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Purchasing Foreign Property

The Situation

Mr. S is looking to purchase a high value property in Spain. Spanish property values are increasing so Mr. S is concerned and would like to reduce his potential liability to capital gains tax upon resale. Mr. S is also quite elderly and is worried about the potential inheritance tax consequences if he was to die while still owning the property..



The Problem

If Mr. S dies owning a property he would be subject to Spanish inheritance tax, at rates of between 7.65% and 34% depending on the relationship between him and his heirs. Spanish law also contains "forced heirship" provisions that dictate that Mr. S must leave certain proportions of his Spanish-situated assets to his wife and children. Only one-third of his Spanish estate can be bequeathed according to his private wishes.

If Mr. S were to sell the property, he would be subject to capital gains tax at 35% on any increase in the value of

the property. The transaction costs on the resale would also amount to around 10% of the resale value. This would be a considerable cost to the purchaser and would effectively reduce the price Mr. S could expect to receive for his property.

During the life of Mr. S, he would be subject to Spanish wealth tax on his total Spanish-based assets at a rate of between 0.2% and 2.5% per annum, depending on the total value involved.



The Solution

Traditionally, the most tax efficient way of purchasing property in Spain was to own it through an offshore company. But companies not resident in Spain are now subject to an annual charge of 3% of the value of the property, making this form of ownership unattractive for all but lower value properties.

If, however, a company resident in Spain buys the property and non-resident companies own the shares of

that Spanish company, then the 3% tax does not apply. Inheritance tax is also eliminated because the company would continue even after the death of Mr. S.

Resale could be achieved by transferring the shares of the non-resident companies to the new buyer. This would circumvent any transaction in Spain and would therefore eliminate both the capital gains tax and the Spanish transaction costs.



Notes

Persons who already own Spanish property in their own names, and who wish to avoid Spanish capital gains tax on resale can also use this arrangement. The property can be injected into a Spanish company at minimal cost, and the shares of that company can then be transferred to offshore corporate ownership. The tax saving possibilities outlined above would then apply on resale. The earlier this is done the better.

Even if the subsequent purchaser wished to purchase the property and refused to buy the corporate structure there would still be a massive saving. Spanish companies pay capital gains tax at a rate of 15%, whereas nonresident individual owners pay tax at a rate of 35%. As a result, the minimum saving using this structure is 20%.





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