Non-compliant offshore bonds hit by Spanish tax rises

A temporary rise in Spanish income tax means non-compliant bonds, which are subject to withhold tax every year, will be affected by the increase over the next two years.

Whilst the increase in Spanish personal income tax for 2012 and 2013 does apply to all offshore bonds, Skandia International says that there will be little or no affect on tax-compliant policies if surrender by Spanish residents is deferred to 2014. This is because the policy only becomes subject to tax in the year in which proceeds are paid out.

Explaining further, Skandia International’s Head of Product Law and Commercial Gain, Rachael Griffin, says that following these changes, from 1 January 2012 until the end of 2013, gains on tax-compliant offshore bonds will be taxed at a flat rate of 21%, as opposed to the normal rate of 19%, which is automatically withheld by compliant product providers.

There will be no further personal income tax liability for the policyholder if the gains amount to less than €6000 savings income in a tax year - this includes interest earned on savings accounts and dividends received in the same tax year. Any gains above €6000 will be taxed between 4% and 6% depending on the size of the gain. If the policy suffers a loss over the tax period, the loss can be offset against other income tax liabilities. 

Skandia International emphasises the importance of clients understanding what type of policy - tax-compliant or non tax-compliant - they hold in order to satisfy the Spanish tax authorities’ rules and account for the correct tax liability.
 
"In today’s world, the choices available to investors can be overwhelming.  It is crucial that they understand the implications of choosing the right product in order to utilise the available tax advantages to the full. For example, tax-compliant bonds reduce the burden of reporting on individuals classed as tax-resident in Spain and can be affected by changes in tax regimes to a lesser degree than non tax-compliant alternatives. The recent changes introduced on 1st January 2012 illustrate these advantages perfectly,” says Griffin.