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The Spanish Lawyer Online

Antonio Flores’ Blog

Thoughts about laws and regulations which affect foreigners in Spain


Archive for December, 2010

Defaulting Spanish Developers to Prove Destination of Deposits, Or Else!

December 20th, 2010

Reading the Times yesterday, I spotted a funny short article written by David Robertson and Deborah Haynes about the British Army’s SA-80 assault rifle. According to the paper, it has been upgraded several times but its long history of problems has led the military to christen it “the civil servant”, because it does not work and cannot be fired.

This quote came to mind when being asked for a second opinion in respect of the case of Urbanizadora Costa Palatinum/Proyectos Antele, another failed project by a developer which I can group with many others that dot the costas and which I dub the “civil swindlers”, because they get paid from you to do something, they do nothing, and there is little prospect of realistically getting any funds back, since they have no equity on their assets and no interest whatsoever in refunding, even though the funds should be in some bank account (with Proyectos Antele, in Venezuela it would appear).

As 30 or so purchasers are being dragged around civil courts pointlessly (for this developer now says he has none of the monies), and considering that nothing has been built on a plot they already owned prior to exchanging contracts, as part of my legal inquest into the death of the development, I would like to ask the developers one straight question: where is the dosh matey?
To not make this post too long, I will quote some examples why Spanish top judges are in disagreement of the activities carried out by developers who do just that (i.e. take money, not build, spend money elsewhere and blame the market) and who are upgraded, from the term “civil swindlers”, to a more adequate “criminal misapropriators”.

Two and a Halve Years Sentence for a Developer in Tarragona

Tarragona Provincial Court ruling of the 5-5-2010 – Perpetration of criminal action consisting on:  Using the funds and not developing the project. In this case, the developer took €24,000 from a buyer for the purpose of building a property and signed an off-plan private purchase contract. In this instance, the accused, with debts elsewhere, used the funds to settle these and did not build the unit. It is highlighted by the courts that the developer was almost fully aware that he could have not received the license since he did not submitted certain documents, which he completely ignored. This developer had boasted being a reputable developer in the area, and, on this premise, the buyer entrusted him with carrying out the agreed job. I cannot but add here that in the Ocean View Property scandal, Ricardo Miranda had boasted to the press, to gullible Monaco Prince Albert and to ever-smiling  President of Dominican Republic, Lionel Fernandez, that 6,000 built units by his “group of companies” preceded him. So either his group of companies encompass Ocean View Properties (who never built but simply acted as unscrupulous agents for several developments -by loading up prices dramatically) or we are going to have to get archaeological experts to dig out those units, most probably built in Phoenician times.

The Tarragona Provincial Audience highlights that the developer had also created an artifice to lure the buyer into buying, and had offered a bank guarantee to cover the down payment (which was never seen).

Three Years and Two Months Sentence for a Developer in Albacete

Albacete Provincial Court ruling of the 1-7-2009 The Court does a simple mathematical calculation: if when the construction was stopped the developer had only built 43% of his budget (€1,680,000, with a further €2,259,000 to complete the job), had received €3,200,000 from the bank, €980,000 from buyers, having himself put down €2,200,000 (part of which he got back), and after having paid the agents (€240,000) and architects (€80,000), they conclude that there are €580,000 missing

6 Years and 6 Months Imprisonment for Developer

Supreme Court ruling of the 23-12-2006: Perpetration of criminal action consisting on: Using the funds improperly and not for the destination agreed upon on a property development contract.

8 Years Imprisonment for Misappropriation, Swindle and Embezzlement of Funds

Supreme Court ruling of the 22-10-2008: In this case the developer was in the process of obtaining ownership of a plot of land by means of a swap contract, and whilst this was being processed, he started an aggressive campaign of promotion, as a result of which numerous people that wanted to acquire a property contacted the developer, agreed on the terms of a private purchase contract and paid an upfront sum. It is highlighted that these sums were not paid into a special account opened with the bank nor was an insurance policy issued to protect these down payments (in this instance, the developer argued that he could not get a mortgage for the plot in favour of the guarantor, and therefore the statutory obligation to insure third parties’ funds was not fulfilled).

