Cornered Spain gets desperate

Desperate times call for desperate measures and, as far as country's economies go, things can't get much more desperate than Spain right now.  So it's no surprise to see some government measures being announced that would ordinarily never see the light of day.

Spain's plight is well known - a seemingly endless "crisis" (pronounced cree-see in Spanish) which has resulted in mass unemployment and a shrinking economy.

The immediate problem however is avoiding default. Spain has to sell bonds to finance its deficit and the fear is that if the interest rate on those bonds rises to 7% the government will have to seek a bailout from the EU and the IMF.

Last week's bond auctions saw demand for Spanish debt at 6% so there is not much margin for error.

This is why the government is trying all sorts of things to raise money which are causing massive controversy in Spain.  No one wants to end up being the next Greece but there is widespread anger at some of the measures:

- an amnesty for tax dodgers who can get repatriate funds hidden offshore no questions asked and just pay 10% in tax.  The government thinks it can raise €2.5 billion but everyone else thinks it's unfair.  The opposition want to block it in the courts as "unconstitutional" because it undermines the right to equality among citizens.

- making pensioners pay 10% of the cost of their previously drug prescriptions has caused a huge outcry even though the amount they pay has been capped at €8 - €18 a month depending on their level of income and non-pensioners pay far more (up to 60%).

- As I predicted in February (Spanish electricity bills set to soar) the government has hit energy costs with electric bills up 7%.  They now stand 60% higher than they did in 2007 when the crisis first began.

Will all this keep the bond markets happy?  Probably not as all the pain inflicted by the government just makes it harder for the economy to grow which in turn will push the deficit targets further out of the reach.

That is so obvious it hardly needs stating but what else is the government supposed to do?  Imagine if it just shrugged at the deficit and carried on regardless (which is more or less what the French seem to be doing).

Spain is chasing its tail and it's hard to see it ending in anything other than a bailout.

From our website:  Taxation of rental properties in Spain

Spain cuts spending - where the axe will fall

Last week I wrote about some tax rises that are in the pipeline for Spanish property owners (Spanish property owners face a double tax shock) and our main website now carries an article describing the 2012 tax rises for Spanish residents.  

The plan is to raise some €6 billion in new taxes to reduce the deficit which has risen to 8% of GDP versus a target this year of 6%.  However the new government is also taking an axe to public spending pencilling in nearly €9 billion of savings.

Here is the breakdown of the savings being sought:

Development €1.6 billon
Industry €1 billion
Economy €1.1 billion
Foreign Affairs €1 billion
Education €485 million
Employment €435 million
Finance €432 million
Health €409 million
Agriculture €400 million
Defence €340 million
Interior Ministry  €163 million
Justice €40 million

Local authorities are having their funding cut by more than €1 billion and there are €600 million in cuts planned from the Research and Development budget.

From the perspective of day to day living in Spain I would guess that the Health and Education (if you have got kids) cuts are the most worrying as these are normally areas which need increases and cuts may have a very noticeable impact.  

Public sector workers are going to get a pay freeze, a hiring ban and a longer working week (up from 35 to 37.5 hours) so expect lots of strikes.

Zapatero's parting shot at the rich

At the end of last month I posted about the possibility of Spain's socialist government reintroducing the wealth tax ("Spain targets the rich"). At the time the move was just "under discussion" and some press reports categorically stated that it wouldn't happen. But unfortunately those reports were wrong and it is on the way back, with big implications for property owners.

The Zapatero government announced the return of the wealth tax on Friday. It's a tax on assets including property, investments, cash, cars etc completely separate and on top of income tax. Fortunately the government has reintroduced the extra tax with a big threshold (700,000€) that make it payable mainly by the very rich only. In addition there is a 300,000€ allowance versus your own home. The rate will be 0,2-0,25%.

As my original post showed the main losers could be foreigners who own holiday homes in Spain. They already pay, or should do, non residents income tax (see our article Spanish taxes for non residents) and this could double or treble that liability. When the wealth tax previously was levied in Spain (2007) non residents could not claim exemptions or allowances and paid quite heavily. We will have to wait for the details this time.

