The summaries were prepared as at June 2005 and have not yet been updated for changes since then. Introduction Spain is a parliamentary mo...

The summaries were prepared as at June 2005 and have not yet been updated for changes since then. Introduction Spain is a parliamentary monarchy with the King as Head of State. The current Constitution was enacted in 1978, following the death of General Franco and the return of democracy. The official national language is Spanish, which co-exists with four other regional official languages. Spain is made up of 17 autonomous communities, including the Balearic and Canary Islands, plus the two North African enclaves of Ceuta and Melilla. Each autonomous community has its own government with independent legislative and financial powers. Spain is the second most extensive country in the European Union. Its land area is about 500,000 square kilometres, with a population of 80 people per square kilometre. The currency is the Euro. Trusts Spain is not a party to the Hague Convention on the Law Applicable to Trusts and on their Recognition, July 1, 1985. Although it is not possible to create a trust under Spanish law, a trust in respect of Spanish situs assets may be created through a company constituted in a jurisdiction where trusts are recognized. Property, Estates and Probate Property There is no distinction in Spanish law between a “legal estate” and a “beneficial interest”, so that any transfer of assets to “trustees” or “nominees” will result in the transferee becoming the absolute legal and beneficial owner for all purposes. Typically, such a transfer, if effective at all, will be taxed as a sale or a gift. Probate and estates The terms “probate”, “executor” and “personal representative” are meaningless in the context of Spanish law. Assets pass on death directly to beneficiaries on acceptance of the inheritance by signing a deed before a notary. “Joint tenancies” do not exist, and assets never pass automatically by reason of survivorship. Foreigners who acquire assets in Spain would be well advised to execute a separate Spanish will, rather than relying on one which uses the terminology of their home country. Although Spanish private international law will uphold a bequest or legacy which is valid under the law of the country of which the deceased is a national, complications may arise where there is a renvoi from that national law. Where Spanish law applies, part of the estate (including lifetime gifts, which must be brought into “hotchpot”) must be reserved for the forced heirs: the extent of their legitim will vary, depending on the number of heirs and their proximity of kinship with the deceased. Other Forms of Legal Entities The corporate structures most frequently adopted in Spain are the public limited company (Sociedad Anónima or “SA”) and the private limited company (Sociedad de Responsabilidad Limitada or “SL”). The minimum share capital is EUR 60,102 for the SA, and EUR 3,006 for the SL. At least 25% of the capital must be paid up in the case of the SA, while in the case of the SL the capital must be fully paid up. Capital duty is 1%. The debt equity ratio should not exceed 3:1. No restrictions apply as to the nationality or residence of the members or directors of Spanish companies, but majority investments by members resident in tax havens are subject to prior administrative notification. Management may be through a board or a single administrator with all the powers of a board. Shelf companies are seldom used, and formation is by deed signed before a notary, after which the company can trade. Typically, this process takes ten days. Afterwards, the deed must be registered at the Company’s Registry. Investments in Spanish real estate by companies resident outside Spain are subject to a special tax levied every year at 3% of the fiscal value of the property. Exemption from this tax can be obtained only if it can be proved that the company and its participators are resident in a territory (or territories) with which Spain has signed a Double Taxation Agreement which contains an exchange of information provision. Exemption must be applied for every year and must be supported by proof of residence from the relevant foreign tax authorities. There is no equivalent to the 3% tax on investments in assets other than real estate. Taxation Individuals Residence Subject to treaties, liability is generally determined based on residence. Persons are deemed resident in Spain if they spend more than 183 days in the country in any calendar year, or if their centre or base of their activities or financial interests is located in Spain. Certain presumptions of residence apply unless rebutted. Income and capital gains taxes Although there are regional variations, for residents, income is generally taxed at the rate of 45% on taxable income above EUR 45,000. Long-term gains are charged at 15%. There is no exemption for gains made on disposal of the principal residence, except after the age of 65 years. Non-residents pay tax at flat rates on Spanish-source income and gains. For example, rentals