Capital Gains When a Taxpayer Ceases to Be a Spanish Tax Resident

When a taxpayer ceases to be a Spanish tax resident because of a change of residence, the positive difference between the market value and acquisition value of shares or interests in any entity owned by that taxpayer is treated as a capital gain.

Law 26/2014 of 27 November, which amended Law 35/2006 of 28 November on Personal Income Tax, the revised Non-Resident Income Tax Act approved by Royal Legislative Decree 5/2004 of 5 March, and other tax rules (Official State Gazette of 28 November), introduced a new Article 95 bis into the Personal Income Tax Act, effective from 1 January 2015, entitled “Capital gains arising from a change of residence”. It provides as follows:

When a taxpayer ceases to be a Spanish tax resident because of a change of residence, the positive difference between the market value and acquisition value of shares or interests in any entity owned by that taxpayer is treated as a capital gain, provided that the taxpayer was resident in Spain for at least ten of the fifteen tax periods preceding the last tax period that must be reported under this tax and one of the following circumstances applies:

a) The aggregate market value of the shares or interests referred to in paragraph 3 of this article exceeds €4,000,000.

b) If the condition in point (a) is not met, at the end of the last tax period that must be reported under this tax the taxpayer holds more than 25% of the entity, and the market value of the shares or interests in that entity referred to in paragraph 3 exceeds €1,000,000.

In this case, this article applies only to the capital gains attributable to the shares or interests referred to in point (b).

The capital gains form part of savings income under Article 46(b) of this Act and are attributed to the last tax period that must be reported under this tax, on the terms to be established by regulation. Where applicable, a supplementary return must be filed, without penalties, late-payment interest or surcharges.

The capital gain is calculated using the market value of the shares or interests on the date the last tax period that must be reported under this tax ends, determined under the following rules:

a) Securities admitted to trading on a regulated securities market as defined in Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments, and representing an interest in the equity of companies or entities, are valued at their quoted price.

b) Securities not admitted to trading on any regulated securities market as defined in that Directive, and representing an interest in the equity of companies or entities, are valued, unless a different market value is proven, at the higher of:

The net equity attributable to the securities according to the balance sheet for the last financial year closed before the tax accrual date.

The amount obtained by capitalising at 20% the average results for the three financial years closed before the tax accrual date. For this purpose, profits include distributed dividends and allocations to reserves, except revaluation or balance-sheet restatement reserves.

c) Shares or interests representing the capital or assets of collective investment institutions are valued at the applicable net asset value on the date the last tax period that must be reported under this tax ends or, failing that, at the last published net asset value. If no net asset value exists, the value is the net equity attributable to the shares or interests according to the balance sheet for the last financial year closed before that date, unless a different market value is proven.

Temporary work-related relocation

On the terms established by regulation, where the change of residence results from a temporary work-related relocation to a country or territory that is not considered a tax haven—or, for another reason, to a country or territory that has signed a double taxation treaty with Spain containing an information-exchange clause—the taxpayer may apply to the Tax Administration to defer payment of the tax debt corresponding to the capital gains governed by this article.

The deferral is subject to Law 58/2003 of 17 December, the General Tax Act, and its implementing rules, particularly as regards the accrual of interest and the provision of security.

For the purposes of providing the security referred to above, it may be secured wholly or partly by the securities covered by this article, provided that they offer sufficient legal and economic value.

The deferral expires no later than 30 June of the year following the end of the period specified in the next paragraph.

If, at any time during the five tax periods following the last period that must be reported under this tax, the taxpayer again becomes a Spanish tax resident without having transferred ownership of the shares or interests referred to in paragraph 1, the deferred tax debt and accrued interest are extinguished. For work-related relocations, the taxpayer may ask the Tax Administration to extend that five-period period where circumstances justify a longer temporary relocation, although the extension may not exceed five additional tax periods.

The debt is extinguished when the return for the first tax period in which the taxpayer must again be taxed under this tax is filed.

In that case, the taxpayer is not entitled to reimbursement of the cost of any security provided.

If the taxpayer again becomes a Spanish tax resident without having transferred ownership of the shares or interests referred to in paragraph 1, the taxpayer may request an amendment to the self-assessment to obtain repayment of the amounts paid in respect of the capital gains governed by this article.

The repayment referred to in the preceding paragraph is governed by Article 31 of the General Tax Act, except that late-payment interest accrues from the date the payment was made until the date repayment is ordered. The request for amendment may be filed after the deadline for the return for the first tax period that must be reported under this tax has expired.

