Spain introduced an exit tax in 2015. It applies to individuals who have been resident in Spain for at least 10 out of the previous 15 tax years, and who hold shares that meet certain criteria.
The exit tax is triggered when the individual leaves Spain and moves to another country. Importantly, Spain's exit tax is applied to the entire gain since the date the shares were acquired, not the gain arising from the date the individual acquired residence in Spain.
With appropriate planning, it is possible to avoid the exit tax by holding investments in assets that are outside the scope of exit tax.
Scope of Exit Tax
Exit tax applies to all unrealised capital gains derived from shares or interests in an entity that meet the following conditions:
- The total value of all shares held by the taxpayer is more than €4m, or
- The taxpayer holds an interest of at least 25% in a single entity and the value of that holding exceeds €1m. In this case, only the value of the gains derived from that interest are taxed.
The values are assessed at 31st December of the last year in which the taxpayer was resident in Spain, and the taxable gain is calculated as the difference between the market value of the shares at that date and the acquisition cost.
The gain is taxed at the 'savings tax rates' in Spain which currently range from 19% to 26%.
Deferral of Exit Tax
In situations where a taxpayer moves to another country as a result of a temporary work assignment, the exit tax can be deferred for a maximum of five years provided that:
- The host country is not blacklisted by the Spanish authorities, and
- The individual notifies the tax authorities which country they are moving to, and
- A guarantee is submitted (a bank guarantee or a pledge over the securities).
Failure to make the appropriate claim for deferral will result in the exit tax becoming payable.
Moving from Spain to Another EU or EEA Country
If the taxpayer moves from Spain to another EU or EEA country (including Switzerland) the gain is only subject to exit tax in Spain if, within the following ten years, either:
- The shares are sold (or otherwise disposed of), or
- The taxpayer becomes a non-EU (or Non-EEA) resident.
After the ten year period has elapsed, no exit tax is payable.
Moving from Spain to the UK
As the UK is no longer a member of the EU, there is no exemption from exit tax when an individual moves from Spain to the UK, unless the individual has been assigned to the UK on a temporary work assignment and the appropriate claim for deferral has been made.
Planning to Avoid Exit Tax
High net worth individuals who have been living in Spain for at least ten years and who hold substantial shareholdings may find that they have a significant exit tax charge on those shareholdings if they choose to leave Spain.
Planning to avoid exit tax should preferably be carried out by shareholders before becoming resident in Spain, in order to avoid the application of the exit tax should circumstances change and they decide to leave Spain in future.
Depending on the individual's particular circumstances, Spain's exit tax may be avoided by restructuring investments. For example, instead of holding shares directly, shares may be held indirectly through a suitable life insurance wrapper that is compliant with Spanish law.
Life insurance policies are outside the scope of exit tax, and also offer other tax advantages for residents of Spain. Life insurance policies can therefore be a tax efficient investment for individuals owing substantial shareholdings who may otherwise fall within the scope of exit tax should they decide to leave Spain in the future. In particular, this is an important consideration for British nationals moving to Spain with qualifying shareholdings if there is a chance they may return to the UK in future.
Individuals who move to Spain should seek advice on the extent to which Spain's exit tax may affect them in the event they choose to leave Spain in the future and move to another jurisdiction or return to their home country.
With careful planning, exposure to exit tax can be avoided by holding investments that are not only outside the scope of Spain's exit tax, but which also offer income tax and wealth tax advantages whilst resident in Spain.
Early tax planning is essential and we would recommend that professional advice is sought, preferably before moving to Spain.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.