Tax Resident in Spain? Learn how to reduce tax on investment income by 90%

In January 2003 Spain took a huge step towards trying to solve what is possibly the biggest demographic headache in Western Europe– a dramatically falling birth rate combined with the healthiest, longest living pensioners.

Whilst the ultimate objective of this move by Hacienda was to encourage tax payers in Spain to invest much more in providing for their future retirement income – thereby reducing the burden on the state – the new rules introduced three years ago have also proved to be an exciting opportunity for foreign expatriates to take advantage of these rules with their own investments.

The result is that many are enjoying seeing the profit, or “income”, from such investments receiving extremely generous tax concessions which mean that tax rates on such income can result in savings of 90% or more.

How does this work?

Quite simply! Let’s assume an investment of €50,000 via an International Offshore Investment Bond. After 3 years it is worth €60,000 and you take out €10,000 profit. The gain is calculated as follows:

So, of the €10,000 taken, Hacienda calculate that the actual gain is €1,667 with the balance of €8,333 being a return of some of your original capital. The €1,667 is then reduced by a 40% tax concession so the actual amount assessed for tax would be €1,000. Assuming a tax rate of 20%, the actual tax paid is €200 — equivalent to 2% of the €10,000 withdrawal, i.e. a 90% reduction. If the profit was withdrawn after 5 years the tax concession available would then be 75% so the equivalent rate of tax could be less than 2%.

EU Savings Tax Directive

An additional attraction to this type of Investment Bond is that it is exempt from the requirements of the EU Savings Tax Directive. This was introduced in July 2005 to encourage exchange of information (or the payment of a withholding tax) between respective jurisdictions in Europe and concerned certain types of investment accounts (including offshore bank accounts).

As Offshore Investment Bonds are not covered by this Directive all investment growth and/or income from these bonds is outside its remit. Furthermore, investments into the Bonds can be structured in such a way as to avoid both Wealth Tax and Spanish Inheritance Tax perfectly legally.

Is this available to everyone?

The simple answer is YES provided you make a tax declaration in Spain. However – because of the generous tax advantages available particularly when such investments are made via an International Offshore Investment Bond you must be aware of certain conditions which apply.

Companies offering such Bonds must have been granted permission by the Spanish Regulator (Dirección General de Seguros) to market their products in Spain and these products must comply with the same rules as Spanish-based investments. OMM is fully licensed and regulated to deal with such Companies on our clients behalf under its Licence no. J-2126.

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