When someone with a high net worth in Spain considers changing their residence, they face a challenge known as “exit tax” or Exit Tax. This is not a specific tax itself but an additional obligation for taxation in the Personal Income Tax (IRPF).
Established in 2015, this obligation is common in the European Union and aims to distribute the taxation of capital gains derived from shares among member states, based on the principle of territoriality.
For entrepreneurs and individuals with considerable wealth, exit tax becomes a significant obstacle when considering moving out of Spain, whether with the intention of selling assets or not.
This tax is triggered when changing residence to a country that is not part of the European Union or the European Economic Area without agreements on tax information exchange.
Who does Exit Tax affect in Spain?
Fortunately, this tax only affects taxpayers with a significant volume of wealth and does not apply to the majority of residents in Spain.
The legal basis of Exit Tax is found in Article 95 bis of the Spanish Personal Income Tax Law (IRPF). This article states that tacit or unrealized capital gains will be subject to taxation when certain requirements are met:
- Having been a tax resident in Spain for at least ten of the fifteen tax periods preceding the last one declared for the IRPF.
- Ceasing to be a tax resident in Spain.
- Being the holder of:
a) Shares or participations in entities whose market value, as indicated in Article 95 bis 3, exceeds a total of 4,000,000 euros.
b) In case the conditions in point a) are not met on the accrual date of the last tax period declared for this tax, being the holder of shares or participations representing a participation percentage in the entity exceeding 25%, provided that the market value of the shares or participations in said entity, as indicated in Article 95 bis 3, exceeds 1,000,000 euros. In this case, only the IRPF corresponding to the tacit capital gains on the shares or participations mentioned in this letter b) will be required.
As can be seen, this tax seems designed to retain in Spain large fortunes and entrepreneurs rooted in the country who have already been paying significant taxes.
How much is the taxation of Exit Tax?
Exit tax is calculated considering the difference between the market value and the acquisition value of the shares. The percentages applied to this gain can go up to 23%, with prospects of increasing to 27% in future legislatures.
This tax thus becomes a challenge for international investors and high-net-worth individuals choosing to establish their residence in Spain, potentially prompting the premature departure of many of them before reaching 10 years in the country.
How to avoid it?
Avoiding exit tax is not an easy task, and doing so without professional advice can lead to disastrous tax consequences. Some common strategies to minimize this tax include:
- Emigrate to the European Union: Opt to defer the application of exit tax for 10 years by moving to another EU or EEA member state.
- Temporary Relocation: Temporarily change tax residence for work-related reasons, with a maximum of five years.
- Business and Asset Reorganization: Invest in specific assets or carry out prior restructurings to avoid the exit tax threshold.
- Immigrant’s Return: Pay the exit tax and, upon returning to Spain without selling, request the refund of undue income.
Conclusion
Exit Tax is a measure by which the tax authorities seek to secure their share in the “tax pie” when there is a change of tax residence outside of Spain. The Tax Administration aims to tax a hypothetical capital gain that may or may not materialize, considering it as part of its income. This approach, while it may generate debate, goes against the freedom of business and establishment in a competitive and globalized environment. At SUMMIT ADVISORS, in case you decide to change your tax residence to Andorra, we will analyze your situation and assess options to avoid or minimize this tax.