How do you pay for your capital gains in Spain?
Equity gains and losses are variations in the value of a taxpayer’s assets, which are evidenced on the occasion of any alteration in the composition of the taxpayer, unless they are classified as income by the Spanish tax return law (LIRPF).
Depending on how we have obtained a given capital gain in Spain, or what plans we have to reinvest, we will have to pay one way or another.
1. Capital gains and losses in the new tax framework: partner separation
A recent resolution of the Central Administrative Economic Court questioned the consideration that, for purposes of income tax, how much the income received by a partner had been after the acquisition of all its shares by the company itself.
- Established model
One of the ways that a certain company would have to make a capital reduction for amortization is in the acquisition of the shares of a partner.
Traditionally, it was understood by the jurisprudence that the income derived from such an operation would be considered as the return of movable capital. This would include those returns obtained through participation in the entity’s own funds (Article 25.1, Law 35/2006).
For example, from obtaining dividends and other benefits derived from the status of a member to those that are the result of amortizations and transfers of financial assets
- New scenario
The aforementioned Central Court ruling points out what seems to be a change of direction and a transition towards a new model. This body understands that, with the sale of all its shares to the company, the partner effectively separates from it.
Therefore, we’re looking at the application of art. 37.1, section e), of Law 35/2006, regarding the alteration in the patrimony of the taxpayer due to the separation of the company. In such cases, the difference between the market value of the goods received and the acquisition value of the corresponding capital share is considered as a capital gain or loss.
2. Deduction for investments in companies of new or recent creation.
Taxpayers may deduct twenty (20) percent of the amount paid in the said period if they subscribe for shares in new or newly created companies.
In addition to capital, you can also invest in business or professional knowledge, suitable for the development of the activity of the entity.
- What are the requirements for cataloging a company as new or newly created?
The shares in the entity must be acquired by the taxpayer, either at the time of the incorporation of the company or through a capital increase carried out in the three years following said incorporation, and remain in its holding for a period of more than three years and less than twelve years.
The entity must be in the form of a Limited Company, Limited Liability Company, Labor Limited Company or Labor Limited Liability Company and not be admitted to trading on any organized market. This requirement must be met during all years of ownership of the share.
Likewise, it must exercise an economic activity that has the personal and material means for the development of it. In particular, it may not manage a movable or immovable property in any of the tax periods of the entity concluded prior to the transfer of the share.
And finally, the amount of the entity’s own funds cannot exceed 400,000 euros at the beginning of the tax period of the same period when the taxpayer acquires the shares.
When the entity is part of a group of companies, the amount of its own funds shall refer to the group of entities belonging to that group.
- What conditions must be given to be able to enact the deduction?
- The investment had to have been made after September 29, 2013, when Law 14/2013 came into force.
- The maximum deduction base will be 50,000 euros per year and will be formed by the acquisition value of the shares subscribed.
- The direct or indirect share of the taxpayer, together with the one owned by the spouse or any other person united to the taxpayer by kinship, in a straight line or collateral, by consanguinity or affinity, up to the second degree included, cannot be, during any day of the natural years of possession of the share, part of the entity or claim any of its voting rights.
- That it is not a matter of shares in an entity through which the same activity that had previously been exercised through other ownership is exercised.
On the contrary, the reinvested amount that has been entitled to the exemption for reinvestment in entities of new or recent creation will not form part of this deduction; nor the amounts that would have served as the basis for applying an autonomous deduction for the same investment.
3. Exemption for reinvestment in entities of new or recent creation.
The entities that originate the right to this exemption must have the same considerations as those described in the previous point, as long as the shares to be reinvested were subscribed as of September 29, 2013.
When the amount reinvested is less than the total amount received in the transfer, only the proportional part of the capital gain in Spain is obtained that corresponds to the reinvested amount, as set forth in art. 38.2 LIRPF:
“a) When the taxpayer has acquired homogeneous securities in the year before or after the transfer of the shares. In this case, the exemption will not proceed with respect to the securities that as a consequence of said acquisition remain in the possession of the taxpayer.
b) When the shares are transmitted to their spouse, to any person united to the taxpayer by kinship, in a straight line or collateral, by blood or affinity, up to the second degree included, or to an entity with respect to which it occurs, with the taxpayer or with any of the aforementioned persons, any of the circumstances established in CCom art.42, regardless of the residence and the obligation to formulate consolidated annual accounts, other than the entity whose shares are transferred.”
4. Reduction of capital gains produced in transmissions acquired before December 31, 1994
Onerous transmissions are those acts or legal businesses that require a consideration in exchange for a good or right between the parties, which can be monetary or patrimonial (eg purchase of a property).
The amount of the profits corresponding to the transmissions of assets acquired prior to December 31, 1994, will be determined according to the following rules:
- First rule
The number of years between the date of acquisition of the item and December 31, 1996, rounded up by excess, will be calculated.
Percentages for each year of permanence exceeding two:
11.11%: real estate.
25%: shares admitted to trading, with the exception of shares representing the capital stock of Investment and Real Estate Investment Companies.
14.28% for the remaining capital gains.
- Second rule
The value of transmission of all the assets to whose patrimonial gain would have been applied as indicated in this disposition, transmitted from January 1, 2015 until the date of transmission of the asset, will be calculated.
- Third rule.
When the sum of the transfer value of the asset and the amount referred to in the previous point is less than 400,000 euros, the part of the capital gain in Spain generated prior to January 20, 2006 will be reduced by the amount resulting from applying the percentages for each year of permanence (the profit generated after this date will not be reduced).
When the sum of the transfer value of the assets is greater than 400,000 euros, but the result of the provisions of the letter b) is less than 400,000 euros, the reduction will be made to the part of the capital gain in Spain generated prior to January 20, 2006.
Given the complexity that this assumption may acquire, the following example is presented:
A taxpayer owns a home acquired on August 1, 1992 for a price of 180,000 euros, with expenses incurred in the acquisition of 18,000 euros, decides to sell the house on December 15, 2013 for a price of 900,000 euros (IIVTNU: 25,000 euros).
Number of days until January 19, 2006: 4,920.
Total number of days in the taxpayer’s estate: 7,807 days.
- What is the amount of the profit that must be included in the tax base?
The part of the profit that has been generated since August 1, 1992 (date of acquisition) until January 19, 2006 will be reduced depending on the period of permanence of the home in the patrimony of the taxpayer until December 31, 1994 (1996 minus the last two years):
Transmission value (900,000 – 25,000) = 875,000.00 euros
Updated acquisition value (198,000 x 1,3167) = 260,706.60 euros
Profit (875,000 – 260,706.60) = 614,293.40 euros
Gain generated until January 19, 2006 (614,293.40 × 4,920 / 7,807) = 387,130.
Permanence of the element until December 31, 1994 (rounded in excess): three years.
Reductive coefficient (11.11% × 3) = 33.33%.
Reduction (33.33% × 387.130) = 129.030.43.
Reduced profit (614,293.40 – 129,030.43) = 485,262.97 euros