The policy looks similar to Gordon Brown's 50% tax rate. There is an election due this November and the Zapatero government may simply be playing a political game. They know that the opposition PP will hate this tax and indeed some regions governed by the PP have said that they will not collect the tax. But like Brown, Zapatero will know that sympathy for the rich is in short supply and that PP's opposition to the tax will simply make them look like a party for the wealthy.

Spain targets rich taxpayers

Or does it? Spain's government was reported to be looking at ways of getting more tax from its wealthiest citizens last week. It's looking at ways of getting its budget deficit down to 6% this year. The inspiration is said to have come from France where a 3% tax surcharge was imposed on incomes over €500,000 recently.

One idea being mooted is a return of the wealth tax ("Patrimonio") abolished in 2008. This was an extra tax based on assets like investments and houses rather than income.

Because of reasonably generous tax allowances the tax didn't raise very much money - about €2.1 billion in its final year - and was quite an intrusive and inefficient tax. Its abolition was widely celebrated even though most of the wealth tax was paid by the very wealthy at the top of the pile.

One group that would be badly hit by a return of the wealth tax in its old form would be non resident property owners. Holiday home owners are already obliged to submit a tax return and pay income tax based on the rateable value of their house or apartment (see Spanish Tax Form 210 for details). Up until 2008 they also paid wealth tax which doubled or trebled their liability partly because they were not entitled to the same deductions as residents.

Hopefully it won't come to that. Spanish newspaper La Razon in an article entitled "The government parks taxes on high incomes" is pretty sure plans were discussed but then shelved due to differences of opinion within the governing PSOE. It categorically ruled out the return of the wealth tax or an increase in taxes on very high incomes (Spanish tax rates are already rising to 45% this year) although some other newspapers hedged their bets. Other articles this week have talked about the wealth tax returning but with a much higher threshold for paying it e.g. minimum assets of €600,000 or €1,000,000.

Spanish taxman says "Stand and deliver"

What an absurd song that was! Good fun video though. Certainly more fun than the tax nightmares that have been visited on innocent property owners in the Valencia province recently.

I read about this story on the Costa Blanca News website and am indebted to their reporter Tom Cain for his diligent reporting of this unpleasant situation which seems to be confined to Valencia at the moment. According to the article, property buyers are being hit with back tax demands, sometimes running into the thousands of euros.

Click on the link for the full story - Expats hit hard by property tax probe - but in essence it relates to the tax you pay on purchase of a Spanish home. This is commonly called "stamp duty" by expat buyers and does work like UK stamp duty except that the % you pay is higher - between 7-8% of the purchase price depending where you are buying.

Another difference with the UK is that tax avoidance is rife on property transactions where the sale price in the contract often bears no relation to the actual price agreed. This allows the buyer to save on stamp duty and the seller to reduce their capital gains tax liability. The difference is usually made up in cash and can run into tens of thousands of Euros.

The tax authorities have always known about this practice (it would be impossible not to being completely routine in some areas) but have usually been content to accept it so long as the declared contract price is not too much lower than expected market value. But in recent years some cash-strapped regional governments have sought to levy extra stamp duty on transactions they think have been falsely undervalued.

The article here talks about highly retrospective charges though running into the thousands with very little apparent justification in terms of valuations being too low. Hopefully it will be just something that applies to Valencia and will spread no further but it certainly should give property buyers cause to think twice before committing. Not exactly what Spain needs right now - another reason for foreigners to lack the confidence to buy property here.

See also on our main website - Spanish property taxes for non-residents

Things to remember about your Spanish tax return

AA very Spain-centric blog this week and at that one that will only be of any interest to people who are Spanish tax resident, declare their taxes and have not already done so. A few reminders:

Everyone who lived in Spain for 183 or more days in 2010 should be submitting a tax return. There are exceptions and if your income is below certain levels then you don't have to declare (but see below). To see these levels visit Spanish income tax rates 2011

If your income is too low to declare it may still be wise or even obligatory to do so: wise because you may have a tax rebate due; obligatory in your first year of residence regardless of income levels. If you never declare La Renta you will never be considered tax resident which can put you at a disadvantage when it comes to paying other taxes like capital gains and inheritance.

