Spanish Government plans to raise taxes so get prepared

Spanish taxes to rise in the light of coronavirus covid-19

In a bid to combat Covid-19’s severe social and financial repercussions, the Spanish Government seeks to raise 80bn euros through a drastic increase in taxation across the board. Lawyer Raymundo Larrain briefly explains to us what these planned changes are and what you should do to protect your assets.

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By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Abogados
8th of June 2020

I’m going to briefly write on the wide impact these proposed tax changes will have, with specific focus in inheritance tax and wealth tax, which is what mostly affects expats. There is no point in reviewing all the other proposed tax changes as most of them will not affect non-residents.

I will preface the article with a rambling on my take on this planned tax change, feel free to skip it and get to the point. So, please indulge me and kindly excuse my digression which I find most necessary given the convulsed times we are now living in.

Introduction

The communist partners of Spain’s ruling coalition (UNIDAS PODEMOS) unveiled in May a new tax proposal called “Horizonte País” (a 419-page economic manifesto) which constitutes an unprecedented tax hike that aims to rake in an extra 80 billion euros; that’s billion, with a ’b’. Never in Spain’s young 45-year-old Democracy had such an ambitious tax haul been implemented. I stress this is a proposal, it still needs approval.

The hard-left wing coalition claims nonchalantly this tax hike is aimed only at the super-rich and large companies appealing to lofty ideals of solidarity amid a global pandemic. By this, they mean a reduced collective of around 6,000 individuals (what we commonly refer to as HNWI and UHNWI). Although this on paper sounds good and well, it is a common fallacy; particularly from left-wing apologists, that I’ve heard time and time again over the years in Spain. The fact of the matter is, as I’ve pointed out repeatedly and practical experience shows, the burden of a much-vaunted tax rise is brunt foremost by Spain’s middle class and SME’s, not by the ‘rich’. Take as an example Wealth tax. I can almost guarantee you that over 99% of those who pay this tax in Spain are not affluent but simply hard-working class. HNWI and large corporations have the motivation, the means, and the legal and fiscal knowledge to neatly circumvent such tax increases without a blink. Make no mistake, this unprecedented tax rise will be paid foremost by Spain’s struggling middle class and SME’s in the midst of the most challenging financial context over the last 100 years (understatement).

One of the many untold victims of this virus outbreak has been the middle class. The middle class, as I’ve written countless times over the years, constitutes the cornerstone of all western democracies. They are the ones that shoulder the tax burden of society and contribute towards its political stability. There can be no strong democracy without a strong middle class. One of the (many) nasty effects of Covid-19 is that it has induced a severe recession on us that is decimating Spain’s middle class. Never in history have we witnessed such rapid destruction of the middle class, not only in Spain, albeit worldwide. Millions of people have lost their jobs, and millions more are sitting at home in the hope of being paid the ERTEs called in by their employers.

As written, the hard-working middle class is what gives a country its political stability, it is democracy’s backbone; lose it, and the country becomes polarized, delivering us into political instability with social strife becoming rife. Spain’s companies are over 90% SMEs. In truth, Spain has very few large corporations compared to other developed economies, relying heavily on tourism (16% GDP), hospitality industry (6%), and construction (6%). An untamed tax hike could obliterate SMEs in the thousands, compounding job losses furthermore, paving the way for nationalisms (read separatists) and extremist political movements. An unbridled tax increase, at such an inopportune financial moment, could potentially tip Spain’s economy off the edge, wiping out the middle class, and destabilizing the whole country as a result for decades to come.

Take Argentina, for example. At the end of WWII it was one of the most stable countries in South America, believe it or not. It boasted the largest middle class in the continent. In fact, Argentina was known at the time as the ‘granero del mundo’ or breadbasket of the world as it had such a large food surplus that it exported it to other countries (and at times even generously gifted it, such as to hunger-stricken Spain during its devastating post-civil war that ravaged the country). It had the highest income per capita of all South America. A country rich in natural resources seemed destined for greatness. Alas, successive governments adopted a series of ill-advised economic policies that decimated its middle class and led the country to file for bankruptcy, time and time again. I believe, as I write these lines, they are about to default for the seventh time in the last 70 years. Nowadays no one who thinks of Argentina associates it with the term ‘stability’, quite the opposite. The deleterious consequences of poor decision-making roll forward for decades. Argentina is a prime example of what can happen to a strong country if the (economic) policies adopted by its ruling class push it over the edge.

At a time when ailing families and companies are struggling to make ends meet in Spain, (drastically) raising taxes doesn’t seem to my mind like the right approach. I don’t think it takes a Ph.D. in Economics – like the one our president has – to realize it is only common sense to lower taxes in such a dire financial context to attract foreign investments and foster job creation. Raising taxes, at such a delicate time, is counterproductive, and could further exacerbate and compound the dramatic financial situation we are in, tipping us into a full-blown II Great Depression, God forbid.

