Following the discussion today on whether Brexit will impact on the Double Tax Agreement (DTA) between Spain and the UK, I thought I would summarise my understanding of the potential impact overall on some taxation issues.
Firstly with regard to the DTA, my understanding is that it will not be impacted by Brexit, because it is a separate agreement between Spain and the UK. The UK has over 100 DTA with many countries throughout the world, all based on the OECD Model Tax Convention which was first developed in 1963. The last revision was in 2013 replacing the one which had been in effect since 1976, and covered a general updating to reflect changes in the OECD Model Tax Convention, and the domestic laws and treaty preferences of both states. So, for example the DTA included the ability of Spain to include the value of UK government pensions in tax calculations for the purpose of calculating the relevant tax rate. This is a common clause in other DTA’s negotiated by Spain with other countries.
So, although I do not see any impact on the DTA, there are other potential changes, which may have a significant impact unless there is a specific agreement. Specifically these include
– Imputed income tax
– Income tax on non-resident earnings including rental income
– Inheritance tax
– Capital gains tax
I noted in discussion that the fact the EU does not have specific legislation on personal taxes, rather their role is to oversee national tax rules – to ensure they are consistent with certain EU policies, such as:
– promoting economic growth and job creation
– ensuring the free flow of goods, services and capital around the EU (in the single market)
– making sure businesses in one country don’t have an unfair advantage over competitors in another
– ensuring taxes don’t discriminate against consumers, workers or businesses from other EU countries.
In particular the last point has been significant for EU residents of Spain, as the EU has forced Spain, through judicial process, to treat Spanish citizens and EU residents the same. Most people will be aware of the changes forced on Spain with regard to capital gains tax, and more recently inheritance tax.
“Imputed” income tax, commonly known as “non-resident” tax is in fact a tax on second homes for residents and non-residents alike. It is payable when a property is available for the personal use of the owner. If you are an EU citizen, but non-resident in Spain (EUNR), then you currently pay 19% on the “imputed “income, whereas non EU non-residents (NEUNR)pay 24%.
Non-resident earnings: as a general principle all non-resident earnings in Spain are taxable in full without any relief. This includes rental income. However as a EUNR you can claim relief for some expenses provided that they are directly related to the returns obtained in Spain and that they have a direct economic link and inseparable from the activity carried out in Spain. This means that rental income for NEUNR is taxable in full irrespective of any costs incurred.
Inheritance Tax: following a ruling by the European Court of Justice (ECJ) in 2014, regarding discrimination and movement of capital, Spain made some changes to the IHT legislation.
In order to avoid discrimination where the deceased or the beneficiary of an inheritance is not habitually resident in Spain, i.e. a non-resident it was clarified that:
where the deceased was not resident in Spain (EUNR), taxpayers are entitled to the application of the regulations approved by the Autonomous Community (AC) where the greatest value of the property and assets are situated in Spain, or if the assets are overseas, the AC where the beneficiary lives.
If the deceased had been resident in an Autonomous Community, non-resident taxpayers who are resident in a Member State of the European Union or the European Economic Area (EUNR) are entitled to the application of the regulations of the AC where the deceased lived.
In plain English this means that the rules of the AC will apply to
– the inheritance of assets based in Spain by a EUNR
– the inheritance of assets from a EUNR by a resident of Spain
NB: there are no changes in respect of NEUNR, who only receive the state allowances, which at best are circa €16,000 and worst are €0, depending upon the relationship with the deceased.
This is particularly significant if as a resident of Spain you are expecting to inherit a large sum from the UK. If you live in Andalucía for example, with effect from Monday 1st January 2018, you can inherit upto €1,000,000 from a parent with no inheritance tax to pay in Spain, but following Brexit, then you would only receive the allowance of €16,000 if there is no agreement otherwise.
Capital Gains : In 2015, following the ECJ ruling, Spain clarified that where a EUNR sold their former habitual residence in Spain, then providing the full net proceeds received were reinvested in a new residence, which could be another EU country, then they could claim full relief from any capital gains accrued. Where only a portion of the proceeds were reinvested then proportional relief could be claimed. The relief is subject to rules regarding submission times. etc. This relief is not available to NEUNR.
So, unless there is specific agreement between the UK and Spain and/or the EU, then the reliefs described above as available to EUNR may no longer be available following Brexit, with potentially significant impact for some people.
IMPORTANT UPDATE. FURTHER TO THE EUROPEAN COURT OF JUST RULING ON DISCRIMINATION ON INHERITANCE TAX FOR NON RESIDENTS, THE SUPREME COURT HAS TAKEN THE NEXT STEP WIHT THIS VERY IMPORTANT RULING.
SUPREME COURT RULING
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