The Congress of Deputies has already approved the incorporation of the new Temporary Solidarity Tax on the Large Fortunes as an amendment by the Government to the Act for the establishment of extraordinary taxes on banks and energy companies.
The purposes of the new tax are revenue collection (due to inflation and the energy crisis) through demanding a greater effort from the richest; and harmonisation, with the aim of reducing the differences in the taxation of wealth in the different Regions, especially those that have totally or partially deducted the Wealth Tax.
The Temporary Solidarity Tax on Large Fortunes will be a direct tax, personal in nature and complementary to the Wealth Tax, which will be levied on the net wealth of individuals with more than €3,000,000.
The complementary nature is achieved through the deduction, in the new tax, of the tax payable in the Wealth Tax of each Region, in addition to the deductions and allowances to avoid double taxation. In this sense, in Regions with a low or no Wealth Tax, residents with a net wealth higher than €4,000,000 will be obliged to pay an “equivalent” tax.
An exempt minimum of €700,000 is applied, which means that, for example, in the case of Catalonia, this minimum is equal to the Spanish exempt minimum (whereas in the Wealth Tax the exempt minimum is €500,000 in Catalonia and €700,000 for those applying the Spanish law). Moreover, the exemption for the main residence is maintained.
The tax base will be taxed at the tax rates of the following scale:
- 0% for assets between 0.00 and €3,000,000.
- 1.7% for assets between €3,000,000 and €5,340,000.
- 2.1% and affects the range between €5,340,000 and €10,690,000.
- For a net wealth above €10,690,000, a rate of 3.5% will be applied.
The new tax is intended to respect the tax benefits of family businesses, which will be exempt, but it is feared that the criteria for eligibility will be tightened. Currently, in terms of the Wealth Tax, in some regions, there are certain softer interpretations of the requirements, whereas the national Directorate might not be so generous in applying now that it is dealing with a state tax.
For example, the requirement to have a full-time employee for leasing activities is required by the Spanish Directorate for each of the individual company in a Group, whereas Catalonia accepts a single contract for the whole group of companies.
It should also be noted that the joint taxation limit of 60% of the total personal income tax, IP and the IGF itself is applied, so that in communities such as Madrid, Andalusia and Galicia, where the total tax liability is subsidized, significant reductions in IGF will be applied.
In principle, this new tax will be in force for only two years, but a review clause to assess its maintenance or elimination is included in the wording of the Act. The Government’s intention is to enforce this Act before 31 December 2022, although this has yet to be confirmed.
This would leave no room for manoeuvre for those taxpayers who had considered their tax residence to avoid paying this new tax, given that it would be implemented retrospectively with effects from 1 January 2022. This last circumstance might be the subject of litigation soon.
Moreover, to enjoy the tax benefits of the family business, the company must be active, a precept that can only be breached for a maximum of 90 days per year. For example, a taxpayer in Madrid who is not concerned about the annual payment of the Wealth Tax and who only occasionally operates with this company does not have sufficient time to decide to reactivate the company until the 270 days required to avoid taxation have been reached.
The draft of the tax on Large Fortunes reveals a relevant aspect to be considered for non-residents with net wealth higher than €3,000,000. They are taxed only for assets located in Spain, and therefore they will not be able to reduce the taxable base by the minimum exemption provided for in the Wealth Tax i.e., €700,000, Moreover, the value of the main residence up to € 300,000 will not be included as exempt for non-residents either.
This exception in the taxation of non-residents was already qualified as discriminatory by the EUCJ forcing a legal amendment that has not been replicated in this new tax. The EUCJ Judgment of 3/9/2014, case C-127/12 condemned Spain because the Inheritance and Gift Tax did not allow non-residents to apply the significant tax benefits approved for its residents. It was considered that this discrimination against non-residents violated Article 63 EUFT, which prohibits ”all restrictions on the movement of capital between Member States and third countries”.
In short, the new tax affects Regions that grant 100% tax relief on wealth, such as Madrid and Andalusia. Even so, it also affects those Regions that maintain the Wealth Tax but have lower tax rates than those set in the new tax. This is the case of the highest wealth in regions such as Asturias, Cantabria, Catalonia, and Murcia, as their maximum marginal rate is lower than the 3.5% set in the new tax.
Finally, it should be noted that Article 3, final provision 1 of the amendment, which modifies article 65 of RD 111/1986, raises the possibility of making the payment of the tax payable in kind for the taxation of this new tax figure.
So far, this option was only allowed for taxpayers who intended to pay the Inheritance and Gift Tax, the Wealth Tax and Personal Income Tax debt by means of the delivery of goods that are part of Spanish Historical Heritage. The Government is aware that some large fortunes have vast wealth, but lack liquidity, so this measure would allow them to pay the tax debt for this new tax.
If you have any doubts related to this or other tax, accounting, or legal issues, please do not hesitate to contact our tax advisors in Barcelona.
