Antonio Flores’ Blog

Offshore is definitely off. The times of the property owning offshore-based companies are over. The glamour associated with names such as Seychelles, British Virgin Islands, Turks & Caicos etc., has now turned into a stigma. Because there was a time in Spain when, if you went to certain summer cocktail parties or high-flying bashes and you did not own an offshore company based in some fanciful island, you were a nobody. In fact, your lawyer was quickly tagged as unsophisticated, uncreative, in essence, not up to scratch with this new posh trend that was all the rage among the richer.

The Mallorca Provincial Audience (May 2010) has sent a lawyer to jail for almost 4 years and given him a fine or €600K  for setting up a “fiscal engineering scheme to instrumentalise defrauding and money laundering procedures “, in the sale of a property in Puerto Pollensa (Mallorca). In this case, he had set up the structure to, among other aims, avoid (or rather evade) paying Capital Gains Tax (at 35%) on the real price (as opposed to the officially declared) when selling his client’s property.

According to the prosecutor, and the judge in the examined ruling, the investigated  law firm indiscriminately offered offshore companies, via the website offshore.biz site (in which even two Mallorca notaries were mentioned), to their clients with the intention of:

• Minimizing the tax almost to the point of exemption.
• Offering 100% protection to the assets.
• Offering 100% anonymity.

The message this Court ruling has sent out is a very clear one: using offshore companies to hold Spanish property does not entitle the beneficiary to legally avoid payment of taxes in Spain, whether you sell the shares, and alongside it, the property. This applies also to the buyer of the structure, who is not exempt from paying transfer taxes.

The Court Office, in reaching its decision, invoked the following:

• Non-Resident Act 5/2004: Capital Gain Taxes obtained, directly or indirectly, from property situated in Spain, will be taxed in Spain. In particular, the following gains are included: when they are originated or derived from rights or shares of a company, resident or not, which assets are made of up of, primarily, directly or indirectly, property based in Spain. The gains obtained from transferring the shares of a company, resident or otherwise, that attribute its ultimate owners the right of their enjoyment in Spain.
• Double Taxation Agreement between Spain and Ireland of the 18th of November 1986: the gains derived from the sale of property can be taxed where the property is located (for some reason, this was invoked as part of the defence strategy).

In this case, the tax office, assisted by the police, found enough evidence of the crime when they were given authorisation by the court to raid the firm’s premises, in which they found not only crucial information on the transaction (particularly deeds of share transfer and deeds of resignation of director and appointment of new director, both done on the day that the property changed hands, bank transfer slips, etc.) but also a private purchase contract for €875,000 for the property in question, when the price paid officially paid was €425,000.

Finally, the Tax Office’s report puts under serious scrutiny Law Firms that, apart from offering the standard juridical, financial and accounting services, have specialized in the design of schemes and structures of fiscal engineering that are utilized to defraud and launder money. These professional firms, which act as company incorporating agents, don’t have as its object international fiscal planning, but are purveyors of mechanisms for subjective simulation, by inserting physical and juridical persons, national and foreign, in the ownership of the assets they intend to conceal. The mechanisms, according to the Tax Office, are as follows:

1. Incorporation of offshore of property holding companies (offshore-based) .
2. Incorporation of Spanish Companies (mostly Limited-SRL), owned by the above offshore, to manage Spanish property. These companies are merely holding property, having scant bank movements.
3. Appointment of directors different from the ultimate owners, either being the same lawyers that created the structure or, as in the case study, someone paid to do the job (and who has also been sentenced to a jail term, albeit suspended). These persons are also authorised to operate both the offshore and the onshore accounts and are, at times, beggars pulled off the street. 
4. Utilization of the law firm’s clients account to receive and remit transfers, with the intention of a) concealing the true nature of the transactions behind the transfers and b) avoiding compliance with anti-money laundering provisions (thereby making it more difficult to know the real nature of the deal).

As a result of the above court action, the lawyer, the ultimate beneficiary and the director were all sentenced to jail terms, although only the lawyer will have to serve time, for the beneficiary paid up the taxes owed prior to the hearing (€135,000) as well as the fines, and the director was found guilty only of conspiracy to defraud.