The deadline for submitting your Spanish tax declaration "La Renta" is the end of June but to submit allowing the tax office to take your tax (or repay your tax) directly from your bank account, as opposed to paying cash, you should declare by 27th June.

If you are tax resident but have the non resident tax exemption (Beckham's Law) and have been paying the flat rate 24% all year you do not have to do a tax declaration; any non Spanish income is not taxable.

You can pay in two installments to spread the tax burden - 60% at the end of June and 40% in November.

Deductions are available for rent and housing costs paid, including mortgage repayments, if income is below 24.000 level

Mothers of young children (under three) who are working can claim an extra allowance (see Spanish maternity benefit)

If you have rental income it must be declared but if you are renting out a property as a dwelling ("vivienda") you can claim a deduction of up to 60%. If you are renting out a foreign property (e.g. UK) but pay the tax on it in that country you can leave it off your Spanish tax return.

If you have foreign income (i.e. non Spanish) which is not denominated in Euros it needs to be translated at the exchange rate prevailing at the point at which you earned the income. For regular receipts through the year an average rate is acceptable.

Autonomos retain their expenses allowances

I spotted this news article in the Spanish press:

http://www.europapress.es/economia/fiscal-00347/noticia-economia-fiscal-gobierno-mantiene-rebaja-tributacion-modulos-2011-pymes-autonomos-20101111123251.html

In essence the message is all in the title and the article doesn't add that much: the government keeps the 5% deduction for small and medium-sized enterprises (SMEs) and autonomos (self-employed) for 2011. This refers to a rule that can save autonomos money if they do their quarterly "modelos" correctly i.e. return a simplified "objective" declaration of their business profits rather than the full version. This allows them to report a taxable profit equal to income minus allowable expenses minus a further 5% of net income as an additional expense allowance. The idea is that the small business will have expenses which they cannot easily claim because of a lack of receipts or justification and this allowance makes up for it.

In a sense it is more than necessary because otherwise the system of what is and what is not deductible in terms of business expenses is quite harsh particularly when compared to the UK. There is a full guide on our website (autonomo expenses guide) but as examples :

- if a self employed businessman flies to London on business the flight can only be claimed as an expense if it is demonstrably 100% business-related. If the spouse travels or there is any day spent away from business then the whole cost of the trip is disallowed. The assumption is that the trip has been at least in part for pleasure.

- it is routine in the UK to claim for business lunches and entertaining but practically verboten in Spain

Reading the article, the authorities are making it sound like retention of the 5% deduction is a temporary measure because of the crisis. It could be removed when (if) things pick up for the Spanish small business sector. With Spanish GDP growth coming in at an invisible 0% for Q3 it looks like business needs all the help it can get.

How to save money on your Spanish non resident tax declaration

The downside to owning a place like this ...

Judging by the increased demand we have recently experienced for our Spanish Tax Form 210 service, holiday home owners are starting to think about their tax returns. There's plenty of time as the declarations for 2009 are not due until the end of the year. For those Spanish property owners who don't anything about their tax obligations, I have pasted in an extract from the Spanish tax office website describing what has to be declared for non residents who DON'T rent out their properties.

For those that do understand that there is income tax to pay and wish to ensure they are on the right side of the law, how can the declaration be made as cheaply as possible? Well unfortunately there is no way (that I know of at least) of reducing the tax burden itself because it is based on a fixed percentage of the property's rateable value (see details below) without allowances or deductions. However if you have or intend to get a tax adviser to make the declaration for you there could be savings to be made.

Many people who do pay the tax use a paying agent to do the paperwork but that can prove costly if you haven't shopped around for a low fee option. This may be the case if you are using the lawyer who handled the original property purchase. How much should you pay? Advoco charges 30€ (upwards) and some other services are being advertised for not much more.

Or why not do it yourself? It sounds a bit radical but it is not so hard particularly after the first year invested in getting yourself organised. There is info on our site (Spanish non resident tax) and others including the government's - see below. If you have any questions posting a question on one of the Spanish forums will usually yield an answer.

