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17/01

Tax increase represents an opportunity for tax-compliant bonds in Spain

On 1 January 2012, the Spanish personal income tax regime was temporarily modified resulting in a rise in income tax for 2012 and 2013. This increase, however, will have little or no impact on tax-compliant bonds sold in Spain if they are not encashed until 2014 – according to Skandia International. This is in contrast to non tax-compliant bonds which are required to withhold tax each year.

17 January 2012

On 1 January 2012, the Spanish personal income tax regime was temporarily modified resulting in a rise in income tax for 2012 and 2013. This increase, however, will have little or no impact on tax-compliant bonds sold in Spain if they are not encashed until 2014 – according to Skandia International. This is in contrast to non tax-compliant bonds which are required to withhold tax each year.

Following these changes, from 1 January 2012 until the end of 2013 gains on tax-compliant offshore bonds will be taxed at a flat rate of 21% (as opposed to the normal rate of 19%) which is automatically withheld by compliant product providers. There will be no further personal income tax liability for the policyholder if the gains amount to less than €6000 savings income in a tax year; this includes interest earned on savings accounts and dividends received in the same tax year. A further 4% personal income tax liability will need to be accounted for by the policyholder on the next €18,000 savings income and a further 6% if the overall savings income for that tax year is above €24000. If the policy suffers a loss over the tax period, the loss can be offset against other income tax liabilities.

Whilst the increase in taxes will apply to all offshore bonds, tax-compliant policies will be affected to a lesser degree if the surrender of the policy is deferred to 2014 – as it only becomes subject to tax in the year in which policy proceeds are paid out.

This is in contrast to non tax-complaint, or ‘foreign’ policies, which are required to withhold tax every year and so will be further affected by the increase during the next two years. Additionally, in instances where the provider of a non compliant policy fails to withhold tax correctly and in a timely manner, policyholders may become subject to penalties for non-reporting, and these can range from 50-150% of the tax due.

There are generally 3 types of tax-compliant policies available in Spain: with profit policies, policies where the insurer restricts the assets available to EU domiciled UCITs (excluding bank deposits) and policies where the insurer restricts the assets available to internal funds (including cash funds). If a policy does not meet one of these requirements then it is likely to be a non tax compliant policy.

However, non tax-compliant policies have their merits, as such policies can offer other features which can make them attractive to certain types of investors – for example, access to a wider investment universe of assets and the ability offset losses on an annual basis.

It is, however, important that clients understand what type of policy they hold in order to satisfy the Spanish tax authorities’ rules and account for the correct tax liability.

Rachael GriffinRachael Griffin, Head of Product Law and Commercial Development at Skandia International, comments:

"In today’s world, the choices available to investors can be overwhelming. It is crucial that they understand the implications of choosing the right product in order to utilise the available tax advantages to the full.

"For example, tax-compliant bonds reduce the burden of reporting on individuals classed as tax-resident in Spain and can be affected by changes in tax regimes to a lesser degree than non tax-complaint alternatives. The recent changes introduced on 1st January 2012 illustrate these advantages perfectly."

This press release is for journalists only and should not be relied upon by financial advisers or customers.