $10,000 withdrawal (20% of the growth).
- Taxable amount: Pro-rated part of the gain, significantly less than the full growth amount.
- Potential Tax: Assuming 20% of the gain is taxable, the tax payable might be approximately $1,150 (23% of $5,000).
Together with great tax benefits, the strategies provide the need for clients to look at using a robust and low-cost investment platform.
This will allow anybody residing in Spain to access a wide range of funds at the lowest cost possible, creating the best environment for growth potential.
Conclusion
Relocating to Spain offers exciting opportunities, but it requires careful financial and tax planning.
By understanding the tax implications of holding investments, employing tax-efficient strategies, structuring investments wisely, and working with licensed professionals, clients can ensure a successful transition.
Partnering with a tax adviser and a financial planner provides comprehensive support, helping clients navigate the complexities and make the most of their move to Spain.
Article submitted by Mauro De Santis Bo, Partner at GSB Wealth