Extract from the Agencia Tributaria website explaining the non resident tax charge:

The amount to declare will be that resulting from applying the following percentages to the assessed value of the property as shown on the Property Tax bill (IBI):

· In general, 2%.

· In the case of properties where the assessed value has been revised or modified since 1 January 1994, the percentage will be 1.1%.

This yield is calculated once per year, on 31 December.

If you have not been the owner of the property during the whole year, or if it has been rented for any period, only the proportional part of this amount is declared.

· Tax Return Form: 210, using the general section 210-A and entering 02 as income type.

· When to file the tax return: During the whole natural year after the date of accrual.

· Where to file the return: With the Branch of the Tax Agency or Administration belonging to the Tax Agency responsible for the area where the property is located.

· Tax rate: 24%.

Spanish tax strategies for married couples

A little while allow the firm's website published a guide to the calculation of tax for married couples (Spanish Taxation of Married Couples) and it has prompted quite a lot of couples - or at least the half of the couple who do the tax stuff - to send in their queries.

Apart from the mechanics of the calculations, there have been a few proposals for cutting the overall tax bill by some restructuring of the couple's fiscal affairs. Often the question is "I've had this idea for reducing our tax bill; will it work?". People can get quite creative. I just wanted to comment on a couple of ideas:

Income sharing - often a retired or semi-retired couple will have a very uneven skew of income with one spouse earning almost everything. If some of the income could be shifted to the other spouse then that could save tax either by using up more of their personal allowances or shifting some of the couple's income out of higher rate tax. Obviously some sources of income are very specific to the person - like a pension or salary - but some deposit accounts and investments could be put in both names to divide the resulting income up between spouses.

Similarly couples where one spouse owns a business may be able to legitimately transfer some income to the other either by employing them in some capacity or, in the case of a limited company, paying a dividend to them.

A very specific idea I came across was the proposal to form a Spanish business partnership - Sociedad Civil (description of legal form here) - to take the place of a simple autonomo set-up. The husband was self-employed and earning a high and regular income; the wife earned nothing. The idea was that if they formed a partnership then they could say the partnership earned the money and then divide the proceeds between them as income. This could work, with two provisos:

- the partnership will cost more than a single autonomo to run thus taking away some of the tax savings from increased use of allowances and less higher rate tax. Primarily this is because both husband and wife will have to sign up for autonomo social security ( see Autonomo Guide) and also because there is more reporting to do. While a Sociedad Civil only has to submit one IVA declaration, each of the partners has to do quarterly income tax returns.

- the partnership has to be legitimate or at least not demonstrably illegitimate. For example if a lawyer sets up a partnership to practice law with his wife, who is not a lawyer, then that would clearly not be acceptable. If, on the other hand, the couple is doing an activity which both could plausibly be contributing to then setting up a Sociedad Civil is a perfectly acceptable route to follow. But the tax savings would have to be considerable to make it worthwhile which is probably why it is still quite rare.

New guide on our website - Spanish non resident taxes

Modelo 30 and other Spanish tax forms

My firm has just published a major new guide on its website:

Spanish tax forms explained

For anyone living in Spain or with fiscal interests there, should consider bookmarking it for future reference. Besides explaining what all of the most commonly used Spanish tax forms (modelos) are for, it also has links to their downloads.

The first one covered in the guide is the Modelo 30 which is the most commonly used of all the forms, for private individuals - as opposed to businesses - any way. As the guide says this is the form you use to sign up for Spanish tax in the first place. If you become liable to tax in Spain or think you may be due a tax refund (see Getting a Spanish tax refund) then it is necessary to register using this form. The same form is used if you become liable to Spanish NON resident income tax, which all foreign owners of Spanish property or assets probably are (unless they are residents).

A lot of people expect that if they are liable to tax in Spain they will find out soon enough i.e. they will be sent a tax return or demand and take action accordingly. Others think that by obtaining their NIE number or residency certificate, that identifies them to the Spanish tax authorities. Neither is true - the modelo 30 is the only way to register for Spanish tax.

