A recent report on national Spanish TV makes it clear that expats have good reason to be worried about a new law obliging them to declare their assets outside of Spain.
The new law “affects all residents in Spain, including the 1 million foreigners who make tax declarations in Spain,” explains the news clip, which was aired on the national news (RTVE) on March 17th.
According to Spain’s new reporting requirements all residents have to declare assets abroad worth €50,000 or more (per category) before the end of April.
Relatively few Spaniards have assets outside of Spain, but hundreds of thousands of retired European expats living in Spain have properties, bank accounts, trusts, and pension funds back at home. This law hits them harder than anyone else. Some experts suggest it was designed to do so, whilst others argue it might be an unintended consequence.
Oscar Anton, Deputy Mayor of Javea in the Costa Blanca, believes the asset declaration exercise is missing its intended target – Spanish citizens moving money abroad to avoid taxes – and instead hitting foreign residents keen to abide by the rules. “People living here and paying taxes must declare assets over 50,000€. Why? Because the government is not thinking of the expats but the Spaniards sending money out of Spain,” he told Round Town News.
Whatever the true motivation, expats are the biggest group of victims. “We think this law goes for the collective of retired foreigners resident in Spain, who live on our coasts, and who normally maintain links with their country of origin…. bank accounts, properties,” explains Estebán Raventós, a partner of the prestigious international law firm Baker & McKenzie (starting at 0.16 in the clip). “Watch out! These people are obliged to report [their assets] before the 30th April this year.”
Further on, Jose Maria Tovillas, a professor of tax law at the Universtiy of Barcelona (starting 0.48) describes the new measure as “the most powerful that Spanish lawmakers could have come up with to get people with assets abroad to pay taxes on them in Spain .”
Which is the biggest group of residents with assets abroad? Retired European expats, especially British pensioners. Conveniently, none of them can vote in national elections.
ORGANISED CRIME, TERRORISM, AND EXPATS
Introduced as part of a drive against tax evasion, money laundering, and the financing of terrorism, you would expect this law to target locals who have defrauded Spain and taken their ill-gotten gains offshore. But in reality, it mainly affects elderly European pensioners who have moved to Spain to enjoy their retirement, having worked and saved all their lives outside of Spain.
The reporting requirements, arguably more onerous than domestic requirements, are complex and can only be done online by professionals, at extra cost. The guidelines, in so far as they exist, lack clarity: As a result, confusing and contradictory advice now abounds.
Early complaints even suggest the new reporting requirements are incompatible with financial data from other countries, making it impossible to comply in some cases. For example, Spain does not recognise trusts, which are quite common in the UK.
To make matters worse, the law has not been well publicised (a fact the news report points out) so many elderly expats may not know about the new law and how it affects them. What little information the Spanish tax office has provided is almost all in Spanish.
Crushing fines could be imposed on expats who fail to comply, with swingeing costs for even small mistakes. Fines start at €10,000, and escalate from there.
According to calculations by Lex Tax Consulting, failure to declare a house outside Spain worth €150,000 could lead to a fine of €162,000 were the Spanish tax authorities to get wind of it in 2014.
Such disproportionate fines, targeting a politically powerless group, could be a poisonous source of bad news for Spain for years to come. The international media would have field day with stories of expat pensioners being ruined by a law they were unaware of.
SPAIN SHOOTS ITSELF IN THE FOOT
There has always been talk of Spain becoming the “California of Europe”, attracting millions of pensioners from Northern Europe to buy homes in Spain, and spend their savings here, creating wealth, jobs, and revenues for Government coffers. Already under threat from various scandals involving corruption and illegal building in popular places like Marbella, that model will be doomed if Spain becomes a fiscal danger zone for expats.
It stands to reason this new law will discourage expats from retiring to Spain, or at least doing so legally and declaring their residency.
Everyone knows the Spanish state is struggling to fund high deficits. How many expats will now move to Spain and put their life’s savings within the grasp of the Spanish tax authorities?
BAD NEWS FOR HOUSING MARKET
Foreign demand for homes in Spain will almost certainly fall as a result. I estimate this new law could reduce foreign demand by 10pc or more, at a time when Spain needs all the help it can get to digest its property glut. As a result, Spain will lose tens of billions of Euros of foreign investment in housing alone.
Spanish banks, with their massive property portfolios, will be big losers, and the Sareb – Spain’s so-called “bad bank”, the biggest loser of all.
The surprising thing is, the Spanish Government knows it needs to attract foreign buyers, which is why it recently floated the idea of residency permits for Russians and Chinese who spend more than €160,000 on a home in Spain.
Many Spaniards would agree that measures are needed to encourage foreign demand, which could help Spain recover. Foreign demand for homes in Spain is the only segment showing some signs of life.
What Spain should do now is make itself an attractive fiscal destination for millions of retiring baby-boomers from Northern Europe. A big step in that direction would be a new fiscal category, like the former non-doms in the UK, making Spain an irresistible fiscal destination for expats. That would help attract millions of European baby-boomers to Spain, creating wealth, jobs, and Government revenue. It would also help deal with property glut.
Unfortunately, these new regulations take us in the opposite direction, and will alienate Europeans and non-Europeans alike. Spain now treats people it desperately needs to attract like potential criminals.
The irony is, the Spanish state will almost certainly end up with less tax revenues as a result.
The Spanish Government claims the new measures are merely “informative” but the experts appear to disagree. Why would Spain want to know about assets abroad if not to tax them at some point in future? If the objective really is just to gather information, then it will come at a high price.
Javea’s Deputy Mayor Anton is planning to lobby the Government in Madrid to improve the law. “I want to present a motion explaining to Madrid that they don’t realise what they have done to the expat – the spirit of the law was for the Spanish not foreign residents.
“I want to say to Madrid that we are not happy about the law and the government must limit things because in future people will not choose Spain to make a new home because the state will be asking you a lot of questions,” said the politician.
“People are coming here to retire and relax or to work – they pay their taxes, we do not want more taxes from them because they spend their money in our shops, restaurants and bars and for our services. It is wrong to get to these people.”
Meanwhile, expat action groups are preparing a petition for Brussels questioning the legitimacy of the declaration process under European Union law. Complaints have also sent to the European Commission – with the possibility of a challenge in the European court of Justice.