BackIn Spain, “Exit Tax” entails an additional payment for taxpayers with certain assets when changing their tax residence outside the country, linked to the Personal Income Tax (IRPF). This obligation, established in 2015 and common in the European Union, aims to distribute tax authority among member states.
It applies to latent gains for those relocating their tax residence, ensuring the payment of taxes before leaving the country, simulating taxation as if the transfer of assets had already occurred.
The Nuances of Exit Tax in Spain: Exclusions and Specific Conditions
However, it does not apply in a general manner, as this tax only affects taxpayers with a certain level of wealth, excluding many residents in Spain. For a taxpayer to be subject to this tax, certain requirements must be met:
- Have been a tax resident in Spain for at least ten of the last fifteen years.
- In the case of those who have previously opted for the special regime for workers relocated to Spain, the ten-year period will be counted from the first period in which they do not apply this special regime.
- Be owners, as of December 31 of the tax period, of shares or participations whose market value, for income tax purposes, collectively exceeds 4 million euros, or whose percentage of participation in the entity is higher than 25%, provided that the value of the participations in the entity exceeds one million euros.
It is important to note that the special regime applies only to the set of participations that meet these requirements, not to all those owned by the taxpayer, unlike the first threshold.
Deadlines and Options: Exit Tax When Changing Tax Residence in Spain
Income from these sources must be declared in the last tax period in which the taxpayer is a resident in Spain and is required to file an income tax return. The corresponding payment, made through a supplementary declaration, must be made one year after confirming the change of tax residence. If the decision to relocate is made in the second half of 2023, the Exit Tax would be paid in June 2025.
It is important to highlight the option to defer payment when changing residence:
- A period of 5 years in the case of temporary relocation to a territory with which Spain has a double taxation agreement.
- A period of 10 years for relocations for employment reasons, provided that the destination is not a tax haven.
It is advisable to consider applying for a deferral, as retaining portfolios of securities and returning as a tax resident will extinguish the obligation to pay the Exit Tax.
Deferral and Taxation: Strategies against Exit Tax on Securities Portfolios
Securities portfolios affected by the Exit Tax are subject to taxation as transfers, applying the savings scale to the market value minus the acquisition value. The current tax rate in the Personal Income Tax (IRPF) is 26%, and it may increase to 28% in 2023.
Is it possible to temporarily postpone the Exit Tax? Yes, through deferrals. To consider them, the destination is first analyzed:
If the destination is in the European Union:
According to EU treaties, when changing residence to another EU or EEA Member State, the gain can be deferred for up to ten years, provided that the shares are not transferred, and residence is maintained in a Member State.
The obligation to communicate to the tax administration, declare the new residence state and changes, and maintain ownership of the shares must be met.
If these conditions are not met within ten years, a self-assessment of the gain will be required, even if the transfer of the shares occurs after that period.
Work Assignment: Strategy to Mitigate the Tax Impact When Changing Residence in Spain
An additional option for changing tax residence and avoiding the Tax Impact of Change of Residence (Exit Tax) is temporary relocation for employment reasons. Although it involves a deferral rather than an exemption, the taxpayer must notify the relocation and provide guarantees for the eventual payment of the tax debt.
The regulations allow a maximum of five years, with the possibility of extensions, for this work assignment, recognized when carrying out an activity in the destination country, whether as an employee or self-employed. Opting for an employer in the destination country ensures full coverage.
In the case of holding a significant volume of shares or interests, changing tax residence requires careful consideration. In the absence of specific provisions in the double taxation treaty between the country of departure and arrival, the sale of the shares after the change of residence would result in taxation in the destination country, leading to double taxation.
This tax can be a hurdle for foreign investors and high-net-worth individuals looking to establish long-term residency in Spain. Despite its attractions, Spain does not present itself as a tax haven or a fiscally welcoming destination for extended stays.
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