Take Germany, for example. The Union’s leading economy has adopted a cautious stance lowering VAT on food for example, from 19% to only 7% in a bid to prop up ailing businesses. This, to my mind, is the right approach to tackle this severe crisis. You need to give companies and individuals tax breaks, allow them breathing space over the next 12 months, at least, until a cure is hopefully found, and we get back to ‘normal’.

Spain, on the other hand, has instead opted for the ostrich approach; burying its head in the sand and ignoring the elephant in the room. It has forbidden, yes forbidden, companies to lay off employees! It has also forbidden companies to file for bankruptcy!! While they are at it, they should also forbid people to die from the virus. Maybe that would help to massage the soaring numbers of our high death toll.

Bottom line, if you help struggling small businesses, you will save millions of jobs in the process. It is not so hard to understand. A drastic tax increase is not the way out of the woods and may unleash an unmitigated disaster. There has to be a resolute political will to make this happen, I’m thinking along the lines of Roosevelt’s New Deal; an EU-wide concerted supranational effort to fight a common crisis together, as one. No country can hope to win this battle on their own, least of all Spain. If the Union truly aspires to be Churchill’s “United States of Europe,” it better get its act together and start acting as one. You need to put your money where your mouth is.

“In union, there is strength.” (Aesop).

As it stands now, the fate of Spain’s middle class lies squarely in the hands of our socio-communist politicians. Through their actions (or inactions), they will either contribute to decimate Spain’s middle class or help preserve it.

“70% of society is only three payrolls away from poverty.”

Wealth tax

Mark Stücklin, had already masterfully covered this point in-depth, and frankly, I do not feel I can contribute much more. So, please read his article on the new proposed tax measures: Thousands of second-homes in Spain would be hit by a new tax on “large fortunes” proposed by the coalition government’s far-left Podemos party – 14th May 2020.

Spanish Inheritance Tax – proposed changes

As I had been pointing over the last 15 years, there has been an ongoing trend to suppress inheritance tax in Spain, led by centre-right wing political groups. Several regions in Spain have in practice abolished it, being Andalusia the most recent one to join this bandwagon in 2019. I had covered these groundbreaking tax changes in several articles:

In practice, these changes in IHT have resulted in expats paying little to no inheritance tax, which is always a welcome respite.

However, Spain’s newly elected socio-communist coalition wants to put an end to this and rein in devolved tax competencies from all regions, centralising them. It plans to enact a new law this year on inheritance tax that would apply a uniform tax rate nationwide. They propose to quash all lenient regional tax allowances that currently make taxpayers pay almost nil in both IHT & Gift tax.

If they go ahead with these plans, the taxation of inheritances of Spanish estates will skyrocket. No longer will expats (or Spanish residents) face nil IHT & Gift bills, as has been the case in most regions over the last decade.

What to do? Take pre-emptive action now, whilst you can!

Affluent Spaniards, in view of the proposed tax changes, have been busy taking action over the last month, seeking tax advice from lawyers and tax advisors – and you should do the same.

Regarding inheritance tax, as we have pointed out in several taxation articles, you should consider moves to pre-empt this potential draconian tax increase such as gifting properties to your loved ones (spouse, children) and benefit from the ultra-low tax allowances currently in place whilst they last paying little to no tax. Because once they are gone, they are gone; likely by year’s end.

You need to instruct a lawyer to legally formalize gifting assets and money to your loved ones, as this can only be done through a deed witnessed by a notary public to benefit from the highlighted tax advantages that result in an almost zero taxation.

To close, don’t attempt to do this on your own, unrepresented by a lawyer, or you will likely end up like one of this week’s legal queries we received that must now face over 26,000 euros in tax because he failed to seek legal counsel before acting. Had he spoken to us before, he would have paid under 300 euros in tax on being gifted hundreds of thousands of euros.

Conclusion

We strongly urge expats and residents, with assets in Spain, to seek immediate tax advice from their lawyers and tax advisors and look for ways, within the law, to mitigate exposure to the proposed tax changes, namely IHT and wealth tax.

At LNA, we can assist you advising and re-arranging your business and property holdings in Spain to mitigate exposure to these taxes, regardless of your property’s location, we act nationwide. We have 17 years’ taxation experience at your service, ask us free of compromise.

Larraín Nesbitt Abogados, small on fees, big on service.

L’art de l’imposition consiste à plumer l’oie pour obtenir le plus possible de plumes avec le moins possible de cris.” – Jean Baptiste Colbert.

French economist and Finance Minister under King Louis XIV.

Loosely translated as: “The art of taxation consists in so plucking the goose as to obtain the largest possible number of feathers with the smallest possible amount of hissing.”

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Article also published at LNA: Spanish government to raise taxes – 1st July 2020

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