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.

Interest rates: low does not always mean better

There is something about low interest rates. That they are a "good thing" is deeply ingrained into the psyche. To homeowners they promise cheaper mortgages and higher house prices and to businesses cheaper borrowing and more cash in their customers' pockets. Politicians look to low interest rates as a general economic cure-all.

Indeed a few years back when Labour was trying to persuade Britain that the Euro was a good idea, the main argument was that joining would keep interest rates low. The Conservatives today are arguing for a tough approach to the public sector deficit partly because they say that will keep interest rates down.

But are low interest rates such a great thing? If the government suddenly decreed that it was illegal to charge any interest would that be a good thing? No because it would take away the incentive to save and lend money to people who want to borrow. After all, interest rates are a pricing mechanism designed to balance the plans of savers and borrowers, consumers and investors. Surely what we really need is "correct" interest rates that ensure enough money is saved to finance investment in the economy.

Living in Spain I can visibly see the effects of an extended periods of low interest rates just by looking out of the window. Spain had the low interest rates that Tony Blair tried to sell the Euro using and it stoked a huge boom on the back of consumer and corporate borrowing. Now we see the stalled building projects, shutdown shops and businesses and unsold property that resulted. Spain shows no sign of recovering.

I know a lot of people will say raising interest rates now would be a recipe for "double dip", a slide back into recession particularly if public spending is cut and tax raised at the same time. All I am saying is that let's rebuild the economies of Spain and Britain on sound principles this time. Instead of trying to stoke demand via dollops of public spending, massaging down interest rates and house price booms, let's try and improve the supply side: the workforce, productivity, competitiveness. Meanwhile allow interest rates to settle at a rate that rewards savings to fund investment and stops people taking on debt they can't afford.

My latest column at the Alrroya website covers this topic in more detail Time to Raise Interest Rates

See also a related post What Spanish Pigs Can Teach Us About Economics

In praise of Norway

I have a great deal of admiration for Norway (even if I have rather childishly chosen a picture of the "Norwegian Blue" parrot to illustrate this post) mainly because of how they have handled their economy. Just like Britain, Norway has been blessed with huge oil and gas reserves to exploit in the North Sea and this industry has made it a very rich country.

The main plank of their economic policy (apart from to keep a million miles away from the Euro and the EU) is to invest much of the oil and gas money into a national fund to underwrite the country's future prosperity and specifically pensions.

This fund has grown to close on half a trillion dollars in value ($457 000 ooo ooo at the end of 2009) and is invested in bonds and shares all over the world including Spain. In fact the Norwegians have shown surprising faith in Spain investing about €18 billion in companies like Telefonica, Santander, BBVA, Iberdola and Repsol. It may be a sign of the times and show a lack of faith in the Spanish government's ability to manage its own finances, but the fund has very little invested in Spanish government bonds.

It's interesting, and quite depressing if you are British, to contrast the positions of Norway and the UK which also had a North Sea windfall:

Economy - Norway's is strong. GDP per head the 3rd highest in the world and fell only slightly during the recession. Britain's ... er, isn't

Public Finances - Contrast Norway's consistent surpluses with the UK's near bankruptcy

Trade - UK has chronic balance of payment difficulties, Norway exports twice what it imports.

Pensions - Norway's national pension fund contrasts with the destruction of the UK's private pensions and unfunded (most likely unaffordable) commitments to pay state and public sector ones.

Energy - Britain's North Sea production is in decline and we are closing power stations with no clear plan of how the lights are going to be kept on. Norway has used hydropower for its internal energy needs and invested heavily in energy efficiency.

You get the picture. It's like chalk and cheese and successive British governments are to blame with the current one being the worst of the lot when it comes to all of these issues. Let's hope come this May that it is dead, deceased, ceased to be, expired etc etc

http://www.articlesbase.com/human-resources-articles/a-guide-for-businesses-employing-staff-in-spain-1436365.html

http://www.advoco.es/home/22-latest/31-starting-a-business-in-spain.html

Now everyone can buy property safely in Marbella

It's the nightmare scenario - you buy a house or apartment in Spain through a legitimate estate agent and hire a lawyer to do all the checks, but down the line you are faced with a demolition order. Your dream home is demolished without compensation because it was illegally built even though you appeared to have done everything possible to make sure it was legal. This has happened to a few people and thousands of other Spanish property buyers have been threatened with this outcome causing untold amounts of stress and worry. How can this happen?

