Antonio Flores’ Blog

Less than a week has passed since we learnt that Emilio Cuatrecasas, owner of the largest fiscal advisory firm in Spain, just hired former Deputy Prime Minister Soraya Saenz de Santa María. In 2015, Mr. Cuatrecasas pleaded guilty to 8 counts of tax fraud in exchange for a rather lenient 2-year suspended imprisonment -suspended- conviction agreed with both the Prosecutor and the State Lawyer, the latter working on direct instructions of Mrs. Saenz de Santa María, when the PP party was in power.

What’s interesting of this case -besides the fairly obvious connection between Mr. Cuatrecasas’ favourable Court ruling and the hiring of the instigator of such advantageous outcome- is the nature of the tax fraud: deducting personal outlays as company expenses. In this case, it was done in a grand scale where, for example, servants hired for his personal residences or his privately used yacht, electrical appliances, decoration and generally, maintenance of his personal assets, were all introduced in the company balance sheet as deductible expenses. In the end, Mr. Cuatrecasas had to pay over 3 mm Euros plus 1 mm Euro in interest to avoid doing jail time.

Spain is no different from any other country when it comes to tax deductible expenses. But what are they? Broadly speaking, they are those deemed helpful and appropriate for a business, as well as necessary and reasonable. More specifically, this what the law says:

Deductible expenses: employes salaries and social security, rentals (office or part of a home used to work from) and associated expenses, equipment and supplies, repair and maintenance, stationery, external advisors, VAT (where it is not claimed) and uniforms not susceptible of private use, to name a few. Vehicles not exclusively used for business purposes will be deductible on prorate, with a maximum of 50% (save for cargo, transport and similarly used vehicles which will be 100%). Travel expenses, meals (maximum of 1% of turnover) or Christmas presents can be deducted if they are associated with business and this can be proven when required.

Non-deductible expenses: Director’s salaries, dividends, fines, services provided by providers based in a tax haven, guard dogs, clothes (including lawyer’s suits), parfums, beauty treatments, sunglasses or mobile phones (where it is no possible to show that they are exclusively used for a business purpose), weddings, weekly “Mercadona” personal shopping and many other non-expenses habitually picked up by tax inspectors.

Finally, deductible expenses must be provable by means of regular or simplified invoices, as mere receipts will not be valid.

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Following the publication of what appears to be a massive 11.5 million leaked documents from a Panama law firm, Mossack Fonseca, this small Central American territory will no longer be remembered for its Canal or the country that the U.S. invaded in 1989.

It must be said, for the record, that in most modern jurisdictions it is not illegal to either have an offshore bank account, an offshore company or both. What is against the law is to be a resident of a [tax-wise] ‘normal’ country and have money, interests, shares or any other valuables hidden from the country where one pays taxes regularly; in an offshore jurisdiction or under the mattress.

Only in Spain, according to the 2015 Tax Control Plan by the AEAT (Spanish Tax Office), 7,000 taxpayers are already in the investigation stage on whom the Tax Agency has indications that either they had to present form 720 and did not do so or they did not declare their foreign assets correctly. With the Panama Papers scandal, this number will certainly double.

As far as Spain is concerned, it is interesting to note that offshore companies do provide a very significant degree of anonymity. In fact, offenders have generally been caught by tip-offs, police raids on law firms on occasion of fraud investigations or massive document leaks -such as the Panama Papers-. Unfortunately for many those caught, tax evasion came tied in with money laundering since these are connected crimes.

Offshore fans or nostalgics of appealing names such as Belize, Cayman or Seychelles need to once and for all accept that fiscal or planning has nothing to do with fictitious residencies and other forms of concealment.

One can have millions stashed away via a Turks and Caicos company, a boat in the name of a Madeira-registered entity and the villa via a Gibraltar offshore vehicle, provided they are properly declared in the country of residency. And there is no tailored or ‘bespoke’ tax advice or planning that will substitute this obligation.

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Spanish Governments are not celebrated for bringing clarity to the matter of inheritance taxes (IHT), whether on a domestic level –there are 17 different IHT tax regimes within the country- or internationally, in the very relevant cross-border investment context.   

