Law 26/2014, of November 27 on Personal Income Tax (hereinafter, PIT), in force since January 1, 2015, establishes a case of taxation of unrealized capital gains when a taxpayer moves outside Spain, as an instrument to prevent tax evasion and a measure to guarantee tax revenues.
The exit tax established in the PIT taxes the “latent” capital gain generated by the ownership of shares due to a change of residence, even if such gain has not yet materialized as the shares or participations have not yet been transferred.
Furthermore, this tax aims to prevent the loss of tax revenue for the country of origin (Spain) when it comes to financial assets of substantial value, as the relocation of an individual to another country transfers the taxing authority to the latter.
Capital gains and losses are defined in the Spanish Personal Income Tax Law in the following terms: “Article 33. 1. Capital gains and losses are the variations in the value of the taxpayer’s assets that are revealed on the occasion of any alteration in the composition thereof, unless they are classified by this Law as income“.
In this regard, according to Article 95 bis of the PIT Law, individuals who have been tax residents in Spain for at least 10 of the 15 previous tax periods must pay taxes on the unrealized gains of shares they hold in companies if any of the following circumstances occur:
- The market value of the shares they own exceeds 4,000,000 euros.
- The participation in an entity is greater than 25%, and the value of the shares in that entity exceeds 1,000,000 euros.
These fictitious capital gains, calculated by the difference between the market value of the shares and their acquisition value, will have to be included in the taxable base of the personal income tax return for the last tax period of residence in Spain.
However, as stipulated in paragraph 4 of Article 95 bis PIT, it is possible to defer the taxation of the mentioned gains when the relocation is due to work reasons to a country with which Spain has signed a double taxation avoidance agreement containing an information exchange clause or is not considered a tax haven. In these cases, the payment of capital gains can be postponed for 5 years. If the taxpayer acquires tax residency in Spain during the five-year period without having transferred the shares or participations, the tax debt is extinguished.
The aforementioned article also contemplates another speciality of the deferral if the change of residence takes place to another EU Member State, or of the European Economic Area with which there is an effective exchange of tax information. In these cases, the exit tax is only required if within the 10 following years, any of the following circumstances are met:
- That the shares or participations are transferred inter vivos.
- That the taxpayer loses the status of resident in an EU Member State or the European Economic Area.
- That the obligation to communicate the loss of tax residence in Spain is not fulfilled.
In contrast to the special rules applicable to emigrants to Europe, Article 95 bis, paragraph 7, also contains non-optional special rules for emigration to tax havens, provided that the taxpayer does not lose their status under Article 8.2 of the PIT Law (due to the so-called tax quarantine):
- Capital gains will be attributed to the last tax period in which the taxpayer has their habitual residence in Spanish territory, and for their calculation, the market value of the shares or participations on the accrual date of that tax period will be taken into account.
- If the shares or participations are transferred in a tax period in which the taxpayer maintains such status, for the calculation of the capital gain or loss corresponding to the transfer, the market value of the shares or participations that would have been taken into account to determine the capital gain envisaged in this article will be considered.
Conclusion “EXIT TAX”
Consequently, the exit tax is a tax that applies to those taxpayers who lose their tax residence in Spain and have a tacit or unrealized capital gain derived from the ownership of shares in entities.
That said, if you are considering changing your tax residence, especially if you are a significant shareholder, it is important to assess whether you will be subject to the exit tax. Since the exit tax can have complex tax implications, it is advisable to seek the advice of a specialized professional.
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