The Background
Spain is sitting on a pensions time-bomb. It has the lowest birth rate in Europe but the highest density of retirees and very soon those in work, paying taxes, will be insufficient to meet the costs of pensions of those in retirement. Spain’s answer to this has been to introduce substantial tax concessions on long term savings plans to encourage Spaniards to save for their own retirement and so become less of a burden on the state’s resources in the future. However these tax concessions apply to ALL taxpayers in Spain – even those in retirement who have already built up their “pot” and even including foreign residents.
The Method
Spain gives huge tax breaks on pension plans but they also give similar concessions to lump sum investments issued by life assurance companies, including companies situated in the so-called EU tax havens of Luxembourg and Dublin, as long as they conform to the rules set out by Hacienda. The extra advantage of using such “qualifying” offshore bonds is that all the profits grow tax-free whilst they are held in the bond and the literature is in English.
Qualifying bonds are taxed for Spanish Capital Gains whenever a withdrawal is made. However Hacienda considers that any such withdrawal is part original capital and part “gain”. That part considered as original capital is not taxed and the “gain” element gets additional beneficial tax treatment once the bond has been held for more than two years and then again at a higher level after five years.
The Result
As the following Table clearly illustrates, the result is that instead of having your investment “income” taxed at your normal tax rate in Spain (for the purposes of the examples we’ll assume a normal tax rate of 25%) your average tax rate over the next 10 to 15 years will be well under 3%.
| End of Year |
CGT Reduction |
Effective Tax Rate |
End of Year |
CGT Reduction |
Effective Tax Rate |
| |
|
|
|
|
|
| 1 |
0% |
1.74% |
6 |
75% |
2.20% |
| 2 |
40% |
2.02% |
7 |
75% |
2.48% |
| 3 |
40% |
2.93% |
8 |
75% |
2.75% |
| 4 |
40% |
3.77% |
9 |
75% |
2.99% |
| 5 |
75% |
1.90% |
10 |
75% |
3.22% |
The average over the first 10 years is just 2.6% and even over a 25 yr period is only 3.73%!
If you are a Spanish tax payer and worried at all about the implications of the about-to-be-introduced EU Savings Tax Directive (Exchange of Information) then you could well find that this type of investment is just what you’re looking for. Under the terms of the EUSTD investments issued by EU life companies are exempt from the Directive. Why hold your wealth offshore with the risk of getting caught when you can now hold it legally, openly and, as illustrated above, very tax efficiently? Yes – you’ll pay some tax – but not very much – and you’ll be able to sleep peacefully from then on.
Let’s face it, if someone told you that there was a new country in the EU, bordering the Mediterranean, where you could become tax resident without having to have millions (as is the case with Jersey), where the climate was like southern Spain where return flights to the UK could be had for under £150 and where, to cap it all, the income tax rate was 5%, then people would be flocking there. Well now that scenario has come to pass. Come to Spain and place your capital in one of these tax efficient offshore bonds and then lie back and enjoy yourself!
For individual advice, without obligation, contact Colin McCready of Offshore Money Managers Correduría de Seguros S.L. on 95 283 09 16 or by e-mail at info@offshoremoneymanagers.net.
