SPAIN Law and Practice Contributed by: Álvaro Checa, Miguel Checa, José María Vargas-Machuca Reyes and Andrea Fernández Grymierski, KINSHIP
Tax Treatment of Specific Planning Structures Contractual succession agreements, although they may have effects during the lifetime of the transfer- or (ie, transferring ownership to the heir before the death of the testator), are treated under Spanish law as mortis causa transfers for the purposes of IHT and income tax. This is particularly relevant for income tax purposes, as mortis causa transfers do not create tax- able capital gains. 6.1 Common Planning Techniques details the Spanish regions that allow succession agreements. Capital gains tax is also not triggered if the agreements are executed under the applicable law of another jurisdiction that recognises succession agreements. If the transferor wishes to transfer assets while retain- ing some degree of control, a common estate-plan- ning structure under Spanish law can be implemented either by gifting the bare ownership ( nuda propiedad ) to the beneficiary while retaining the lifetime usufruct right. This structure will be addressed in 6.1 Common Planning Techniques . For tax purposes, the transfer of the bare ownership or usufruct is subject to GT based on the value of the transferred right. Upon the trans- feror’s death, any retained usufruct is extinguished, and full ownership consolidates in the relevant party, potentially triggering IHT. The key advantage of con- stituting the usufruct is that it protects against future legislative changes and ensures the application of the next-of-kin transfer tax relief, even if the law has changed at the time of the demise of the transferor, because the relevant rules are assessed based on the law in force at the time the bare ownership is consti- tuted. Tax benefits are also available for the transfer of a fam- ily owned and managed business, which may allow under certain requirements up to 95% (or up to 99% depending on the Spanish region) exemption from IHT and GT on the value of the shares. The tax implica- tions of the succession of family owned and managed businesses are explored in detail in 8.2 Legal and Tax Considerations . Regional IHT and GT Law As stated in 2.1 Determining Domicile , IHT and GT are taxes partly regulated at the level of the Spanish regions, which may, inter alia, establish their own tax
rates, reductions, reliefs and exemptions. This is par- ticularly relevant given that the central state legislation does not provide any significant tax reliefs; accord- ingly, the determination of the applicable regional tax law assumes greater importance. In this regard, some Spanish regions have introduced significant tax relief for GT, such as the following, which have introduced a general 99% or 100% tax relief for next-of-kin transfers: Madrid, Andalusia, the Balearic Islands, the Canary Islands, Cantabria, Cas- tile-La Mancha, Extremadura, Murcia and Valencia. These tax reliefs typically apply to transfers between spouses or between ascendants and descendants by consanguinity. Certain Spanish regions also provide more limited relief for transfers between collateral rela- tives (such as uncles and nieces/nephews) or relatives by affinity (such as step-parents). It should be also noted that these reliefs generally require that the transfer is formalised in a public deed and includes a statement regarding the source of the funds. Some Spanish regions allow for the donation to be initially executed under a private contract and subsequently elevated to a public deed within the deadline. The law does not require the public deed to be executed before a Spanish notary, although this is recommended given that there may be no exact equivalence with other jurisdictions (particularly com- mon law countries). In any case, the notary should expressly certify: (i) the identification of the parties; (ii) their legal capacity and identity; (iii) compliance with applicable law; (iv) that the notary performs functions equivalent to those of a Spanish notary; and (v) the authenticity of the transaction. The determination of the competent authority and GT law applicable for lifetime transfers will depend on the nature of the assets (movable or immovable) and the place of habitual residence of the donee. 5.2 Testamentary Dispositions It is worth noting that the demise of the testator does not trigger any capital gains tax for the deceased’s estate. The assets are received by the heirs at mar- ket value, providing a tax-free step-up in tax basis for capital gains purposes.
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