It’s March, and time for expats to complete the Modelo 720 declaration once again. This form has to be submitted before the end of the month by Spanish tax residents. The Modelo 720 declaration is more of an asset reporting requirement than a tax return. Assets which have to be declared include properties, bank accounts and investments with a value greater than €50,000.
Non-residents do not have to complete the form. However, many expats are reconsidering their options as a result of proposed changes to the non-residency rules. Under the changes, non-residents will be restricted to spending a maximum of 90 days in any 6-month period in Spain. As a consequence, anyone who prefers to spend more of the year in their Spanish home will either have to become resident in Spain or accept the 90-day rule.
For those who decide to become fully tax resident, the Modelo 720 declaration will have to be completed. People who prefer to remain non-resident should be careful not to fall foul of the new rules. They would be advised to keep a record of visits to Spain.
Big Brother and the Modelo 720 declaration
In this globally connected world, tax authorities have many tools at their disposal to track our movements. This means that we have to take the issues of residence and tax liability very seriously.
Despite the Modelo 720 declaration not being a tax return, it does furnish the Hacienda with a record of our assets and their values. If these assets are not subsequently declared on our annual tax return, questions may well be asked.
The recent implementation of the Common Reporting Standard (CRS) will add to concerns for those who have managed to keep under the radar so far. The CRS is, essentially, an information-sharing agreement used by most countries to assist with eliminating tax avoidance and evasion on a global scale.
Spain adopted the CRS legislation in 2018. British citizens should not be surprised to discover that HMRC has been sending information to the Hacienda from the outset. The situation is similar for most other nationalities and their home tax office.
Unfortunately, there are considerable fines being imposed in Spain for non-compliance. These start at €5,000 and can reach six-figure sums; an estimated 6,000 individuals have been fined so far. With pressure on the Spanish government to increase tax receipts, it is likely that this number will rise.
Tax planning solutions for expats in Spain
The good news is that there are numerous ways to reduce the level of our taxes in Spain. Generous allowances on property rental income and expenses are available. Correctly structured pension drawdown, inheritance tax mitigation strategies and tax-efficient investment plans should form the basis of everyone’s financial planning.
As an example, we can look at the tax treatment of UK ISAs in Spain. Although ISAs are a great form of tax-efficient investment when UK resident, these products lose their status when someone becomes Spanish tax resident. They need to be included on the Modelo 720 declaration, as well as your annual tax return; they may well then be subject to Spanish tax.
An easy fix for this situation is to move these funds into a Spanish Complaint Investment Bond (SCIB). SCIBs are treated in much the same way as ISAs whereby no tax is payable on investment growth if no withdrawals are made. They do differ when an individual draws income from the investment, wherein the tax consequences are both minimal and bearable.
The Spanish tax system may appear a little daunting at first. As always, it’s important to speak with a suitably qualified and experienced financial adviser who can assess your situation, create your plan and refer you to an appropriate tax specialist where necessary.