Thursday, May 14, 2015

Easy solution for imputed income tax for non-resident owners of Spanish property

Say you don’t live in Spain but you have property here for your personal use. In addition to all the other taxes, you are also expected to file a non-resident tax return and pay taxes on the “imputed” income from the property.

There’s a pretty simple solution to this, and that is to make sure you have other passive foreign income from a foreign country that doesn’t tax non-residents on your investments (eg Switzerland for interest or capital gains), or at least has a tax rate lower than your home country. (In some cases, this may be Spain, since Spain has a pretty low taxation of passive income).

Then when you do your declaration, you just credit the tax you paid on your imputed rental income against the tax you owe on your other foreign income, and voila, no net tax increase.

Some countries only let you credit foreign taxes against income from that country, so it may not work in all cases.

Compensation limits for dismissal of pre-2012 workers are raised by Supreme court ruling

In a ruling in September 29, 2014, the Spanish Supreme court changed the rules for compensating dismissed workers. The government had passed a law that limited compensation to 720 days, and “froze” any accumulation above this limit for workers that had already accumulated this number of days (45 days per year worked pre-2012, 33 days after).

The court basically “reinterpreted” the law (without really giving any good reason), and pre-February 2012 workers would continue to accumulate compensation until the 1260 day limit (42 months).

For me, this means that I can work another twelve years here before I reach my maximum 1260 limit.


Wednesday, May 13, 2015

Spanish lottery tickets and money laundering

Until recently, Spanish lottery winnings were not taxed, which made them an easy target for money launderers. The way it worked was like this: dirty money goes and buys lots of tickets. For example, the payout ratio is about 70% for the Christmas lottery, the dirty money has been converted into a set of winning clean lottery ticket.

Other strategies involve people buying tickets from the winners (a felony in Spain, up to six years in jail, don’t ever sell your lottery ticket to anyone).

This has let to some amazingly “lucky” people, like ex-Castellon president Carlos Fabra, who managed to win the lottery ten times in the last twelve years, winning them an estimated 3.6 million euros.

Each year Spaniards spend around a billion euros just for the Christmas lottery alone, so it’s not impossible that this wouldn’t have been noticed, if Fabra hadn’t been so open about it.

Now that lottery winnings are taxable, it’s not as an attractive a method anymore.

Friday, May 8, 2015

What kind of marriage do you have?

Turns out that there is an added complication for foreigners moving to Spain that have married outside Spain. You need to decide whether your marriage is a “community property” (bienes gananciales) marriage or a “separation of assets” (seperacion de bienes).

Update: there's a third kind called "participación", where you have a separation of assets, but you have a joint right to all income in the marriage. This has the advantage that you don't need to worry about gift taxes if you give money to each other that comes from salary, etc.

A notary told me that the default comes from wherever you got married, so if you were married in a community property state in the US, for example, by default you may be considered as having this state.
Your property type has an impact on a couple aspects of your life here:
  • For community property, almost all assets (except those acquired previous to marriage, inherited and a couple other exceptions) as owned 50/50 by both spouses, regardless of the title of the account. The dreaded Modulo 720 rears its ugly head here: if one of you have a foreign account only in their name, both of you need to declare it on your 720 form. The owner declares as owner, and the other declares as having rights to the account.
  • Wealth tax works differently if you are in "bienes gananciales": for everything that isn't privately owned (eg pre-marriage and other exceptions), you split it 50/50 regardless of the actual title. 
  • Income taxes can be filed separately and your community property status doesn’t affect this. If you have interest from an account only in your name, only you have to put it on your declaration.
  • Gift tax applies when a couple has “separation of assets” and a transfer is made between accounts that have different owners.

Tuesday, April 28, 2015

Why non-US brokerages restrict US citizens from US markets

If you open a brokerage account nowadays, almost all will ask for a W8-BEN form certifying you are not a US person. For US persons (citizens, greencard holders, or substantial presence in the US), you would fill out a W-8 form.

There are three possible outcomes (ranked from most to least likely):

1. The bank tells you to get lost

2. The bank allows you to open your account, but bans you from almost all mutual funds and any access to US markets.

3. The bank allows you to open your account and access US markets, but bans you from most non-US mutual funds.

[Update: In Spain, there would be possibility #4, the bank manager has no fucking clue and lets you do whatever you want.]

The reason for this is simple: in order to comply with the US FACTA rules, the easiest thing for a bank to do is just certify they have no US persons as customers.

The reason the banks ban you from non-US mutual funds is that the mutual funds have the same problem: they need to certify that none of their investors are US citizens if they want access to the US market. Also, they can't offer their product to any US clients without potentially running into problems with the SEC, which they would also prefer to avoid.

Basically the US doesn't want US citizens owning investments in the US via an a foreign brokerage without knowing that these are US citizens. This is due to the fact that the US wants to be a great destination for foreign capital (without taxing interest or capital gains), but wants to make sure the US citizens don't try to circumvent this by investing in the US via a foreign company or bank.

Thursday, April 23, 2015

Taxation of mutual funds in Spain

Spain has a pretty bizarre taxation system when it comes to mutual funds. As long as the investment meets the criteria of “collective investment” (500 investors, and you can’t own more than 5% of the capital), you can switch between mutual funds to your hearts content without any capital gains taxes.

Feel nervous about the market? Switch to a money market fund, then switch to Asian equities, etc. As long as you don’t cash in your shares, you don’t have to pay any capital gains in Spain.

In addition, there’s no anti-deferral rules like in the US, so any increase in price due to interest, etc is treated just as a capital gain.

The one thing that isn’t clear is how automatically reinvested dividends are treated. European mutual funds generally don’t do yearly distributions of capital gains, interest, etc, so this doesn’t appear to be anticipated in the rules. From a lawyer I talked to, he thought that automatically reinvested dividends wouldn’t be taxed either. This is very similar to a scip dividend, which aren’t taxed in Spain either, so you have at least two arguments.

Of course, the US doesn’t look at it that way and taxes you as soon switch funds (unless they are shares of different classes in the same fund), so you might be able to do funky things in terms of timing your sales if you want to even out your US/Spain taxation.

Wash sale rules (antiaplicación): Spain vs US

If you are calculating your capital gains, keep in mind that the US and Spain have different wash sale rules (in Spanish it's called antiaplicación). A wash sale is when you sell a stock or mutual fund and buy back a substantially similar one within some period of time.

In the US, if you sell a stock at a loss and buy back a substantially similar stock (or a contract to do so), you don't count this is a sale, but add this to the cost basis of the new shares instead. The rule doesn't apply for gains.

In Spain, the rule applies for two months, but you need to declare the loss in a special box that can be used later on when you sell the shares.

So in theory something could be a wash sale in the US, but not in Spain, either because of timing or because of currency movement.

Oh what fun.

I'm writing a program to do this calculation... perhaps I'll post it on github when it's done.