Luckily it is an easy form. We process these for clients but you could do it yourself easily enough. Go to your local Agencia Tributaria and you will see a desk somewhere near the entrance where they hand out tax forms. Ask for a modelo 30 and fill it in there are then. It is relatively untaxing information like name and passport number. One tip is that if you are registering as a couple, you use one form and put a cross in both boxes 101 and 102 on section 1 (the other half is the "conyuge') . Then you fill in one spouse's personal data in section 2 and the other in section 3. Both sign at the end. Simples.

Note that the modelo 30 is also used to modify any aspect of your tax status and it is an offence not to do so. Things that would trigger a modification:

- change of adress (Spanish)

- change of residency status e.g. becoming a resident after previously paying non res taxes

- end of residency e.g. you are leaving Spain and are no longer liable for tax

- change of marital status

IVA tips for Spanish businesses

A good proportion of the queries we get from our Spanish business and autonomo clients concern IVA (Impuesto sobre el Valor Anadido) or VAT as we call it in Britain. The system operates much the same as it does in the UK: you charge VAT on your sales and hand it over once a quarter to the tax office but first of all you deduct the VAT you have had to pay on your costs.

Simples, says the meerkat?

At its most basic it is simple, but it doesn't take long before complications arise. Here are some of the things that have come up during the last year:

Declaration thresholds: There aren't any in Spain unlike the UK where small businesses can get out of charging VAT altogether.

IVA exemptions: the only Spanish businesses that don't charge IVA are those making exempt supplies, such as those relating to education, culture, sport and insurance.

Reduced rate IVA: the general rate of IVA is 16% (due to rise to 18% on July 1st). But there are two reduced rates - 7% (will rise to 8%) for things like airline tickets, restaurants and hotels and 4% for food, books, newspapers and medicines.

Costs exceeding income: can you get your IVA back? Sometimes, but not right away. If, during a particular quarter, you have paid more IVA out on your costs than you've charged on your income, you will not have to pay anything over to the tax office but they won't pay you the excess. Instead you carry the difference forward to the next quarter and claim it against IVA charged on your income then. If you get to the end of the year still in excess (i.e. you've made a loss) then you can reclaim it.

Reclaiming IVA if you don't charge it: if you pay IVA on your costs but don't charge it on your sales (e.g. because they are exempt or exported) then you can't reclaim the IVA you have suffered.

Exemption from making quarterly declarations: you do not have to declare if you have no IVA on your sales because of exemptions

Invoicing abroad: You don't have to charge IVA on exports of goods but you sometimes do on services. If you are invoicing a non-business customer (i.e. one without a VAT number in their own country) you do charge IVA, but you don't if it's a business customer. That's a general rule and there are exceptions - see this explanation Invoicing to and from Spain - New VAT rules

Getting IVA back on your expenses: You can only recover IVA with a proper invoice made out to you with your company or autonomo CIF (id) number on it. You will have to request a proper invoice from the provider of the service. EG if you are in a shop or garage ask for a factura and they should give you a proper one as opposed to a receipt.

For more information about the different rates of IVA that apply in Spain: Spanish IVA rates

For more tips like this check out the Advoco website, for example the autonomo guide:

http://www.advoco.es/home/22-latest/43-guide-to-spains-autonomo-system.html

Spain's economic crisis turns nasty

If you thought 2010 was going to be back to normal with the economy and the year of recovery, looks like you are out of luck. A dreadful week for the Spanish economy ended yesterday with the administrators moving into CajaSur a major savings bank in the south of the country. Depositors should be reassured that there is deposit protection insurance of €100.000 per person so that a joint account would have up to €2000.000 of their deposits safe.

Another Caja, CAM, is in merger talks with other banks after it too has got into difficulties.

All this comes after the government announced a series of austerity measures. These come on top of the VAT and investment tax rises that were announced in January. The new measures include a cut in public sector pay (5% on average), ending the 2.500€ gift to new mothers (nicknamed the baby cheque) and a freeze in most state pensions.

The government has also promised to bring in some increased taxes for "the rich" but won't say what they are or who they consider rich. The press is speculating that the wealth tax may be brought back for people with assets over €1m.