are taxed at 25% on the gross amount, and capital gains at 35%. There is withholding of 5% on the sale price, which a purchaser from a non-resident must pay over to the Spanish Revenue as security for the vendor’s gains tax liability, if any. Tax concessions for high-paid executives moving to Spain: Draft regulations have been published by the Ministerio de Economia y Hacienda pursuant to new tax laws which allow persons who move to Spain as a result of a contract of employment to be taxed as non-residents for a period of five years. The employment contract must be with a Spanish company or with a Spanish branch of a foreign company. Instead of paying tax at a marginal rate of 45% on worldwide income and wealth tax at rates of up to 2.5% pa on worldwide wealth, the employee pays tax at a flat rate of 25% but only on income arising within Spain and wealth tax only on assets situate in Spain. It appears that the concession could result in substantial tax savings. Wealth tax There is an annual wealth tax on net wealth at rates which reach a maximum of 2.5% on net taxable wealth above EUR 10,695,996. This tax applies to worldwide wealth for residents and assets within Spain for non-residents and certain employees entitled to elect to be taxed as non-residents. Gifts and inheritance tax The total value of the estate and the domicile of the donor or donee are irrelevant. The beneficiary or donee is charged tax, not the estate. Tax is payable on all assets passing which are situated inside Spain, and on those outside Spain if the transferee is resident in Spain. The rate of tax varies, depending on both the degree of kinship between donor and donee and the net wealth of the donee for wealth tax purposes. Young children benefit from generous tax-free allowances, dependent on age. For spouses and children of 18 years or over, the maximum tax rates range between 34% and 40.8%, depending on the net wealth of the beneficiary. By contrast, the maximum rates range between 68% and 81.6% where the beneficiary is not related to the deceased or donor. There is no overall exemption for transfers between spouses as there is in the UK. Corporations The mainstream corporation tax rate is 35%, which applies both to profits and capital gains. A reduced rate of 30% applies to some small companies. If the company meets certain legal criteria for more than 90 days per year it will be taxed in that year as a form of private asset holding company (Sociedad Patrimonial). In such a case, general profits are subject to tax of 40%, while the tax rate for capital gains drops to 15%. This special regime can be particularly beneficial for real estate investments that produce little or no income. Value added tax (“VAT”) and transfer taxes The standard rate of VAT is 16%, although a reduced rate of 7% may be applicable in certain situations. For example, the VAT rate for real estate is 16%, but supplies of most dwellings will be taxed at 7%. Real estate transfers which are not liable for VAT are generally liable for transfer tax at 7% (except where the property is exchanged for shares in a company, when the tax rate drops to 1%). Other Relevant Matters Anti-money laundering A 1993 law sought to prevent laundering of money originating from “criminal activity” carried on by terrorists and drugs and arms traffickers. The law regulated banks, casinos, property developers, and others by obliging them to identify clients and report suspicious transactions, as well as other transactions involving a resident of a tax haven or a cash amount exceeding EUR 30,000. The new law of July 2003 extended the definition of “criminal activity” to any crime punishable by a term of imprisonment of more than three years. The persons regulated by the law are extended to include estate agents, auditors and tax advisers. Notaries and lawyers are also regulated under the new law, but only when they are involved in regulated activities. These include situations where they advise in connection with or are involved in transactions such as the purchase of real estate, the management of funds, shares or bank accounts, and the formation or management of companies, fiduciary entities (“trusts”), or similar structures. This is one of the very few occasions where the word “trust” is used in Spanish law. Lawyers are always regulated when they are acting in a representative capacity under a power of attorney. Obligations include the duty to report suspicious transactions and to set up and implement “Know Your Client” rules. Reporting requirements are introduced for anyone who makes payments in cash of any amount exceeding EUR 80,500 within Spain, or exceeding EUR 6,000 per journey if the money leaves Spain. Resources Publications The Spanish section of Tolley’s Planning and Administration of Offshore and Onshore Trusts, published by LexisNexis UK for STEP (ISBN 0 7545 0794 7) Websites Spanish Revenue - www.aeat.es Legislation - www.aranzadi.es and http://www.laley-actualidad.es Official State Gazette - www.boe.es Supreme Council of the Bar - www.cgae.es Legal Website - www.elwebjuridico.com