Particularly in times of economic uncertainty, when relocating abroad is increasingly used as a tax planning strategy, one question remains: How can a country protect its tax base against the emigration of taxpayers, and to what extent are such mechanisms legally permissible? Spanish exit taxation, also referred to as the exit tax, was introduced by Law 26/2014 of 27 November 2014 as part of the reform of the Spanish Personal Income Tax Act through Article 95 bis of the Personal Income Tax Act (LIRPF). Its purpose is to prevent tax avoidance resulting from the transfer of tax residence abroad.

This article provides an overview of the main features of Spanish exit taxation, its scope of application and the conditions under which it applies.

What Is Exit Taxation and Why Was It Introduced?

Exit taxation is a statutory mechanism that allows the Spanish tax authorities to tax the unrealised increase in value of shareholdings through Spanish Personal Income Tax (IRPF) when an individual who is tax resident in Spain transfers his or her tax residence abroad. It is therefore not a separate tax, but rather a specific taxable event within the Spanish Personal Income Tax system.

When an individual moves to another country, the right to tax future capital gains will generally pass to the new country of tax residence. In cases involving substantial financial assets, this may result in a significant loss of tax revenue for Spain. If the shares are sold after the taxpayer has become resident in another jurisdiction, Spain may lose its right to tax the capital gain generated during the period of Spanish tax residence. Without such legislation, taxpayers who have accumulated substantial wealth in Spain could defer the realisation of their gains until after relocating to a country offering a more favourable tax regime. Exit taxation ensures that Spain preserves its taxing rights over those gains.

The exit tax legislation of several EU Member States has, in recent years, been annulled or restricted by judgments of the Court of Justice of the European Union (CJEU), as in many cases such rules were considered incompatible with the fundamental EU principle of the free movement of persons.

Scope of Application: Who Is Affected?

Spanish exit taxation applies to individuals who meet both the subjective and objective requirements set out below:

Subjective requirements:

a) You transfer your tax residence abroad.

AND

b) You have been tax resident in Spain for at least ten of the previous fifteen tax years (where the Beckham Law has applied, the ten-year period begins with the first tax year in which the regime ceased to apply).

Objective requirements:

a) The aggregate market value of your shares or participations exceeds €4,000,000.

OR

b) The market value of your shares or participations in a single company exceeds €1,000,000 and your ownership interest in that company exceeds 25%.

How Is the Tax Calculated?

The tax is levied on the difference between the market value of the shares or participations at the time of departure and their acquisition cost. Since no actual transfer takes place and the tax is based on a deemed capital gain, the tax value of the shares must be used where no market value is available. This deemed capital gain is allocated to the taxpayer's final tax period as a Spanish tax resident.

 

Special Rules and Exceptions within the European Union

Even where the above requirements are met and exit tax becomes payable, the taxpayer may, under certain circumstances, apply for a refund or an unlimited deferral of the tax:

1. Return Clause: If the taxpayer returns to Spain within five years after relocating abroad, any exit tax already paid may be refunded by filing an application for the correction of the relevant tax return, provided that the shares or participations have not been sold (Article 95 bis LIRPF).

2. Deferral of the Tax: Where the taxpayer relocates to another EU or EEA Member State that provides for an effective exchange of tax information, or temporarily relocates abroad for employment purposes to a country that is not considered a tax haven, payment of the exit tax may be deferred (Article 95 bis LIRPF in conjunction with Article 123 of the Personal Income Tax Regulations – RIRPF).

However, the deferral may cease if, within ten years following the relocation:

a) the shares or participations are sold;

b) the taxpayer transfers his or her tax residence to a country outside the European Union or the European Economic Area; or

c) the reporting obligations imposed by the Spanish Tax Agency (AEAT) are not complied with.

Note on German Exit Taxation

It should be noted that the conditions for the application of exit taxation in Germany differ from those applicable under Spanish law. In Germany, exit taxation may already apply where an individual holds at least a 1% interest in a corporation and transfers his or her tax residence abroad. The deferral rules also differ significantly between the two jurisdictions.

Conclusion

Spanish exit taxation is a mechanism designed to safeguard Spain's tax revenues and prevent tax avoidance. It applies to individuals who, after having been tax resident in Spain for many years, transfer their tax residence abroad and thereby cease to be subject to Spanish taxation as residents.

The legislation ensures that increases in value generated during the period of Spanish tax residence are appropriately taxed before the taxpayer relocates abroad. Owing to the possibility of obtaining a deferral when relocating to another EU Member State, the Spanish exit tax regime is, unlike the German rules, generally considered to be compatible with European Union law.

Individuals who are tax resident in Spain and intend to relocate abroad should familiarise themselves with the applicable exit tax rules and their potential tax consequences well in advance. A thorough understanding of the relevant requirements and their implications can help avoid unexpected tax liabilities and facilitate effective tax planning before the change of residence.

Our law firm will be pleased to analyse your individual circumstances, carry out the necessary administrative procedures on your behalf and assist you with the preparation and filing of the relevant tax returns. Should you require further information or have any questions regarding this subject, please do not hesitate to contact us by email or telephone.

Author:

Rike Füllgraf
Tax Advisor
info@sspartners.es
Tel: (+34) 951 12 13 06
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