It's a complicated tale but essentially if the local Town Hall has corrupt officials (many do) and they are prepared to give the go ahead to build on land where they shouldn't, it may appear that a development is legal only for the regional government to overrule the local decision and declare the build illegal at a later date. They often press for demolition even though the property owners are innocent and have no redress against the developer who has gone bankrupt or the officials who are in jail.

Is it possible to protect yourself from illegal build scandals like this? Yes, but you need a good lawyer who is prepared to go the extra yard to check whether a development is legal. Just seeing that the development was approved by the Town Hall is not enough. Did the Town Hall have the right to approve the development? To find this out you have to go to the area's land use plan called the PGOU (Plan General de Ordenacion Urbanistica) which sets out perhaps every 10 years (the duration of the plans varies) how the municipality's land can be used - areas that can be built on or industrialised and areas that must be left green.

Up until now Marbella has been a cesspit of problems of these kind due to super-corrupt politicians including the notorious Jesus Gil whose PGOU was never even agreed by the regional government in Seville and left up to 18.000 properties technically illegal. Finally after years of haggling a new PGOU Marbella was agreed at the end of January this year. This retrospectively legalises most of the illegal builds but leaves the status of a few hundred up in the air.

The significance from a future property buyer's point of view is that now we have a firm point of reference against which to test the legality of a developer. Good Spanish property lawyers should not need to be told to check back to the PGOU if any doubt whatsoever exists over the legality of a development but forewarned is forearmed, if you are buying in Marbella be sure to remember the four letters "PGOU" and ask your lawyer about them.

Avoiding income tax in Spain - part 3

Keeping the tax man's hands off your money is a preoccupation almost as old as money itself (I am sure taxes were proposed soon after money's invention). I have written before about avoiding income tax in Spain both in general terms - part 1- and by going offshore - part 2. Today I want to touch upon two important and substantial tax savings available to us foreign residents of Spain. They are both entirely above board and sound very enticing but are not quite as attractive as they seem when you dig a little deeper.

Tax saving no 1: Application to be taxed as a non-resident ("Beckham's Law")

As I am sure all you well-informed readers know, a Spanish resident tax payer has to declare all their worldwide income. But there is an exception for foreigners newly tax resident in Spain: they can apply to be treated as non-residents for tax purposes i.e. only have to declare Spanish income and once more at the low rate of 24% (the top rate for residents is 43%). This is what David Beckham did when playing for Madrid, hence the nickname for the law. If your application is successful then you can take advantage of this attractive option for 5 years. There are conditions (see this good explanation here) but it is great on the face of it; certainly foreign footballers have benefited greatly.

Reservations: Two really. One is that you have to read the small print in the conditions which will make a lot of people ineligible, particularly the stipulation that you have to have moved to Spain to begin an employment contract with a Spanish entity and perform most of your duties in Spain. Secondly non-residents don't get the tax allowances and exemptions that residents get so although the rate is lower you may lose out in total because of the lost allowances (depends how much you earn and what sort of allowances you are entitled to).

Tax saving no 2. : €60.000 overseas earnings tax free

Another eye-catching tax allowance which applies if you are resident in Spain but go abroad to work e.g. doing contracts back in the UK or elsewhere in Europe. The problem here is very fundamental: you need to have paid the tax in the country where you worked so it isn't tax free as such although could be very useful if you often work in a country with low income taxes.

Conclusion: depending on your circumstances there are often allowances and benefits available so it's worth getting a tax adviser to look at your Spanish tax position when your tax situation changes. On that self-serving note I will leave you with a link to Advoco's tax services page:

http://www.advoco.es/home/22-latest/35-spanish-tax-advice.html

Non resident tax payers might also be interested in a recent article of mine called "Making sense of Spanish tax form 210"

What Spanish pigs can teach us about economics

The contribution of the humble porker to economic theory has been pretty negligible up until now but, after reading about the crisis in the Iberian ham industry, I was struck by how perfectly the story illustrated a crucial but little-appreciated piece of economic theory that goes a long way to explaining the crisis.

