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

This is the question ex-workers from the company Marsans must be asking themselves after trying to cash, at different BBVA branches, cheques which bounce repeatedly.

This same situation was faced by a client who tried to cash in a cheque for forty thousand euros on an empty account, and is also shared in times of crisis, unfortunately, by many other hundreds who have a euro denomination cheque that is not worth the paper it is written on.

This takes us automatically to the subject of this post, it being the legal implications of giving out worthless cheques or promissory notes as well some notes on how these instruments operate in Spain.

Spanish penal code has eliminated the punishability per se of giving out bad cheques (cheque sin fondos), and has associated it, necessarily, with intent to swindle (estafa) so as to make this a criminal offense. However, swindle with a cheque aggravates the criminal action and carries a higher sentence because it is considered that the “use of certain mercantile instruments to commit swindle irrespective of its authenticity or falsity is in itself graver due to the massive use of these instruments in commerce”.

So what really determines if we go to jail or not is intent. Case law establishes that this intent to defraud has to be precedent, antecedent and causing a material or monetary damage, meaning, in other words, that the perpetrator knows full well from the inception of the contract that he will not comply or be able to comply with his obligation to provide consideration, and will enrich himself by doing this. At the same time, the intent to defraud will have to be parallel to a concealment of the truth, or deceit, and as a judge puts it “not being a clumsy, fantastic or not credible deceit, incapable of moving the will of people constituted intellectually.”

In these type of cases there is very fine and blurred line between a mere civil default and a criminal swindle case potentially able to offer an unappealing 4 year prison sentence, and case law, as usual, offers very interesting situations.

As an example, the courts acquitted 2 businessmen who gave out bad cheques because it was proven, in the first case, that non-payment of them happened in a situation of severe financial difficulty (company loan facilities were not being repaid), and in the second that it was not possible to discern punishable conduct because the accused did not concoct or stage a plan to create an expectation of solvency (inexistent), nor did he omit or conceal elements of reality what would have been enough to dissuade the company delivering Jamones Serranos to do so, particularly when they had been doing business together for many years.

Then there is the interesting figure of the postdated cheque (cheque posdatado) which, although does not change its payment at sight nature (Spanish cheques are ALWAYS payable on demand and within 15 days from them being signed), it does alter the consequence of someone not honouring them, since they are no longer considered to be immediate payment instruments but have morphed into a credit facility, guarantee of payment or deferred payment facility, therefore losing its condition of cheque. This happens, according to the Spanish Supreme Court, when cheques are postdated by at least 1 month or are re-written by the debtor in agreement with the creditor due to the previous ones being at risk of bouncing.

So whenever you are about to stamp your signature on a cheque make sure that it does not bounce and if it does, make sure it does not come back to crush you!

Note: All case law cited here is available upon request.

Antonio Flores Corporate Law, Litigation bad cheques, bouncing cheques, dud cheques

I very much enjoyed reading an article written by Eleanor Mill in the Sunday Times in respect of how overprotective EU employment legislation is interfering severely with women’s careers because of provisions on maternity leave. Eleanor says that “legislation designed to protect women is now killing them with kindness” because it almost forces them to stay at home “pureeing carrot” for up to, depending on the country, 3 years when they have made some choices, working being one of them!

I don’t intend to make an analysis or comparison between the different jurisdictions in place across the EU but because Eleanor’s article coincided in time with a labour dispute we had in our office I would like to expand a bit on the opposite, that is, how can a pregnant worker who wishes to never work again (judging by her acts it cannot be otherwise) take advantage of Spanish laws and endlessly link a series of leave periods of different nature to avoid coming back to work and all the while getting paid.

In our case, the worker, who was pregnant, had verbally agreed that she would take maternity leave for a number of months and on her return she would resign, taking with her a reasonable package. She had her baby and it all went well and good until she was due back in the office to implement the agreement we had, when she decided that the agreement was no longer good enough for her because she could get far more from us (inasmuch as even though she is not working the employer still has to pay) and from the social security system…

Chronologically, the events can be summarised as follows:

1. Sick leave (high risk pregnancy/painful back): 23 weeks
2. Maternity leave: 16 weeks
3. Breastfeeding leave: 2 weeks
4. Holidays: 4 weeks
5. Sick leave again (anxiety this time): 9 weeks… and counting.

