Tuesday, September 2, 2014

Spanish finance minister Montoro threatens to use the dreaded 720 form against Jordi Pujol

Since 2013, residents in Spain with assets above a certain threshold are required to file the modulo 720 form every year detailing assets outside of Spain. The penalties for non-compliance are severe, and non-declared assets are taxed as an “unjustified capital gain”, to which additional penalties and interest apply.

Jordi Pujol’s 30 year undeclared fortune outside of Spain seems like a perfect test case for this new law, and it will be interesting to see if the prosecutors go after him using this route. If not, it would make people question the value of filing the 720 form. There are some possible constitutional issues with the law (invasion of privacy, presumption of guilt, etc), so it will be a good test to see how much the Spanish government really believes in the enforceability of this law.

Tuesday, August 12, 2014

Simplifying your US investment taxation for Americans living in Spain

If you are thinking of living in Spain and have an investment account that you want to leave in the US, you may want to think about simplifying your taxation.

If you hold your investments in your own name, you will need to recalculate your taxes once for the US, then do the same thing again for Spain, apply the US-Spain tax treaty, pay some amount in Spain and some in the US. In addition, for some assets there may be differences in how they are treated in terms of recognition of gains, so you may end up with double taxation.

One alternative is to hold your US assets in a member-managed US-based LLC (Limited Liability Company).For US tax purposes, LLCs pass-through their earnings to the owners, so from a US perspective, there’s no change to your taxation. Since you are a US citizen, you need to declare and pay taxes on this income.

From the Spanish side, you need to make sure that you avoid the Controlled Foreign Corporation rules. A foreign company owned by a Spanish resident is generally exempt if that company is:

  1. not based in fiscal paradise, and
  2. the company pays (including taxes paid on passed-through earnings) at least 75% of what it would pay if it declared taxes as a resident of Spain.

Since US marginal rates for passive income are generally higher than in Spain, it’s pretty standard to easy to meet for US citizens. If you were not a US citizen you wouldn’t be able to do this since you would not need to pay any US taxes on pass-though earnings, and thus would fail the 75% test.

Although this normally won’t save you any taxes, it could save you a bunch of aggravation. If you want to be fancy, you can fund the LLC though a loan instead of via equity to reduce the book value of your acquisition.

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.