This comes just as the economy was reportedly growing again albeit by a miserly 0.1%. You wonder how long such a weak recovery can last in the face of such bad news. The austerity measures are designed to cut the deficit by around 8% of GDP so that's a massive chunk of demand to come out of the economy. The banks' woes will make mortgages even harder to come by we can safely assume which does not augur well for the housing market. On top of this the unions are threatening a General Strike (article) in protest against both the austerity measures and proposed labour market reforms.

The Advoco website has a full guide in English to the economic crisis charting its development and underlying causes from the beginning up to the present day: Spain's economic crisis.

Spanish gift tax - a nasty surprise

No one likes taxes but some hurt more than others. One of the most unpleasant has got to be gift tax which strikes me as particularly unfair. If you have built up assets over the years it is normally because you have paid for them out of income that has been taxed once already. Why then should you have to pay again when you give those assets to your nearest and dearest?

I suppose the answer is because (1) the government finds the money handy to spend on vital projects likes billion pound computer systems that never go live (2) if you could give things away without a tax it would undermine inheritance tax takings and (3) the state doesn't want wealth to flow unhindered through the generations as that might entrench class structures.

Mmm. But it's not for humble accountants to moan about the Whys of a tax but merely to advise on the Whats, Whens and most pertinently How Muches of them. Here in Spain the tax seems particularly harsh and all encompassing. We have just put a guide on the website call, er, Spanish Gift Tax. It's got all the facts and the all important rates which are quite murderous in some circumstances. Give a €1m house to a mate and it may cost them around €530.000 in tax (they pay not you). The taxes apply to Spanish assets even if you or the recipient of your generosity is not a Spanish resident. There are a few Spanish gift tax avoidance strategies, like setting up a company to own assets like houses, but these need careful thought and structuring to make effective. If this is an issue which is or might at some stage effect you then take a look at the guide as a starting point but also take advice.

Why Spanish Income Tax is not as bad as it sounds

If you move to Spain from abroad it's probably for the weather, the lifestyle or for the opportunity to start again. Almost certainly not to get up close and personal with the Spanish tax system. But it's almost unavoidable: if you live in Spain you almost certainly will have to declare your income to the Tax Office and pay your tax here. There are exceptions and this guide will help clarify things:

Do I need to do a Spanish tax return?

So if you are like most of us and have to declare Spanish taxes then is it going to hurt? Well it depends on how much you earn of course but there are some reasons to be cheerful:

Exemptions:

Us foreigners have a few exemptions we may be able to call on. For example there is a 60,000€ tax free allowance for income earned and taxed abroad and another exemption for new arrivals who want to be taxed as non-residents. See details here.

Crown pensions (those paid by the government to for example civil servants, army, police) are exempt from Spanish tax and don't have to be declared.

Allowances:

You get personal allowances where no tax is payable in Spain as you do in the UK. The allowances for 2009 are:

Everyone €5.151 (€6.069 for over 65s and €6.273 for over 75s)

Disability allowance - up to €6.900

1st child €1.836 2nd child €2.036 3rd child €3.636 4th child €4.182 (plus maternity allowance of €2.244 for children under three)

Earnings related allowance - €4.080 for earnings up to €9.180 reducing to €2.652 for earnings above €13.260.

(pensions count as earned income for this purpose)

Deductions:

• * Credit is given for all tax deducted at source whether this be in Spain (e.g. “retenciones” deducted by banks on interest or employers on salaries) or abroad, if there is a tax treaty in force.
• * Any payments into the Social Security system are deductible.
• * There are important deductions allowable in the calculation of rental income – for residents but not non residents – and capital gains on property sales.
• * Homeowners can deduct 15% of their mortgage costs (subject to limits)
• * Pension contributions are tax deductible (subject to limits)
• * The first €1.500 of dividend income is tax exempt.
• * As a crisis measure the government introduced a €400 tax credit for all employees and self-employed persons in 2009. This is to be abolished from 2010.

If you want to learn how you can make your Spanish tax filing as painless as possible please come and talk to Advoco. If you like send me a private email at jb@advoco.es