Under new rules designed to clamp down on tax evasion, British expats as well as other foreign nationals who live in Spain must now declare all assets they hold outside the country. Why the new rules now? A spokesman for the Spanish tax authority stated that the globalisation of financial activity and increasing problems with fraud made it necessary “to establish a specific obligation of information on assets located abroad”.
Residents have until the end of April 2013 to declare all relevant assets held overseas that are valued at more than €50,000 (£44,000). In future, the deadline will be the end of March, but you will only need to report the assets again if their value increases by more than €20,000 (£17,000). If the assets are not declared, expats could face significant fines for not complying.
What exactly do you need to declare? Assets include life insurance policies, annuity income, shares, property and bank accounts. The new rule extends to people who are not only direct owners of an asset but who are also authorised signatories or beneficiaries. The law also requests for the average balances of bank accounts (in the last quarter of the year) as well as the acquisition value of properties to be stated.
How do you know if you qualify for the Spanish residency rule? British expats would be considered as residents if they stay more than 183 days in the country per year. The Foreign Office estimates that 800,000 British nationals live all or part of the year in Spain, with tax residents varying from 250,000 to 400,000. The residency will also apply if the spouse and dependent minors live there.
Those that are considered residents must declare the value of their assets as of December 31st 2012. This will give Spanish authorities the ability to cross-check that information with what you have included on your tax return. If you are already compliant, there will be some new forms to fill out. But if you have been residing in the country without stating your income overseas, you could be in trouble.
What is the worst case scenario? The starting penalty for failing to declare is €10,000, you also have to account for tax on undeclared income, interest on late payments as well as penalties which could go up as much as 150% of the total tax due. Let’s give an example, a resident of Spain with holdings of €300,000 (£260,000) in an overseas account, if left undeclared, would incur the minimum penalty of €10,000 (£8,640). This amount will then be taxed at the top interest rate of 52%. They would also be fined 150% of the tax owed as well as additional 4% annual interest going back four years, meaning in total they would owe the Spanish tax authorities €424,960 (£368,000). Tax which has not been paid as a result of undeclared assets held overseas, if valued more than €120,000 (£104,000), could also be considered a tax fraud criminal offence.
What is the expected outcome? As the result of the new rules, many expats seem to be concerned to the point of considering leaving Spain altogether. This is not a new trend and just adds salt to the existing wound. Thousands of British expats and second-home owners have already been leaving Spain in recent years as its economy has been suffering profound downturn. According to the Madrid-based National Statistics Institute, Spain slipped back into recession in 2011 and the economy shrank at the fastest pace in more than three years in the final quarter of last year.
Just as a number of Eurozone governments have increased the taxation burden on holiday-home owners, sterling depreciation has been acting as a double hit. The falling sterling has impacted British expatriates dependent on their pound incomes, such as a pension annuity, have seen their incomes noticeably reduced. With many research institutions expecting a further depreciation in sterling, the cost of Eurozone property ownership is likely to go further up for the Brits.
The combination of average property values decreasing by 30.7% from the 2007 peak (EuroStat), the cost of maintaining a property overseas continuing to grow while the taxation keeps on increasing in many of the countries where expats live, is certainly a cause for concern.
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