If you’re an expat living in Spain with an Investment Account, ISA or Offshore Bond, taxes can be complicated.
It’s common to hear people have moved from one country to another with a product which they thought was tax protected (like those above), only to find out in Spain the rules are different.
As well as extra paperwork, this can mean you need to start paying taxes on dividends, interest and capital gains, for investments held both in Spain and overseas.
But investment tax wrappers which are locally compliant in Spain can help, recuse tax and simplify reporting.
What tax wrappers should Spanish residents consider?
Like much of Europe, investment-linked life insurance can help Spanish residents delay the impacts of taxation, and simplify their arrangements.
It’s important these policies are compliant with Spanish rules.
Investment-linked life assurance policies, sometimes referred to as offshore bonds, or investment bonds, are investment tax-wrappers provided by a life assurance company.
These allow you to hold a range of investments, like mutual funds and ETFs inside of a life assurance based tax-wrapper.
How are Investment Bonds taxed in Spain?
For Spanish compliant investment bonds, your investments are not subject to tax on income, dividends, or capital gains within your policy.
You only pay tax on the growth of your investments, when you withdraw funds from your investment bond.
No tax is due on your original capital. And 19% tax is automatically deducted from the gain portion of any withdrawals.
However, owners of non-compliant investment bonds, must pay personal income tax each year, on the growth in value of the policy, whether any funds are withdrawn or not.
And holders of normal investment accounts, will be taxed on dividends, interest, and capital gains, as they arise.
This makes compliant policies more tax efficient, as they allow for tax deferral.
Taxation of Savings Income in Spain:
| Amount of Income/Growth | Savings Income Tax Rates |
|---|---|
| €0 – €6,000 | 19% |
| €6,001 – €50,000 | 21% |
| €50,001 – €200,000 | 23% |
| €200,001 – €300,000 | 27% |
| €300,001 Onwards | 28% |
Do I have to hold my investment bond for a certain amount of time to benefit from the tax reductions?
No. The special tax treatment of Spanish compliant investment bonds does not require you to hold them for a set period of time, before making withdrawals.
What about tax reporting in Spain?
Compliant investment bonds can be exempt from Modelo 720, if the insurer reports the value of the policy in annual Modelo 189.
This means for some investment bond providers you could have no additional tax reporting, and any tax due at the lower rate is automatically withheld (and paid) by the product provider when you make a withdrawal.
Modelo 720
Non-compliant policies, along with other overseas assets, need to be disclosed as an overseas asset under the Modelo 720 declaration each year as part of your tax return. And you’ll need to directly pay any taxes due to the Spanish authorities.
The Modelo 720 form is mandatory if you hold more than €50,000 in foreign assets, including bank accounts, shares and property.
The penalties for failing to declare these assets can be severe, so it’s worth getting this right.
Can anyone invest in a Spanish investment bond?
They are most suitable for expats looking to invest for 5 years or more.
Most compliant investment bond providers require you to be already resident in Spain. So if you have a policy which was set up before relocating to Spain, there is a high probability it’s not compliant with local rules.
The minimum initial investment for most investment bond providers that work with expats is €100,000. With the costs reducing the higher the amount invested.
Looking for help to tax-efficiently structure your investments?
Are you an expat living in Spain? Arrange your complimentary initial consultation today.
