The much despised Wealth Tax in Andalucia has been eliminated following Juanma Moreno’s recent election victory. Great news for Andalucian taxpayers! QROPS relationship with Wealth Tax has always been a contentious issue; at least we now know that they are definitely outside the scope of Wealth Tax for Andalucian (and Madrid) taxpayers, albeit by default.
We shouldn’t congratulate a politician for keeping pre-election promises. Sceptics always felt it might not happen, but as of the 21st of September 2022, we can say goodbye to Wealth Tax in Andalucia. Please close the door as you leave!
Taxation policy is always a case of balancing the swings and roundabouts of giving something here and taking it back there. Political ideology generally decides who wins and who loses as a country’s wealth is (re) distributed.
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Wealth tax in Andalucia acts as a disincentive to wealthy individuals seeking to move there
In this case, the perceived unfairness and ineffectiveness of Wealth Tax were the main drivers behind change. Wealth Tax in Andalucia was always a barrier to wealthy individuals setting up permanent residence here, particularly as they could live in many other countries that don’t impose it. It was seen as unfair that money which wasn’t earned in Spain would then be subject to taxes, particularly bearing in mind a lot of that money had already been taxed in the wealth accumulation period.
Wealth Tax in Andalucia was also seen as ineffective as it only contributed to 0.6% of the annual budget. Statistics show that 10 of the 20 wealthiest Wealth Tax payers left to avoid paying it.
Losing wealthy residents due to unfair taxation is detrimental to the economy if they decide to live elsewhere and pay income and other indirect taxes to that country. The elimination of Wealth Tax is expected to attract 7,000+ more wealthy individuals to establish permanent residence in Andalucia. This will significantly impact the economy; everyone who works in the many service and hospitality industries will benefit.
More wealthy people coming to live in Andalucia means more tax revenue; it is predicted that the 0.6% loss in revenue will be massively exceeded by direct and indirect taxation.
Pensions and Wealth Tax
The Spanish government and tax department have recently adopted EU law regarding the tax treatment of non-Spanish pensions. Essentially, the EU created legislation to ensure residents weren’t being unfairly taxed in any EU country simply by taking advantage of Freedom of Movement opportunities. Many employees move from one EU country to another, and it was seen as important that unfair taxation didn’t create a barrier to one of the central tenants of EU law.
For Spanish residents, the questions that follow are:
- What is considered to be a pension?
- And when is a pension not a pension?
State pensions, government pensions and ‘Final Salary’ pensions.
State Pensions and Final Salary/Defined Benefit schemes are taxed as normal earned income. So, much the same as salaries. This also applies to genuine Purchased Annuities, where the pension pot is handed over to an insurance company that agrees to pay an income for life. This type of pension has always been exempt from Wealth Tax.
Until recently, it has been unclear how other foreign pensions are taxed. QROPS, in particular, have been the subject of much confusion. Some tax advisers say they have always been exempt from Wealth Tax, and others the opposite. The tax implications of QROPS being exempt from Wealth Tax were that withdrawals should be treated as normal income and taxed accordingly. If, however, QROPS didn’t benefit from Wealth Tax exemption, the implication is that they aren’t treated as bona fide pensions. So, this is where a pension isn’t a pension.
This means a QROPS would be taxed as an investment when withdrawals are made. I have spoken to several well-respected accountants in Andalucia, and they are of this opinion.
The tax note below confirms the position of QROPS and Wealth Tax (this was made before Wealth Tax in Andalucia was eliminated). There are other taxation implications, however, and in most cases, individuals who hold a QROPS will be taxed less if taxed under Investment Income rules.
V0878-22. PENSION SCHEMES CONSTITUTED AND REGULATED UNDER MALTESE RULES. WEALTH TAX
The tax resident in Spain set up a pension plan with an entity domiciled in Malta, regulated by the rules of that country. The General Directorate of Taxes concludes, as in consultation V1049-19, that a pension plan constituted with an entity domiciled in Malta and subject to the legislation of that country would not meet the requirements to benefit from the Wealth Tax exemption, since the Wealth Tax Law does not expressly provide for this possibility, unlike Law 35/2006, of 28 November, on Personal Income Tax, which in several of its provisions expressly refers to the pension plans regulated in Directive (EU) 2016/2341 of the European Parliament and of the Council of 14 December 2016 on the activities and supervision of institutions for occupational retirement provision.
A quest for some clarity
Spain has also adopted EU law regarding Pan European Pension Plans (PEPPs) and Institutions for Occupational Retirement Provision (IORPs) to confuse matters further. Having also spoken at length to a major Malta QROPS provider’s technical department about whether QROPS qualify as either PEPPs or IORPS, they confirmed that they don’t.
The combination of the tax ruling above and the fact that Malta QROPS aren’t PEPPs or IORPS (in most cases) means they have never been exempt from Wealth Tax but will be from the tax year 2022 in Andalucia (and Madrid) onwards.
Implementing an effective tax and financial planning strategy is like completing a jigsaw puzzle. Each piece must fit with adjacent blocks to make sense of the picture. Tax planning is similar in that every individual element of a person’s tax exposure should be treated in context with each other. It’s therefore important to seek tax and financial planning advice from professionals who truly understand how all of your personal tax jigsaw pieces fit together.
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