The court found, when sentencing, that the developer did not pay the funds into the special account he was obliged to, in lieu of the 57/1968 Act, and used these funds to pay architects fees, construction costs, license fees, but also salaries and commissions, publicity and promotional issues which were NOT directly related to the construction and which should have been paid by his own pocket. As the developer could not finalize the construction he is deemed to have misappropriated the funds.

In this ruling, the sentencing court establishes that of the funds received (approximately €2 million), 36% have been used for the purpose of buying the plot and the construction whilst 46% have been used for, fundamentally, promotional costs.

One Year Imprisonment for Misappropriation  Reduced  After Refund

Supreme Court ruling of the 27-11-1998: This is probable one of the most relevant ruling in that, not offering the buyers bank guarantees nor insurance policies is deemed as a pivotal evidentiary element within the misappropriation, since the developer had received not only funds from buyers but also funds from the bank, all of which exceeded notoriously the cost of the construction, and therefore misappropriation is likely to have occurred.

In this instance the Supreme Court rules that it is notorious that the developers loan drawdowns were guaranteed by a mortgage, and therefore the pecuniary damage to the individual buyers is complete since not only they receive a property, nor can they seize the assets (since it is already mortgaged), nor is there an obligatory bank guarantee offered to protect the buyers, as the law prescribes.

The court determines that where a developer decides to start a project and received funds upfront, it is not mandatory for these to be blocked in a special account. However, it is essential that these funds are used, exclusively, for the use they were intended to, with the required proof of such use, all the while being protected by a bank guarantee. If this does not happen, the court determines that IF a definitive refusal to refund down payments where the property is not finished occurs, in detriment of the buyers, and NO bank guarantees are available to protect these, such omission to protect the buyers allows the court to conclude that the funds were used with a clear intention of not refunding these, in in a definite manner, and therefore intent to defraud encompasses not providing the said guarantees.

The court concludes that the title by which the funds were received includes an obligation to refund, by normative imposition, in the event that the works do not reach a satisfactory conclusion, and therefore deems illicit the use of the funds without ensuring that these are insured or guaranteed.

Litigation, Property, Scams , , , , ,

Ever Heard of ‘The Danske Bank Kick in the Bollocks’?

December 14th, 2010

This is the question I was asked the other day by one of my clients who was about to show me the letter he had just received from his lender, the Danske Bank.

I am appealing to your empathy, and, to that extent, I want you to sit back and think, think how would you feel if after a life of hard work, when you were about to reap the deserved enjoyments of retirement and you had invested all your savings to purchase a hilltop beautiful villa on the Costa del Sol, the following happened (chronologically):

  • You landed in Spain having sold your property in the country where you lived the last 60 years, cashed your pension and emptied your local bank accounts.
  • You bought your retirement home with your life time savings, mortgage free.
  • One sunny Saturday, one bloke, who happened to be a friend of a friend, turned up for lunch with a grin the size of a half-moon.
  • After a few glasses of wine and after listening patiently to a rather boring recount of what you think is a vivid lifetime of experiences (might be for you, not for your new friend), this bloke, who you now think is a new friend, reacting with apparent anguish suddenly interrupts you to enquire whether your children are sufficiently protected against Spanish Inheritance Tax, which he conveniently sells as a happiness killer.
  • Since by now, owing to the sun and the wine, you trust him, you open your ears and eyes as he explains that you are in serious danger of ruining your future, and that of your children.
  • Avid to learn more, you enquire, and because he is in a hurry, he suddenly and quickly offers you a miraculous financial instrument to ensure that not only your unencumbered home is protected but also, you will have a monthly payment for life.
  • By now you are well sober, listening to the wonder product that will protect your family plus give you some pocket money. Your friend tells you that he works for Danske Bank and that he can help.