When I spoke to a colleague with vast expertise in labour to ask him for some advice, he broke into a laughter and reproached me that “it served me well for hiring women of a certain age because they were explosive devices which detonate by pregnancy”. I don’t have to say how much I disapproved his comment, but it had me thinking for some moments after which he said that the only way to tackle this problem was to reach an agreement with the employee because, in his experience, Courts in Spain would always rule in their favour and until reaching a ruling I would still have to pay wages and social security cover (a horrific 30% of the salary!)

Two months later received another registered letter with acknowledgement of content (burofax) indicating that she was pregnant again…

Aside from this, it appears that, due to the crisis, some employees are taking their employers to Court in spite of pre-agreed work conditions that don’t suit them any longer. As an example I can cite two typical examples:

1. Employer hires under the condition that the employee will not claim the extortionate 45 days of salary per year worked (the famous “finiquito”, which is considered to be one of the causes of our near to 20% unemployment and 25% in Andalucía). The employee agrees gleefully and shakes hands but when he loses his job he reneges on the deal due to the fact that these rights cannot be waived and takes his employer to the cleaners.
2. Employer enters a contract with a self employed worker (autonomo), which is a contract typically used in the real estate industry and with some lawyers. Since plenty of case-law deems that this type of contract is used by employers to avoid social security and redundancy payments it can successfully be morphed to a full labour contract, through the Employment Tribunal, which will hit the employer, retrospectively, with a request for unpaid social security, fines, interest, redundancy etc. Enough to put anyone off employing in Spain forever!

I will finally add that in my experience, real estate workers, in particular sales representatives, have an extremely high ratio of honouring verbal agreements when fired under an “autonomo” contract, far more than lawyers hired under those same circumstances (sorry colleagues!).

So what it the solution to the above? According to the trend of our unemployment rate and our average salaries in comparison to the rest of Europe, there is only one solution (unions will blacklist me for saying this): don’t hire in Spain, or if you do, make sure salaries are very low, and if you can avoid it, don’t sign indefinite contracts!

Antonio Flores Corporate Law finiquito, spanish redundancy, unemployment in spain

It will certainly sound perplexing for many, especially when thinking on Spain’s internationally infamous bureaucracy, but as from the beginning of 2010 someone willing to open a business in Spain will not be required to obtain a license but only to apply for it. Although the procedure sounds “too good to be true” it is indeed the case, but not thanks to Zapatero but to a EU Directive known as the Bolkenstein Directive which has now been implemented.

Anyone who has been involved with opening a business will know that this legislation change is providing a legal framework to something which was de facto being done, that is, start running a business without having the permit which, in some Town Halls, was taking up to 12 months to grant. The problem us lawyers had with this was telling a client that yes, it was not a problem to open it whilst “mañana” Town Hall officials reviewed the papers and decided, after innumerable trips to the businesses department with fully stamped certificates from until-then-unknown technicians, to grant the bloody thing. Because although the above system was in practice, any unfriendly neighbour could call the local police to complain that a place was running without a license, and that automatically merited a visit and a fine (some of up to €1,200).

The Omnibus Act, as it is called, has replaced the requirement of having to apply for a business opening license with a Declaration of Responsibility, where the business owner needs only to assemble the paperwork and the technical certificates required and submit them to the Town Hall, followed by a statement confirming that the applicant has complied with the requirements undertaking to maintain these throughout the duration of the activity.  

But as usual the Act has a trap: the exemption of having to apply for a license leaves out all the activities which fall under the Environment Management Act which includes, inter alia, guns & ammunitions factories (thank God for that!), mineral extraction quarries, open air cattle, hog and livestock wholesaling, F1 circuits and many other unimaginable businesses, but also (and this is the trap) pubs, bars, restaurants, butchers, fishmongers, kebab corner shops and many other joints so popular in the Spanish coasts. So as far as we are concerned the new Act will pass by and large unnoticed.

Antonio Flores Corporate Law spanish bureaucracy, spanish red tape, starting a company in Spain