Notably, Spain has only signed agreements to avoid IHT double taxation with Sweden (1963), France (1963) and Greece (1920), rather bizarrely. If you think about it, a country that is trying all sorts to lure foreign investment, yet fails to specifically address the IHT situation of an investor from Britain (by and large the largest exporter of property buyers to Spain!), is a country with massive inefficiencies.

Spain signed its latest Double Taxation Agreement with the United Kingdom on the 14^th of March 2013, entering into force in June of 2014.

As far as Spain is concerned, the treaty is meant to cover the following:

income tax on individuals; (ii) the corporation tax; (iii) the income tax on non-residents; (iv) the capital tax; and (v) local taxes on income and on capital;

Yep, no trace of inheritance taxes, as if the thousands of British investors in Spanish property were immortal or this was a point of (tax) law that nobody ever asks or worries about. Paradoxical and incomprehensible.

Still, however, national laws in each country provide the solution:

In Spain, a rather unknown binding resolution of the Spanish Directorate for Taxes, with number V0148-08, applies the 1987 Spanish Tax Act to address the a scenario of double taxation of a Spanish resident who inherits from a UK resident (where the estate is taxed). In this case, the resolution establishes that any taxes paid in the UK will be deducted off the taxes to be paid in Spain (if those UK assets are at all declared in Spain!).

What if it was the other way round i.e. a UK domicile inheriting a Spanish property? In this instance, as Spanish taxes will be paid on local assets, according to the site https://www.gov.uk/inheritance-tax-double-taxation-relief, HMRC gives credit against Inheritance Tax for the tax charged by another country on assets sited in that country. Interestingly, the web page cites an example of Spanish-based property and the “relevant double taxation convention”…when there isn’t one!

So whilst there is an understanding as to where and how will IHT be paid where assets of Spanish/UK residents are involved, surely it cannot be too difficult to sign up a treaty on the matter for complete clarity, just as the wholly superfluous 1920 Double Taxation Agreement with Greece does.

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The above proverb often implies that details might cause failure, and failure is what occurred to the three real test-cases (below) who thought that, by having a tax-residence-of-convenience status (Andorra and Switzerland) and spending a short time there, they would be shielded from the action of the AEAT (Spanish Tax Office).

TEST CASE 1: A self-defined Swiss tax resident lost an interesting case brought by the Spanish Tax Office who deemed him a resident of Spain. The tax payer had argued that, according to the DTA (Double Taxation Agreement) Spain-Switzerland, he could be classed as a resident of both country. Indeed, the man had properties in Switzerland and Spain, and had one daughter in each country; according to the Spanish Supreme Court, these facts alone would not conclusively establish where his connections were stronger. The devil in this case was he had signed up to the Spanish Automobile Club as well as Maritime Clubs in Ibiza and Marbella, without analogous memberships in Switzerland (attempts to convince the Taxman that there was no sea in this country were to no avail…).

TEST CASE 2: A Spanish Andorra-based taxpayer could not successfully argue against the evidence that was stacked up against him, notwithstanding his marriage to an Andorra citizen. The AEAT challenged his status by arguing that he had a company in Barcelona, his apartments in Spain were being regularly used (utilities were up and running), yet there was no proof of rental activity, he had a daily subscription to a local paper and had hired domestic employees. In upholding the Tax Office’s case, the Catalonia Supreme Court (1254/2013) deemed a tax residency certificate from the Andorran authorities not relevant.

TEST CASE 3: Similar to the above case, the Spanish Tax Office successfully proved that the Andorra resident was in fact in Barcelona-based because his medical insurance broker was based in the city and, more conclusively, a local hospital had reported frequent visits inconsistent with living in Andorra.

On a next issue, we will discuss those who were able to successfully challenge the AEAT who, we should not forget, has no influence over a Court decision (contrary to popular belief).

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Transfer Tax in Spain, and more specifically in Andalucia, has been consistently raised in the last years. Up until the 31^st of December 2011, Transfer Tax on resale property was capped at 7% (6% some years before) but, as if the worldwide housing slump had not reached this region, the Socialist Government chose to increase it to 8%, 9% and 10%, applied on purchase price segments of 0-€400k, €400k-€700k and €700k  and above, respectively.

Madrid, on the contrary, thought that it was wiser to bringing it down by 1%, from 7 to 6 (a little incentive to make up for lack of good weather it seems).