A few years down the line

  • Your friend has disappeared, your property has an embargo on it, Danske Bank is asking you to return €850,000 which you never saw and then you receive, by post, the following letter (click to open in PDF):

  • Difficult as it is, you manage to read the letter, and you understand what it implies: your own bank, Danske Bank, without you ever writing to them, and who was entrusted with looking after, investing and providing a return on €1,030,000 (and which they managed to reduce by €850,000 thanks to cautious investing), which they extracted from your home on false pretences has the gall, in spite of it all, to let you know that you happen to have instructed them to debit your  (blocked) account with €23,703, in cover of “LEGAL COSTS” in favour of their own lawyers’ account in Spain so that these lawyers can…errr, sue YOU and repossess YOUR home, after having efficiently lost your life time savings in some volatile very-high-risk Luxembourg bond that was sold to you as cautious.

You have now discovered what the “Danske Bank Kick in the Bollocks” is all about!

Litigation, Mortgages, Property , , , ,

Spanish Inheritance Tax Don’ts #2: Seeking Exemption by Incorporation of UK Companies

December 8th, 2010

Spanish Inheritance Tax, and the ways to avoid it, is a very much debated legal matter and opinions vary enormously, depending on who you ask and particularly, what the people you ask do for a living.

Lately, a few companies have started to offer a “miracle” service, according to which, by incorporating a UK-based company and transferring the property into it, you can avoid not only Spanish Inheritance Tax, but also, if you so wish, Capital Gains Tax (in case you sell) and transfer tax (for the buyer of the shares). Interestingly, Mr. and Mrs. Hore, currently being charged by the Prosecutor with tax fraud (in Spanish), together with their ex-lawyer (already convicted on a separate case as jointly liable), did exactly the same, albeit with offshore entities, and are facing between 15 and 20 years imprisonment.

The company more actively operating this scheme, which boasts having invested over a hundred thousand pounds on an online bespoke Case Management System (the word “bespoke”, associated to a service or product, generally makes me shiver), is aggressively promoting a campaign, with the legal endorsement of some lawyers, to persuade property owners to forget everything they have been told or read in relation to the matter and dive into untested waters. That is, dive into what the Spanish Tax Office Tax-Fraud Prevention Plan considers as fiscal engineering, abusive tax-planning or anomalous business arrangements (point 2.1.h of the Plan), in particular in respect to organizations that are called “company nests”, whose only purpose is to incorporate and sell companies that are then used to conceal property (point 9.1.5. of the Plan).

Unfortunately, these types of all-encapsulating tax-avoidance schemes not always have the desired effect (equity release turned total investment fiascos), but in fact occasionally end up having totally undesired consequences for both the promoters and the beneficiaries (which include prison sentences).

So what we are now being told, by the company Wincham Investments primarily, is that, by incorporating a UK Limited Liability Company, one is exempt from having to pay IHT altogether, when one inherits. This statement, which I find mistaken (for the reasons I explain), is a result of prior misconceptions the “conceiver” of the scheme abounds with. Excerpted from their sales literature, these can be summarised as follows:

  • Wincham Investments claims: owners do not understand that their Heirs and their Estate will pay IHT in two jurisdictions…it therefore should not be assumed that one tax can be offset against the other as they are both totally different taxes on totally different entities.  I claim:  Article 47 of Rd 1629/1991 (Inheritance and Gift Tax Royal Decree) stipulates that a resident tax payer will have the right to deduct, from the final tax due, the sum paid on an equivalent tax, abroad. Non-residents are not allowed to follow this procedure, as they should claim this in the jurisdiction where they are residents. Wincham also talks about double taxation agreements, but it does not clearly mention that there is no such agreement in place between Spain and the UK (in fact, Spain has only signed 3 of such agreements, with France, Greece and Sweden). But if we investigate further, we find that HM Revenue and Customs stipulates that unilateral relief is applicable where no double taxation agreements are in place, which means that the UK will give credit to the amount of tax paid in Spain.
  • Wincham claims: under EU Treaties a UK Company is only taxed in one jurisdiction, the UK. I claim: Yes, probably, unless that company has been incorporated solely with the intention of holding Spanish property, and I base my opinion on the following:
    1. Law does not support the abuse or the anti-social use of it (Article 7 of the Spanish Civil Code).This old and basic, yet crucial, legal precept is being invoked by the Spanish Prosecutor in large fraud cases involving offshore companies, and Judges are upholding it, where they are used to evade payment of taxes.
    2. Resident tax payers will be obligated to pay taxes on goods and rights received by way of inheritance or gift, wherever these are situated. This would include foreign companies (Article 17 of Rd 1629/1991 Inheritance and Gift Tax Royal Decree). In addition, Article 18 stipulates that anyone not included in article 17 will have to pay taxes on goods and rights, of any nature, that were situated, were susceptible of being exercised or should be carried out in Spanish territory. Article 17.2 specifically stipulates that the following will be deemed as situated in Spanish territory: Real Estate.
    3. Capital Gain Taxes obtained, directly or indirectly, from property situated in Spain, will be taxed in Spain (Non-Resident Act 5/2004). In particular, the following gains are included: when they are originated or derived from rights or shares of a company, resident or not, whose 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 enjoyment of Spain. By extension, we can easily conclude that property changing hands via a UK Company would be taxed in Spain, and not abroad, unless the Spanish legislators envisaged 2 different tax treatments for what is essentially the same thing, transferring property through transfer of shares.
    4. Liability of the people involved with companies deemed fraudulent by the Tax Office. (article 43 of the Ley 58/2003 General Tributaria): Point g) refers to the liability of persons or entities that have the effective control, total or partial, direct or indirect, of the juridical persons (companies) or in which there is a shared or joint decision making process, when it is verified that the juridical persons have been created or utilized in an abusive or fraudulent manner with the purpose of eluding the patrimonial universal responsibility in respect of the Tax Office, and there is a uniqueness of people and economical or financial spheres, or confusion or diversion of assets. Point h) refers to the liability of the persons and entities of which the tax  payer is in control of, partially or totally, directly or indirectly, for the tax obligations of the taxpayer, when it is verified that the juridical persons have been created or utilized in an abusive or fraudulent manner with the purpose of eluding the patrimonial universal responsibility in respect of the Tax Office, and there is a uniqueness of people and economical or financial spheres, or confusion or diversion of assets Although both scenarios seem similar they are quite distinct since one refers to the people in charge of the companies that are used to defraud, and the other the companies that are under the control of the defrauding taxpayer.Note that these 2 points have been enacted, and added to the previous law, by virtue of the more recent 2006 Act on Prevention of Tax Fraud (Ley 36/2006, de 29 de noviembre, de medidas para la prevención del fraude fiscal). All of which sounds too symptomatic of a specific intent to curtail tax evasion by using companies.
    5. Using companies for a purpose other than trading. There is abundant Supreme Court case law, but, in essence and for the sake of brevity, what the Supreme Court is against is the utilization of companies for the purpose of achieving a result distinct from the normal and genuine purpose of incorporating one, which is to trade. There are references to the fraudulent use and abuse of companies in many instances, the artificial creation of juridical entities or the mere appearance to obtain a result contrary to law, fictitious entity, inconsistency of juridical person, instrumentation, mere formal juridical personality, confusion of personalities, substantial confusion and identity etc. If we put our Joe Bloggs hat on, what would we think if one someone transferred his property into a company and next day sold it? Indeed, it would strike us as rather hanky-panky.
  • Wincham claims: Whilst the Statue of Limitations on Taxation in Spain is 4 years this would not be relevant if the Spanish Government could subsequently prove a fraudulent non-disclosure had taken place. There is no such Statute of Limitations for fraud, and therefore, there is a very real risk the Spanish Authorities would claim that there was deliberate criminal withholding of information and thereby enforce the Tax retrospectively. Misuse the Statute of Limitations in this manner is a criminal act and highly dangerous method of Tax evasion – not to be advised! …Whilst this is possible and we have seen Probate cases where the Taxes have been evaded in Spain by employing this method
    I claim:Christ, what a load of mumbo-jumbo!

