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Exit tax in Spain: what it is and how to escape the “tax trap”

Whenever a Spanish high income earner considers changing his residence, he faces the same problem: the well-known “exit tax” or “Departure Tax”.

It is not a specific tax per se, but an additional obligation of taxation of the Personal Income Tax (hereinafter, IRPF).

This obligation was established in 2015 and is quite common in the European Union. It was born with the intention of distributing among the different member states the taxing power on capital gains derived from shares based on a territoriality principle.

In other words, if a company has been generating value for decades in one country, the sale of the company will not be tax exempt for the shareholder just because the shareholder changes residence one year with the intention of selling it and not paying taxes.

For this reason, for businessmen and “rich” people in general, the exit tax is the biggest obstacle and impediment to move out of Spain, whether they intend to sell their assets or not.

As you can see, this is quite a complex issue, so we are going to try to solve the most common doubts.

What exactly is the exit tax?

The exit tax implies the subjection to taxation of latent or unrealized capital gains when a Spanish personal income taxpayer changes his tax residence to another country.

That is to say, it implies paying taxes as if you were selling your stock portfolio or your company but without really having monetized that operation. In short, paying taxes for something that you have not earned and that has not generated any income.

This tax was implemented within the European Union with the intention that tax residents rooted in a country would not change their residence to a low-tax location with the mere idea of selling their company and paying less tax and coming back with a considerable tax saving…

That is why, since its implementation, many agree in defining Spain as a “tax trap”: you get in but you cannot get out.

But who is affected by the exit tax?

Fortunately this tax only affects taxpayers with a certain amount of personal wealth and does not apply to most residents in Spain.

Those Spanish tax residents who meet the following requirements will be subject to this exit tax:

    • Those persons who have been tax residents in Spain for at least 10 of the 15 tax periods prior to the last tax period for which IRPF must be declared.
    • They cease to be tax residents in Spain.
    • They are holders of:
      • Shares or participations in entities whose market value, determined in accordance with the indicated IRPF, exceeds, jointly, 4 million euros.
      • Or being the holder of shares representing at least 25%, provided that the market value of the shares in the company exceeds 1 million euros.

Thus, it seems clear that the exit tax is intended to retain in Spain those high net worth individuals and businessmen with strong roots in Spain who have probably already been paying significant taxes.

In short, it is the resource of a Treasury that is not willing to “lose good customers” without making them go through cash.

How does it work?

The exit tax will be paid with the last income tax return filed by the taxpayer who ceases to be a tax resident in Spain.

That is, if the change of tax residence takes place, for example, in 2020, the capital gain imputed by the emigrant must be declared together with the income obtained in 2019.

The tax is aimed at taxing the following assumptions:

  • Firstly, the holding of shares or participations in entities in which the emigrant has a shareholding equal to or greater than 25% (i.e. the beneficial owner in accordance with the laws on prevention of money laundering) which is traditionally associated with the ability to exercise significant influence over the management of the company or entity, the minimum exemption being 1 million euros.
  • Secondly, portfolio investments in shares and participations whose combined market value exceeds €4 million are taxed.

The aforementioned unrealized capital gains and their taxation are calculated as follows:

  • For the computation of the gain will be taken [Market value of the shares – Acquisition value of the shares]
  • The rates to be applied to the gain will be those of savings income, being able to reach a maximum of 23% (27% if the reform of the IRPF promised by Pedro Sánchez’s executive is carried out)
  • In this way, and as an example of calculation of the exit tax, for a “fictitious sale” with a non-real gain of 100,000 euros the taxpayer could pay 21,880 euros to the tax authorities without having previously paid anything.

In this sense, it seems clear that this is a serious obstacle for large estates and international investors to take up residence in Spain, and may cause many to decide to leave before accumulating 10 years of residence there.

However, there may be a solution….

How to avoid exit tax

The exit tax is not easily avoidable, and doing it without advice or “on the spur of the moment” can lead you to a real tax catastrophe… So we recommend that in any case you seek professional expert advice if you decide to undertake a change of tax residence with an exit tax involved.

At SpainAdvisers we can help you (you can contact us here), but below we will summarize the most common strategies to avoid the exit tax:

Immigrate to the European Union

The same Spanish Personal Income Tax legislation establishes that when the taxpayer emigrates to another EU or EEA member state, he/she can choose to defer the application of the exit tax for 10 years, that is, not to pay the latent capital gain for moving to an EU country.

That makes other destinations with preferential regimes, non-doms and NHR (so fiscally beneficial) within your reach.

If you do not intend to sell your company we strongly recommend you to analyze such attractive tax residences as Portugal, Greece, Italy, etc.

Emigrate with a temporary relocation to avoid exit tax

Another option to change your tax residence without being affected by the exit tax would be for you to move temporarily for work purposes.

As in the previous case, this is a deferral or postponement of the application of the exit tax, but not an exemption, so the taxpayer must communicate the displacement and provide a guarantee for the potential payment of the tax debt.

In this regard, it is worth mentioning that the regulations allow a maximum of five years (extendable), and accept as a labor posting the exercise of an activity in that country, without specifying whether it is an employment or self-employment. However, if you decide to move to a country outside the EU, it would be more optimal that an employer from that country hires you in order to cover your back 100%.

Neither the doctrine nor the Spanish tax authorities make any express mention as to whether it has to be a full time job, nor that it should be a % of your total income, etc…. But of course it must involve actual work of some kind (otherwise it would be a simulation and would be prosecuted).

Business and estate reorganization to avoid the exit tax

To the extent that the exit tax applies only to a closed list of assets, when the taxpayer has in mind a possible change of tax residence, and when the amount of its assets could be affected by the same, it could be understood that it would be more advisable to invest in real estate or fixed income securities instead of equity securities or collective investment schemes.

Likewise, a previous patrimonial and business restructuring via donations, mergers, acquisitions, etc., could allow the taxpayer to escape the exit tax threshold.

Immigrant’s return and application for refund of undue income

Another less pleasant way but also possible and only suitable for “brave” would be to pay the exit tax and if finally upon return to Spain has not sold, proceed to the application for refund of undue income in respect of exit tax ….

It can be contemplated as an option, but it is undoubtedly a very rudimentary and ineffective way to “avoid” the exit tax.

Our conclusion

As we said, the exit tax has been in force since 2015 and there is no doubt that it is here to stay (the Court of Justice of the European Union in its case C-164/12 gave the German exit tax as good)….

Be wary of industry websites that tiptoe around the exit tax issue or sell you miracle solutions, because they can end up putting you in a real bind.

Which are the best tax destinations?

If you are seriously interested in changing your tax residence, we recommend you to download for free and read our updated report “The definitive guide to living and paying taxes in Spain”.

Picture of Andreu Capmajó
Andreu Capmajó

Tax director

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"The definitive guide to living and paying taxes in Spain"
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