But going back to Andalucia, not all transactions are taxed at rates close to double digits: property professionals that buy resale property and sell it within 5 years can benefit from a reduced 2% rate. 

So what are the requirements that have to be met?

• That the property is for living accommodation purposes (commercial and land are excluded).
• That the unit(s) remain(s) registered in the same form (i.e. buying a plot with a derelict property to rebuild and divide up into several units will not qualify).
• That the property is sold within 5 years from purchase, and the sale is not VAT subject (selling with VAT will occur when a property professional rebuilds, adding value, and sells choosing to add VAT on).
• That the property professional is registered with the Tax Office with one of the following codes: 833, 833.2, 861 and 861.1.
• When completing the purchase transaction at the Notary, that the buyer officially confirms that he is a property professional and the asset will be categorized as a “current asset” (i.e. reasonably expected to sold, consumed or exhausted through the normal operations of business), that he wishes to avail of the tax reduction and that he intends to sell within 5 years.

Does this scheme make sense financially?

Three points to be considered when opting to go down this route:

1. The pretty stiff closing costs in Spain if you add buying and selling costs: these can reach 20% if one factors in Transfer Taxes, Legal Costs, Real Estate Agency Fees and Capital Gains Tax (full cycle). By taking up this option, anything between 6% and 8% can be saved.
2. The “running costs” of being a property professional: by registering with the Tax Office, and Social Security, one has fixed minimum costs of €280/ month plus €50/month in legal/accountancy fees -the lowest the market has to offer-, roughly €4,000 p.a. (if we times it by 5 years, that’s €20,000).
3. The “Five Year Rule for Buying a House”, if you believe what is said in this article.

And what happens if one “misses” the deadline?

According to this 2012 ruling, the unpaid Transfer Tax, plus annual interest on late payment (5% for 2014), will have to be paid to the Tax Office.

What about if buying with a mortgage loan?

All cases we have dealt with where cash buys but would be skeptical about getting banks to lend under this scheme, given the risks associated with the buyer not meeting the criteria.

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Spanish IHT is once again a matter for controversy: according to El Pais newspaper, the number of people who have given up their inheritance has gone up by 21% since last year. And there is only one reason cited for this increase: the inability of many potential inheritors to pay a tax bill unless they first inherit and sell the asset in question, generally a property, in a very challenging market.

Unfortunately for many, Spanish IHT and ways to avoid it has been used relentlessly by unscrupulous operators to sell new schemes that promised this tax would no longer be a problem; the Spanish Equity Release comes to mind just now but also, more recently, the bogus scheme where one transfers their property into a UK limited company so that, on death, the Spanish property is inherited in the UK -in a roundabout way- via the inheritance of the shares of the company.

The Spanish Tax Office closed the Equity Release tax avoidance scheme last year, when it was tagged as tax fraud. And more recently, it has also dealt with the scheme that offers UK companies to circumvent Spanish IHT (Tax Binding Consultation 07383-13) pretty much in the same way, by declaring the following:

In relation to the tax scheme consisting in legally transferring a property to a UK company, with the sole purpose of avoiding IHT in Spain through relocation of the taxation of the shares of the said company to the UK, there cannot be a favourable response by this Tax Department in relation to the lawfulness of the scheme. Only via the appropriate inspection procedures will the Tax Office be able to establish whether it conforms to the law or, as the case may be, infringe it in which case, the Tax Office will be able to regularize the anomaly by initiating the required procedures to combat tax fraud.

These conclusions are hardly consistent with a public promotion of a service whereby if you place your property in a UK company, IHT can be legally avoided. In fact, the official opinion on the matter embeds a message of warning: if you use this scheme to mitigate IHT, you will have clearly crossed the line separating lawful tax avoidance and illegal tax evasion.

Antonio Flores Tax Law

Providing sophisticated tax advice has become a risky business, according to the latest spate of incidents relating to tax advisors who have crossed, in the view of the Spanish Courts and authorities, the fine line between tax avoidance and tax evasion.

Last week, the Audiencia Nacional stated that Garrigues, the number one firm in Spain by turnover, has helped a number of CAM bank former directors cheat the Spanish “Hacienda”. The statement can deemed as being bold but then again, how else can you define the advice given to bent bank directors who were accused, and arrested shortly after, of setting up offshore companies in the Dutch Antilles to channel loans granted to themselves that were later syphoned off to these tax havens?