If the change of residence is to another EU Member State or to an EEA State with which effective tax information exchange exists, as provided for in paragraph 4 of the First Additional Provision of Law 36/2006 of 29 November on measures to prevent tax fraud, the taxpayer may elect to apply the following special rules to the capital gains governed by this article:

a) The capital gain must be included in a self-assessment only if, during the ten tax periods following the last period that must be reported under this tax, one of the following occurs:

1. The shares or interests are transferred inter vivos.

2. The taxpayer ceases to be resident in an EU Member State or EEA State.

3. The reporting obligation referred to in point (c) of this paragraph is not met.

The capital gain is attributed to the last tax period that must be reported under this tax and, where applicable, a supplementary return must be filed, without penalties, late-payment interest or surcharges.

The self-assessment must be filed between the date on which one of the circumstances listed in point (a) occurs and the end of the next tax-return filing period.

b) In the case referred to in point 1 of point (a), the capital gain is reduced by the positive difference between the market value of the shares or interests referred to in paragraph 3 and their transfer value.

For this purpose, the transfer value is increased by the amount of distributed profits or any other benefits that reduced the entity’s net equity after the taxpayer ceased to be resident in Spain, unless those amounts were taxed under Non-Resident Income Tax.

c) In accordance with the regulations, the taxpayer must notify the Tax Administration of the election to apply the special rules in this paragraph, the capital gain arising, the State to which the taxpayer moves (including the address and any subsequent changes), and the continued ownership of the shares or interests.

d) If the taxpayer again becomes a Spanish tax resident without any of the circumstances listed in point (a) having occurred, the provisions of this article cease to apply.

This article also applies where the change of residence is to a country or territory regarded as a tax haven and the taxpayer does not cease to be a Spanish tax resident under Article 8(2) of the Personal Income Tax Act.

In those cases, the following special rules apply:

a) The capital gains are attributed to the last tax period in which the taxpayer was habitually resident in Spain. They are calculated using the market value of the shares or interests referred to in paragraph 3 on the date that tax period ends.

b) If the shares or interests are transferred in a tax period in which the taxpayer remains subject to this tax, the acquisition value used to calculate the capital gain or loss on the transfer is the market value of the shares or interests used to determine the capital gain under this article.

8. For taxpayers who have elected for the special tax regime applicable to workers posted to Spanish territory, the ten-tax-period period referred to in paragraph 1 of this article starts in the tax period in which that special regime ceases to apply.”

Switzerland

As to whether paragraph 6 of Article 95 bis of the Personal Income Tax Act can apply to Switzerland, reference should be made to the Agreement on the Free Movement of Persons between the European Community and its Member States, on the one hand, and the Swiss Confederation, on the other, signed in Luxembourg on 21 June 1999 (the “AFMP”). Its purpose is to give effect to the free movement of persons between the contracting States, as stated in its preamble.

Among other things, Article 1 of the AFMP sets out the following objectives:

“(a) to grant the right of entry, residence and access to an employed economic activity, the right of establishment as a self-employed person and the right to remain in the territory of the Contracting Parties;

(…)

(c) to grant the right of entry and residence in the territory of the Contracting Parties to persons who are not economically active in the host country;

(d) to grant the same living, employment and working conditions as those enjoyed by nationals”.

The AFMP also recognises, among other things, the rights of residence and access to an economic activity, as well as the right of nationals of the contracting parties to equal treatment. In particular, Annex I to the Agreement concerns the free movement of persons.

As regards the persons covered, under the preamble and Article 1 of the AFMP, the Agreement applies both to individuals who carry on an economic activity and to those who do not.

The Court of Justice of the European Union addressed the scope of that freedom of movement, and in particular whether an exit tax may restrict it when a taxpayer moves to Switzerland rather than to an EU or EEA State, in Case C-581/17. The Court held as follows:

“The provisions of the Agreement on the free movement of persons between the European Community and its Member States, on the one hand, and the Swiss Confederation, on the other, signed in Luxembourg on 21 June 1999, must be interpreted as precluding a tax regime of a Member State which, where a natural person who is a national of a Member State and carries on an economic activity in Switzerland transfers his or her residence from the Member State whose tax regime is at issue to Switzerland, provides for tax on the unrealised gains relating to shares held by that person to be collected at the time of the transfer, whereas, if residence remains in the same Member State, collection of the tax is deferred until the gains are realised, that is, when the shares concerned are transferred.”

As noted above, the AFMP applies both to individuals who carry on an economic activity and to those who do not.

Article 5 of the Personal Income Tax Act must also be taken into account. It provides:

“The provisions of this Act are without prejudice to the provisions of international treaties and conventions that have become part of domestic law in accordance with Article 96 of the Spanish Constitution.”

Accordingly, in light of the above, paragraph 6 of Article 95 bis of the Personal Income Tax Act must also be understood to apply when a taxpayer transfers residence to Switzerland.