The Effect of
Information Sharing On Offshore Assets
The net is closing for expatriates that are resident in other countries with assets in ‘non-compliant’ investment structures. Starting in 2017, data from financial institutions collated during 2016 was exchanged between more than 50 nations with approximately 50 more following suit in 2018 and beyond. This is now an annual occurrence following the implementation of the Common Reporting Standard (CRS) by the Organisation for Economic Co-operation and Development (OECD). Referred to by some as ‘GATCA’, the intentions of the CRS are FATCA-esque in nature but on a global and much wider scale.
The new exposure of financial affairs will affect anyone that has assets in one country and lives in another, and as establishing residency is often littered with grey areas it is now more important than ever to determine which tax authorities you should be reporting to. All countries with large expatriate communities will be of particular interest and one of the largest is of course, Spain.
As a Mecca for expats it is common for residents to bury their heads in the sand regarding taxation, believing that holding assets in offshore investment centres such as the Isle of Man or Jersey, or receiving a cross-border income negates the need to declare their assets. This is not the case, and blaming lack of clarity in Spanish residency criteria won’t be deemed acceptable by the local tax authority for doing nothing about it. Tax residents in Spain should be reporting worldwide income, gains and increases in wealth, and even if you are being taxed elsewhere it should still be declared in Spain.
Requested or not, like it or not, information relating to wealth at home and overseas will be shared, including bank balances, dividend payments and interest earned, in addition to your tax reference and name and address(es). Once received, verification of whether the correct income and tax payable has been declared will be possible and in Spain, it will also allow simplified comparisons against Modelo 720 declarations in which assets outside of the country need to be reported.
As of now, it is too early to see how effective the CRS will be, but ultimately change is definitely on its way and as with all tax authorities, it is always recommended to find them before they find you. According to Spanish tax expert Francesco Bertagnin at Foresight Consultancy in Sotogrande, the clock is ticking for expats in Spain and it’s a case of when, and not if. He told us “there has been a huge increase in those seeking help with their tax affairs. Sadly however, many come to us having already received formal notification from the tax authorities so the fines applied are far higher than they would have been”.
So, from a tax perspective, what happens if you put your head above the parapet?
Quite simply, you’ll mitigate the possibility of incurring heavy fines and avoid suffering the infinite inconvenience, expense and worry of having the tax authorities audit your life. But while it’s possible there may be some costs to ‘going’ compliant, there are ways of offsetting these with the implementation of compliant investment structures that could ultimately leave you far better off financially.
Offshore bonds have been big business over the last 20 years, often controversially owing to the commission on offer for using them. But if used correctly they can be extremely effective and more so, if customers understand that seemingly 'fixed' charging structures can actually be removed and replaced with ongoing management fees mutually agreed between client and adviser.
If you are resident in Spain and have an Isle of Man bond, or any other non-compliant investment, you are not breaking the law if it’s being declared as it should be. If it is not being declared you run the risk of your investment becoming more visible and subject to increased scrutiny. The taxing regime is also more expensive than it needs to be and it’s a cost that can be easily avoided by making a few simple adjustments.
Spanish savings tax is calculated on a progressive scale:
Up to EUR 6,000: 19%
EUR 6,001 – EUR 50,000: 21%
EUR 50,000 upwards: 23%
Non-compliant structures should be reported by the holder and then tax paid on the growth, regardless of whether a withdrawal is made or not. The benefit of compliant schemes is that they report automatically and are only taxed on the growth element of withdrawals, and only when that withdrawal is made., making the differences too significant to ignore.
Using an example of withdrawing EUR 10,000 annual growth on a EUR 100,000 investment, we look at the comparisons based on the figures above:
Spanish taxation on non-compliant investments - Requires reporting by the holder and will then be taxed directly as follows:
(6,000 x 19% = 1,140) + (4,000 x 21% = 840) = EUR 1,980 payable
Spanish taxation on compliant investments - Reporting is automatic by the investment provider and then taxed only on withdrawals made, using the following calculation to define the capital and growth elements:
(Initial Investment / surrender or current value) x withdrawal amount
(100,000 / 110,000) x 10,000 = 9,091 (capital)
10,000 – 9,091 = 909 (growth)
909 x 19% = EUR 172.71 payable
For larger amounts, compliant investments also provide the option of withdrawals by ‘segmentation’. Sub-policies can be created and drawn on individually, allowing you to assess the impact of varying growth rates in relation to the size of withdrawal, and decide which method is most tax-efficient for you. Segmentation can also be particularly beneficial for expats returning to the UK, where the gifting of sub-policies can significantly reduce tax bills. This is where wills and succession planning also comes into focus.
Assets held in a compliant Spanish investment should be UCITS compliant (undertakings for the collective investment of transferable securities), generally perceived as a mark of quality and providing security for investors. Many exchange traded funds (ETF’s) fall into this category providing a huge range of high-quality, low-cost securities to choose from, many of which pay dividends either for re-investment or income reducing the underlying expense ratios of portfolios.
In summary, establish your position as soon as possible to avoid unwanted complications. The transition from ‘non-compliant’ to ‘compliant’ can be made with the minimum of effort, and a review and restructuring of assets within portfolios can make a considerable improvement to underlying costs and performance. We understand that many old portfolio bonds have charging structures that incur early redemption charges on closure, but this is easily avoided and investments can be transitioned without penalty.
To learn more about the benefits of investing in liquid, low-cost securities within a Spanish Compliant Investment, get in touch today and you'll get the expat financial advice to guide you through the process.
The information contained in this article is provided for informational purposes only and is not intended to substitute formal tax or financial planning advice. While we make reasonable efforts to make sure the content of the article is correct and up to date we do not assume any responsibility for any errors or omissions.
Francesco Bertagnin offers expert tax advice in Spain, Gibraltar and the UK. For more information please visit or call +34 956 614 549.