First the problem piggies. Iberian pigs are renowned for the quality of their meat and dry-cured hams from acorn-fed free range herds are a prized delicacy in Spain and among gourmets around the world. But as the FT reported recently ("Austerity takes a slice out of Spanish ham sales") demand has plummeted in the recession and taken prices of some grades of ham 50% lower. Priced at up to 60€ a kilo, jamon serrano is a luxury that some people, particularly companies who used to buy whole legs for corporate hampers, have dropped in these straitened times.

At this point you might be thinking, "but what insight does that give us into economics?" The recession has crashed demand for all sorts of products (my last post was about the travails of the Spanish car industry and Spain's scrappage scheme); surely falling demand can be blamed on the recession but doesn't explain the crisis itself. Time to introduce the theory and then see if we can tie it back to the pigs.

Some economists point to the "intertemporal misallocation" explanation of the business cycle as a good way to understand and view the crash. Many have argued that interest rates around the world were held too low, for too long in the years before the crash, causing a boom and then the inevitable bust complete with debt hangover. But the intertemporal explanation takes this view a step further and explains the real danger in holding down interest rates.

Generally we see interest rate cuts as a "good thing" as they "stimulate" the economy. Low interest rates encourage more consumption and make it cheaper to borrow to invest to meet the increased demand, thus setting a up a virtuous cycle of economic activity. But there is a flaw in this logic and it relates to the job interest rates do allocating an economy's resources over time: they make sure that current consumption does not crowd out investment for the future and that, when the future increase in production arrives, there are consumers willing and able to buy it because they have savings. If rates are too low then the signals get distorted: people save too little while companies borrow and invest too much. The economy hots up for a while but the contradiction soon reveals itself. Companies have new production/supply coming on stream just at the point where their customers are borrowing and consuming less to enable debts to be repaid. Back to the pigs.

The collapse in demand for hams was only part of the story. The industry association was quoted as saying: "With overheating fuelled by easy credit, and permissive regulations protecting all types of pork meat, a lot of businessmen, including many property developers, went into the ham business and started mass production." The supply of top quality ham rose 33% in the ten years to 2009 and the lower grade production increased by over 400%. But does Spain really need so much ham? Did the country save enough to be able to afford the increased production? Obviously the answer is no on both scores: Spain was the victim of low interest rates which sent out the wrong signals to producers and consumers alike. The same story was repeated across all sectors most tellingly in the case of property. So next time you see a boarded up shop, empty car showroom or unfinished apartment block think back to a herd of pigs munching acorns and what they can teach us - low interest rates can hurt just as much as high interest rates.

Please contact me if you need a Spanish accountant or tax adviser for your New Year "to do list". My personal email is jb@advoco.es or see the website www.advoco.es Happy New Year

Avoiding income tax in Spain - part 1

Part 1 - why?

Foreigners in Spain are often very keen to avoid local taxes wherever possible and indeed to keep out of the system in its entirety if they can help it. This may partly be because tax avoidance by the locals is a national sport and also because everyone seems to get away with it. It's not often you hear about the law catching up with anyone.

Also there may be some double standards operating: perhaps people who paid taxes meticulously in their home country do so reluctantly in their adopted country because they don't see themselves as part of the society being financed by those taxes. At some level they are still on holiday in Spain and don't feel the need to become full citizens, for example by signing up for Spanish social security.

Of course the main reason, as ever in matters of human motivation, comes down to opportunity and thus temptation. In your home country you cannot help but become enmeshed in the state system and avoidance opportunities are few (unless you are an MP with homes to flip). By moving states, EU or otherwise, the chance to cut all ties and start over again often brings an opportunity. It's down to you to put yourself in the system and start paying and declaring. For some people it's like being a kid in the sweet shop when the owner has to go out the back to get something leaving the counter undefended. There is a massive invitation to stuff your pockets with confectionery and many succumb.

In future posts I will discuss some of the ways people try and avoid tax, whether as individuals or if they are starting a business in Spain, and the implications.

http://www.advoco.es/services/35-spanish-tax-advice.html