Sunday, July 13, 2014

Real estate offer agreements in Spain

If you want to make an official offer on a house or apartment in Spain, in some cases the real estate agent will ask you to put down a deposit, together with signing an agreement that if the seller accepts your offer, you will lose your deposit if you back out.

Problem is these contracts tend to be very badly written and can lead to real problems if things don’t work out. Especially important is who is going to return your money if things don’t work out.

The important points of the contract are what happens in each of these cases:

  • If the seller does not accept the offer in writing within a short time period (48 hours), the real estate agent should return your deposit immediately.
  • If the seller accepts your offer, but then backs out, the real estate agent should to return double your deposit. Since the offer contract is only signed by the real estate agent and you, the agent can’t really legally commit the seller to pay anything, since the seller isn’t signing the contract. (The real estate agent might have a contract with the seller, but that’s not your problem)
  • Will this fee will be credited towards the purchase price as part of the agreement? Sometimes it is assumed that this is a commission for the real estate agent, so be careful.

Alternatively, you could just look for a deal where you deal directly with the seller. In that case, don’t sign any agreement except the final one at the notary. In the past, people usually signed “arras” pre-sale agreements, but these can also be minefields (more on that later), so avoid them if at all possible.

Saturday, July 12, 2014

Spain screws long term property owners

Something that has shocked me about the recent tax changes has been the high degree of retroactivity, taxing people for past behavior that they can no longer change. Normally the idea is that taxation should influence future behavior, and changing the tax liability for decisions already made is counter-productive and arbitrary.

The latest change in the capital gains taxation is significant to anyone considering buying or selling property in Spain. Among the recent raft of tax changes, there is a huge change in the way long term capital gains are treated. In the (now) past, there was a reduction for inflation, with an additional reduction if the property was bought before 1994.

The new law does away with this and applies a very simple non-inflation corrected capital gains calculation. Going forward, it doesn’t really matter that much, since the current inflation rate is low enough not to matter, and the lower overall tax rate evens out everything.

However, if you were a sucker (ie have now been retroactively changed into a sucker) to have bought something in the 1980s and have held onto it, you are going to pay as if the 30%+ inflation during the 1980s never happened if you sell your property after 2014.

CincoDias has a great calculator that will show the difference, which can be huge. For example, if the seller bought an apartment in 1980 for 8 million pesetas (about 200.000 euros inflation adjusted, but 48.000 euros non-inflation adjusted), and sold it today for 300,000 euros, the seller ends up paying 44.000 euros extra in capital gains if they sell it after 2014!

So if a place is listed for 300.000 euros and the end of year is coming up, a long term owner might be willing to sell it for 40.000 under list price rather than waiting for the new year to roll around.

Definitely something to keep in mind if you are thinking of making on offer.

Sunday, June 15, 2014

The immunity of the king, his alleged illegitimate son and the succession

Given how the Spanish media treats everything royal related with kids gloves, sometimes its hard for foreigners to get what’s really going on.

One of the big arguments about the succession law has been whether the previous king will maintain his absolution constitutional immunity from civil and criminal lawsuits. As far as I know, the king hasn’t committed any crimes, so why is this such a big deal?

The big deal is that Spanish succession law makes no difference between illegitimate and legitimate heirs, and two lawsuits has been filed claiming paternity, one of which by a son older than the Felipe. The judge dropped the case due to the immunity of the king.

If the king loses immunity, then the other son could claim paternity and the right to be the next king, which would make ridicules the whole succession process.

However, since the king’s current immunity comes from the constitution, it’s not quite that easy to maintain it without fiddling with a bunch of laws, which could potentially be overruled by the courts and create a giant mess.

Once Felipe has been proclaimed, the law says he won’t lose his job if the illegitimate son gets his day in court, but before this happens, no one really knows. Hence, the big rush to get this done as soon as possible.

Monday, June 9, 2014

New US Spain tax protocol and IRS regulations simplify Spanish pension plan reporting

If you have a retirement plan here in Spain and you’ve been wondering how to declare it, the governments of Spain and the US have made things much easier. In the past, Spanish pension plans were not considered “qualified” and thus had to be treated and taxed under the horribly complicated and expensive PFIC regime.

First, there have been some new temporary PFIC regulations that have been published by the IRS in January 2014 (effective for 2013 returns) that state:

The temporary regulations provide that US persons who are beneficiaries of foreign pension and retirement plans must file Form 8621 with respect to any PFIC investments held inside the pension fund unless, pursuant to an income tax treaty, “income earned by the pension fund may be taxed as the income of the [beneficiary] only when and to the extent the income is paid” to the beneficiary.  Not all US income tax treaties provide the specific language referenced in the temporary regulations to alleviate the Form 8621 filing requirement.

At first reading, it looked like the US Spain Tax treaty doesn’t have the required clause, but then I remembered that there’s a new amended Protocol from 2013. And guess what? They added this:

“5. Where an individual who is a resident of one of the Contracting States is a member or beneficiary of, or participant in, a pension fund that is a resident of the other Contracting State, income earned by the pension fund may be taxed as income of that individual only when, and, subject to the provisions of subparagraph (a) of paragraph 1 of Article 20 (Pensions, Annuities, Alimony and Child Support), to the extent that, it is paid to, or for the benefit of, that individual from the pension fund (and not transferred to another pension fund in that other Contracting State).”

