Spanish Lawyer Jailed for Setting up an Offshore Company
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:
- Incorporation of offshore of property holding companies (offshore-based) .
- 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.
- 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.
- 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
while I share your caution on trying to get justice through law 57/58 due to a historic lack of success, surely that points to something else very wrong in the system as a requirement for a BG is the law?. Why are the banks not being taken to task and punished for not providing a BG?.
As Keith’s petition provides a huge amount of evidence to support claims against the banks who haven’t provided a BG, then surely everyone on the right side of justice should be trying to get this ineffective law changed, so that it has a useful purpose!
As you said ‘there is no such thing as a free lunch’ so I would think any petition must be funded by someone at some stage if it’s ever going to have teeth.
Why is this being left for the cheated public to draw up petitions though, when lawyers have had the evidence for years?. I feel it’s about time all decent lawyers in Spain got together and spent a little of their money gained through countless cases of litigation, (mostly taken on due to the lack of regulation and hopeless laws like the BG one we are talking about) on trying to get the laws changed so that common sense regulation and punishment for the crime would go hand in hand. Although this would hugely reduce Spanish lawyers work load,I would think at least some lawyers would prefer to work on genuine cases of injustice, rather than working for most people who are merely victims of lack of regulation followed by the very poor legal/justice system many of us have been cheated by.
I don’t know the answer?, but all the victims of this system need to be heard, not through more expensive and often painfully slow litigation that often leads to nothing, even when cases are won, but through enough people pulling together and shouting loud enough not to ignored any longer by those who can make the changes!!
……..whoops, sorry Antonio.
Please delete my comment above posted on the wrong blog, I have now posted on the right blog!