Offshore is definitely off, and therefore it would be advisable that anyone willing to sell a property owned by a string of companies opted for not selling the shares abroad, because, not only all the above could easily be applicable, but also whoever was buying them would be buying into problem, unless of course he/she was sitting on a pile of cash he wanted to get rid of…(not advisable anyhow).

It may be interesting to see how this links with this new trend of incorporating UE based companies to avoid Spanish Inheritance Tax, particularly UK based, but will leave the study of this dubious proposal for a separate post.

Antonio Flores Companies, Corporate Law, Inheritance, Property, Taxes offshore companies, spanish capital gains tax, spanish inheritance tax

I have, for some unknown reason, always been suspicious of professionals wearing a short sleeve shirt and tie combination, unless, of course, they were cheesy used car salesmen or fast food managers. I have to say in my defense, however, that I have tried to leave behind my prejudices and move on, trying to intimate with the suspect (generally some other lawyer) in spite of his attire when work circumstances demand it, and also because I am told that looks are not everything.

The same happens with exclusive real estate commission agreements. They look one thing but may mean something, nothing, or something different from what they say or mean. And this baffling scenario is what we encounter if we research court rulings issued all over Spain when the principal, who is the property owner, decides to sell the property himself or through another agent, in spite of having signed an apparently impregnable contract with his chosen agent and shaken hands subsequently, with or without a beer.

By analyzing no less than 20 court rulings, we find out that most, if not all, agree that if the property owner sells directly, then no damages are applicable to the agent as exclusive contracts cannot impede the owner from disposing of his own property privately, unless specifically agreed (already departing from what we think “exclusive” means).

This clarified, we now look are the solutions arrived at by courts when an agent different from the initially commissioned to sell, exclusively, does the deal.

• Solution Pro-Owner: This is a restrictive opinion (also shared by French law), whereby the exclusive agent is not entitled to a commission because the essence of the mediation contract is to find a buyer, and where this has not been achieved, then no right to a commission arises. At the most, the exclusive agent will be entitled to damages, but only where these can be proved to have existed, such as meetings, sales or promotional literature,trips, staff hiring etc.In line with this view, courts have pronounced that giving the exclusive agent the right to his commission would produce “unjust enrichment”, since the main obligation of the agent is to sell, and this has not occurred as a result of his activity (it omits an important detail which is that not selling the unit may have happened due to it being sold by someone else!).The Supreme Court has added that the agent’s right to his commission (“loss of earnings” theory) when the seller breaks the exclusive contract can only be applied where there is sufficient verisimilitude to repute the earning of the commission as very probable, in its maximum approximation to an effective certainty so that the result is neither a loss nor an unjust enrichment. It also adds that the loss of earnings have to be proved, not being dubious, unfounded or founded on hope or hypothesis.Again, the courts here redefine what “exclusivity” means, and almost gives cheeky property owners carte blanche to break exclusivity property sales contracts, without visible penalties.
• Solution Pro-Agent: This more harsher solution is more in line with common law, and determines that the exclusive agent did not have the opportunity to complete the task he was assigned with, and, therefore, considers that the exclusive agent would be entitled to any costs incurred in so far, plus full commission (loss of earnings). This opinion is based on the fact that, in the absence of a clear regulation, damages are to be calculated primarily by reference to the lost commission. However, it adds that courts are entitled to “moderate” or “adjust” the application of it on the basis of other circumstances, such as the dedication of the exclusive agent to selling, number of buyers who viewed the property, other sales made with the same client, bad faith displayed by the owner, final sales price, etc. There is an interesting local ruling (Malaga Appeal Court) involving the Kempinski Hotel owners and Sauer International real estate agent, where the latter was given entitlement to 5% commission (half of that agreed on contract) on a number of apartments that were sold by another agent (Kristina Szekely), because the courts understood that by having sold 74 apartments out of a total of 89 it could easily be inferred, with objectivity, that the remaining 15 would have also found a buyer through the services of the original agent.

So if we thought we knew what the penalty would be to an infringer property owner by reading a simple contract, be wise and stay away from assumptions, because Spanish courts are here to prove your assumptions wrong!

Antonio Flores Companies, Litigation, Property