Unfortunately, the new tax treaty hasn’t been ratified by the US Senate (thank you Rand Paul), so it looks like you shouldn’t withdraw anything until this happens, or you may be subject the PFIC and all its glory.

Of course, you still need to report the account on your FBAR and Form 8938, but at least you don’t need to worry about being taxed on the income until you take it out. Interestingly, the clause seems to leave open the possibility of a tax free transfer of a retirement account from one country to another.

Sunday, June 8, 2014

Democracy vs Monarchy

I keep hearing the stupid argument a republic isn’t necessarily more democratic than a monarchy (because North Korea). Well, isn’t the whole definition of a monarch someone you DON’T vote for? Okay, you can take away almost all the powers of the king so that he’s just a figurehead, but then, what’s the point? Either the king has power, in which case it’s not democratic, or the king has no power, in which case he’s a waste of money.

Wednesday, June 4, 2014

Potential post-independence isolation of Catalonia

There seems to an almost religious faith here in Catalonia that the world would beat a path to our door if we were only independent. I think this is a very naïve way of looking at geopolitics and you don’t need to look far to see how miserably countries can get treated if some other country decides to make life difficult.

For example, Greece has been blocking entry of Macedonia into the EU, NATO and any other organization purely because they don’t like their name. (Somehow the people living in what was historically part of Macedonia are too Slavic and thus are too racially impure to be considered real Macedonians).

Similarly, Spain (or any other country in the EU) would be perfectly within their rights to block entry of Catalonia into the EU. Most EU countries have separatist movements, and perhaps Catalonia could serve as a good example for why separation is a bad idea. For example, Spain has already said that it might block entry of Scotland into the EU (to serve as an example) and expect the UK to return the favor. The EU has already shown the willingness to impose extreme suffering on members such as Portugal and Greece.

Tax treaties are another big area where Catalonia would be in a difficult situation. Spain currently has very favorable tax treaties with many countries in the world, including South America. It would take several years to negotiate new treaties, and in the meanwhile, it would be extremely difficult to do businesses in Catalonia. (American citizens or dual nationals would likely be forced to move away, since they would have to pay double taxes).

Just in case you are wondering, despite the US having signed new tax treaties with several countries over the last couple years (including one from Spain in 2013), the US Senate has not ratified a new tax treaty in the last four years, due to a US single senator (Rand Paul) basically holding the entire process hostage his crazy right wing demands.

Exactly what would happen to corporations is difficult to know. Since Spanish corporations are creatures of the law of Spain, they become foreign corporations in Catalonia. If Spain and Catalonia didn’t have a tax treaty, companies would be essentially forced to move their headquarters to Madrid.

The bottom line is that if being treated badly by Madrid is the motivation for independence, a new Catalonia would be at an even worse bargaining position and pretty much at the mercy of Spain. At least in the current situation, Catalonia has enough votes to influence policy in Madrid. As a separate country, Spain would have the incentive to drive the hardest bargain possible.

Monday, June 2, 2014

Owning a Spanish company as an American

If you are American and own a company in Spain, there are two main routes you can take in declaring your company taxes to the IRS:

“Controlled Foreign Corporation” (CFC) Regime: In this case, you need to worry about “Subpart F” income which consists of:

  • “Foreign base company income,” which covers certain dividends, interest, rents, royalties, gains and notional principal contract income; income from certain sales involving related parties; income from certain services performed outside the CFC’s country of incorporation, for or on behalf of related parties; and certain oil related income;
  • Income connected with certain sanctioned countries;
  • Income from operations in which there is cooperation or participation in an international boycott of Israel; and
  • Illegal payments made to a foreign government or agent.

So basically, you can’t use your Spanish company to defer taxes or do much with passive income. (Subpart F income does not include income (“High Tax Exclusion” that is subject to foreign taxes imposed at an effective tax rate equal to at least 90% of the highest U.S. corporate income tax rate (currently 35%). In other words, if the foreign tax rate imposed on the income of a CFC is at least 31.5%, the High Tax Threshold is met and there is no Subpart F income. Unfortunately, since the Spanish tax rate is only 30%, it won’t work unless the tax rates change.)

Bottom line is that if you are running an active business entirely inside Spain, with no funny related-party transactions, and you are not digging for oil, you’re probably ok. However, it’s a really good idea to work out the details with a US-based tax advisor before starting on a business venture. The exact mechanics of avoiding Subpart F income is an art unto itself, and don’t try this at home.

The other alternative is the total opposite, called “check-the-box”, where you chose to treat the Spanish company as a transparent entity via form 8832. This only applies to some types of corporations.

The advantage of this approach is that your company’s income ends up on your Schedule C, so if it is an active business, losses can count against your overall income, and you get the advantages of all the deductions that regular people can make.

The downside of this approach is that instead of the CFC, where you keep Spanish stuff in Spain, now you have to do everything twice, since for the sake of the US taxes, the company does not exist. So you have to do all your accounting over again (this time in USD) and figure out your taxes the US way.