Last month, also the Madrid-based Audiencia Nacional held that Demetrio Carceller, a prominent businessman, has hidden the full extent of his income and wealth “since at least 1990” through a complex scheme, with companies in the Antilles, Panama and Madeira, in which he claimed alternatively to be resident in Portugal and Britain when it appears, lived in a Madrid penthouse, “avoiding as much as possible socializing in the capital”. The State Prosecutor also accuses his son, a straw man and…his lawyer of devising a tax defrauding arrangement, which included commercial centers in Arizona, and will be asking for 14 years imprisonment for each.

And also in Madrid the State Prosecutor, arguing a case against a lawyer accused of devising an illegal tax avoidance scheme, stated that the creation of an onshore (Spanish S.L.)/offshore (Delaware Co.) corporate structure to facilitate the transfer of shares (and the property with it) and hinder hypothetical tax inspections, the setting up of fictitious self-tenancy agreements between the company and the true owner and the proven lack of activity of the Spanish company are incriminating factors per se.

In Malaga, 8 businessmen and their lawyers are accused of setting up a “complex” maze of companies based in the Dutch Antilles (again!) to conceal the true owners of the Spain-based assets and the origin of profits received (profits that appears to have been generated from the Hotel Marbella Club). According to the Prosecutor, the accused law firm also advised to register cash contributions for the purpose of buying real estate as “corporate loans”, thereby illegally deducting fictitious interest from profits, to the tune of 2, 2 million Euros, in a not-so sophisticated tax scheme known as “left pocket pays right pocket”!

3 teachings we can derive from the above:

• Offshore companies are 99% of the times used to cheat someone: a Tax Office, a creditor, an ex-spouse or partner or a victim of a swindle. 1% of the times it is used to just conceal the identity of the true owner, as happens with Moroccans who are, in principle (except for the King of course), prohibited from having property abroad.
• The dividing line between tax avoidance and tax evasion is so difficult to pin down that you have to steer well away from the line.
• No lawyer or tax advisor, no matter how reputable or famous, should suggest or recommend you even get close to that line…

The Spanish Supreme Court, summarizing its stance in this matter, held the following

in conclusion, in the criminal sphere, fraudulent tax engineering has to be repressed when those activities are themselves deemed criminal, irrespective of the formalities used to carry them out.

Antonio Flores Tax Law Offhshore Companies, Offshore Companies Tax Fraud, Spanish lawyers Tax Advice, SPanish Taxes, Tax Avoidance, Tax Evasion

A renewed attempt by the Spanish Government to lay claim on the rock has meant that a few thousand Gibraltar tax-domiciled that effectively reside in Spain will now be investigated, according to an official press release.

As it generally happens with the Spanish `Hacienda´, a well-phrased announcement is enough to cause disturbance among the Costa del Sol expat floating community some of whom take advantage -in the words of the Spanish Foreign Minister- of the proximity of Gibraltar to set up there for tax purposes and yet live across the border “enjoying social, community and health services in our country without paying a single euro toward the Treasury,” as stated in the release.

Aside from the blatant message that this announcement encapsulates –Gibraltar should be Spanish-, there is some reason for concern as Spain could immediately tighten up conventional border control processes or implement e-passport gates as in the UK, a measure that would provide an enormous flow of information that could be collated to target Gibraltar not-so-residents who spend more than 183 days per tax year in Spain.

What could Spain do?

Spanish tax laws consider that fiscal residency is made up of 2 elements, one being an objective criteria based on permanency (more than 183 days in Spain) and a second rather more `spiritual´: the desire to reside in a particular place. These 2 elements define the concept of residency for tax purposes and numerous Supreme Court rulings back this definition.

If the Spanish Tax Office deems that a particular person is a fiscal resident, it will send him/her letter demanding full disclosure and payment of taxes in Spain on worldwide income and/or initiate an investigation.

How can they find out?

Conventional border controls would certainly be the main way to find out. But also, presumptions can be invoked to deem someone a tax resident: registration with Town Halls (`empadronamiento’), levels of consumption of water and electricity on a given Spanish property, children’s enrolment in Spanish schools, main business activities (directly or indirectly through straw men) or use of medical facilities in this country and generally, any means of legally proving that a person effectively resides in Spain.

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