    1. Firstly, the Statute of Limitations on Tax is so protected that, according to Spanish Supreme Court case law (STS 12 November 1998), the recognition and enforcement of the “prescripcion“, as it is called in Spain, is an obligation of the Spanish authorities that cannot even be waived by payment of the tax, after the period has elapsed (not that anyone would want to, but it has happened, by mistake!). The above Court ruling says that once you win the “prescripcion” the authorities will have to accept it “ex officio“, that is, as an official obligation. This applies whether you owed them 10 Euros or 10 million Euros, even if they missed you by 1 day…(that is, 4 years and 1 day counting from the last day to voluntarily pay the tax).
    2. Secondly, they claim that one is committing a fraud if you utilize the Statute of Limitations: well, this is exactly what it was meant for as, otherwise, why enact this law? But for the sake of argument, if we assumed the contrary, how can you commit a fraud if you have not formally accepted the inheritance? In other words, how can you ever be liable for payment of taxes on something you have never accepted as being yours, even if someone wants you to be an inheritor by naming you on a will?
    3. Thirdly, they have invented a new type of fraud, the fraud of non-disclosure, according to which not telling the tax office that you may be interested in inheriting would amount to a deliberate criminal withholding of information as a result of which they would enforce the Tax retrospectively. This extraordinary concept must have been coined by their bespoke Case Management System, unless it is a typing error by the RTN paper printers, or so I would like to think. Some serious clarification required her, please.
    4. Fourthly, although the word “fraud” is clear, it can be confusing: under Spanish law, not paying taxes would either be described as a fiscal infraction (minor, serious or very serious) for tax frauds under €120,000 per fiscal year, or tax crime, if it is over € 120,000 per fiscal year. In the latter case, the statute of limitations is  5 years, provided you have been caught within the 4 years mentioned above (as otherwise there would not be a valid base for a claim, according to Supreme Court case law /STS 10 October 2001).
  • Wincham claims (connected to the previous point):  Every year the registered owner of the property has to submit annual Tax Declarations to the Spanish Government, this is very difficult for a deceased person to do and we are aware that the Tax office is looking closely at properties and levying hefty fines where annual tax submissions have not been submitted. I claim: Yes, paying taxes after you have answered your last call is huge task, surely! The above silly statement intends to hide the known fact that non-resident income tax is probably the less important and least interesting tax for the Spanish Tax Office (particularly in terms of the revenue it brings), so much so that they only attempt to collect it when you decide to sell your property. We submit thousands of declarations every year, and do it electronically, in batches, without knowing if the property owners have or have not paid the tax previously (unless we have helped them), are living in Spain, abroad, or are indeed still alive. All we get from the tax payers is a transfer with an instruction to pay the tax. Not once has the tax office enquired about any of the tax declarations we have submitted on behalf of our clients, they just cannot possibly monitor each calculation. So yes, anyone can pay it, not a problem. Full stop.

In summary, in the opinion of this blogger, using a UK company incorporated purposely is not a real, valid or legitimate vehicle to circumvent the obligation to pay Inheritance Tax in Spain, unless of course, as it generally happens, the Tax Office does not find out of the death of the owners of the shares, in tax-time, and therefore the maligned 4 year Statute of Limitation kicks in, after all!

And, if in doubt about what is written above, you can always get it from the horse’s mouth, which is the Non-residents’ Inheritance Tax Office.

Uncategorized , , , , , ,