Inheritance and gift tax is a tax that must be paid by those who receive an inheritance, legacy, donation or life insurance. In this post we will tell you in which cases it must be paid, how much it is paid in Spain and how international double taxation works.
What is inheritance and gift tax and in which cases does it have to be paid?
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Inheritance and gift tax is regulated by Law 29/1987 of December 18, 1987, which establishes that it is a direct, subjective tax that levies taxes on capital gains obtained for free by individuals in cases of:
- Inheritances, legacies and any other inheritance titles
- Gifts or other free legal business given while being alive
- Receipt of amounts derived from life insurance, when the contracting party is a person other than the beneficiary.
When the recipient of the capital gain is a legal entity, the inheritance and gift tax will not be applied but the corporate income tax.
Who pays inheritance and gift tax?
Inheritance and gift tax must be paid by:
- In inheritances: heirs and beneficiaries. If there is a Will, the Will will establish who the heirs are. If there is no Will, the order of succession is established by law and the heirs will be: children and descendants, ascendants, spouse, siblings and other relatives and the State.
- In gifts: the donee (the person who receives the gift).
- In life insurance: the beneficiaries of the insurance.
Is it possible to avoid paying inheritance tax by incorporating real estate assets into a foreign company?
The first thing we must be clear about is that the individuals compelled to pay the inheritance tax before the Tax Agency are the heirs both by personal obligation and by real obligation. The personal obligation means that the tax is paid in Spain by the tax residents in our country, regardless of the place of residence or the nationality of the deceased or whether the assets are in Spain or in another country. Individuals who reside in Spain for more than 183 days a year, who carry out their main activity or have an economic interest here, and those whose spouse and minor children reside in Spain, are considered to be residents in Spain.
On the other hand, the real obligation means that non-residents who inherit assets or rights located in Spain pay IS in Spain
Incorporating a real estate property into a foreign company constituted as a mere holder of the securities and whose only asset is the real estate, does not avoid the obligation to pay inheritance tax in Spain. It may even entail the risk of tax authorities considering it a tax evasion or it may be understood as a tax crime, depending on the amount evaded
How does international double taxation work?
One of the most frequently asked questions by foreigners regarding inheritance and gift tax is the following: Can I end up paying inheritance tax both in Spain and in my country of residence?
It is quite common, due to the fact that many people live or work abroad, that the death of a person might involve an international succession. In this case, two or more countries might tax the same taxable event (receiving an inheritance), leading to a situation of international double taxation.
In relation to international double taxation, Article 23 of the Inheritance and Gift Tax Law establishes the following:
1. When the tax liability arises from personal liability, the taxpayer shall be entitled to deduct the lesser of the following two amounts:
a) The effective amount paid abroad due to a similar tax that affects the capital gain subject to taxation in Spain.
b) The result of applying the average effective rate of this tax to the capital gains corresponding to assets located or rights that can be exercised outside Spain, when they have been subject to taxation abroad for a similar tax.
On the other hand, there are several international double taxation agreements related to inheritance signed by Spain, so it is necessary to consult them in order to avoid paying twice for the same taxable event. If you have received an inheritance in Spain and you don’t know how to manage it or which taxes you must pay, it is advisable that you turn to expert lawyers in inheritance and gift tax and in international taxation so that they carry out all the procedures and avoid inspections by the Spanish Treasury or the imposition of penalties.