Learn Why Extensive Financial and Tax Planning Is Important Before Moving to Spain
Spain is a sought-after destination for many U.S. expats wanting to move overseas. With its Mediterranean climate, low cost of living, and vibrant history and culture, it’s easy to see why the Spanish lifestyle appeals to American expats looking to move abroad. If you’re a U.S. expat relocating to Spain, make sure you have an advanced financial plan and a cross-border investment plan to ensure a smooth transition. Here are ten items you should consider as an American expat moving to Spain.
1. Investing as a Spanish resident presents more challenges than investing as a U.S. resident
U.S. citizens and green-card holders are always subject to U.S. tax reporting and taxation, regardless of their country of residence. U.S. tax rules make it tax-inefficient (or, to put it more bluntly, punitive) for a U.S. person to hold non-U.S. funds in their portfolio. Additionally, U.S. tax reporting of foreign funds is time-consuming and costly, resulting in tax preparers charging higher fees for tax preparation.
However, EU residents face an obstacle to building a diversified portfolio of U.S. funds — an EU regulation know as MIFID II prevents EU residents from buying non-EU registered funds, including U.S. funds. Fortunately, as a U.S.-based investment advisory firm, we’re able to buy U.S. ETFs on behalf of our EU-based clients, which can be a great investing tool for Americans abroad.
2. American expats living in Spain will likely have a higher tax burden than they would in the U.S.
Navigating taxes as U.S. expat in Spain can be challenging. Between the U.S. and Spain, there are income tax treaty and Social Security totalization agreements that allow U.S. citizens living in Spain to avoid double taxation. However, worldwide income will be taxable in Spain and at Spanish tax rates, so a Spanish resident’s tax burden is likely to be higher than in the U.S
Although there are federal income tax rates set by the Spanish tax authority (Agencia Tributaria), being taxed as a Spanish resident means effective income tax rates will be established by autonomous communities across Spain. And tax rates vary greatly. When considering a resident’s Spanish tax burden, it’s important to look at regional rates and exemption amounts for income tax, wealth tax, gift tax and inheritance tax.
Spanish income tax will be assessed on all income and, depending on the region, an annual wealth tax may be assessed based on the resident’s worldwide assets, regardless of income.
3. There is a special expatriate tax regime with narrow limitations
Royal Decree 687/2005, commonly known as the Beckham Law or special expats tax regime (SETR), allows a Spanish resident to be taxed as a non-resident for a period of up to six years (including the year of arrival).
This regime effectively allows you to only be taxed on Spanish-sourced income and Spanish assets. Spanish income will be taxed at a flat rate of 24% up to 600,000 EUR and 45% on income above this threshold. Capital gains generated in Spain are taxed at 35%, and only Spanish assets are subject to wealth tax.
4. Spanish tax reporting is as complex as U.S. tax reporting
Spanish residents are required to report their assets and income annually in Spain. Tax reporting may include reporting foreign financial accounts on Modelo 720, reporting assets for wealth tax purposes on Modelo 714 and reporting gifts and inheritances on Modelo 650.
5. U.S. tax-advantaged accounts don’t offer Spanish tax benefits
Many U.S. accounts that receive beneficial tax treatment by the IRS will give rise to Spanish tax liability. For instance, Spain does not recognize the tax-exempt status of Roth IRAs, and distributions will be subject to Spanish tax. Similar tax treatment applies to trusts, 529s, HSAs and employer-sponsored retirement accounts, such as Roth 401(k)s. Read more about expat retirement accounts and how they can be used effectively.
6. Certain investments that provide tax benefits for Spanish residents aren’t appropriate for U.S. citizens
Just as Roth IRAs don’t have beneficial treatment in Spain, certain Spanish-ownership accounts and assets don’t have the same tax benefits from a U.S. tax perspective as they do in Spain. Common examples are Spanish insurance products and Spanish private pensions. U.S. citizens who may open or own these types of accounts must ensure proper U.S. reporting and taxation.
Certain Spanish accounts are considered foreign grantor trusts, whose assets must be reported in the U.S. and any underlying funds are considered passive foreign investment companies (PFICs).
7. U.S. Social Security benefits while living in Spain
American expats living outside of the U.S. may receive Social Security benefits as long as they’re eligible. In Spain, the Social Security agreement it has with the U.S. allows contributions made in each country to qualify for benefits. It also allows a Spanish non-resident alien spouse to qualify for U.S. Social Security spousal and survivor benefits, even if the non-resident alien spouse has never lived in the United States.
However, under the Windfall Elimination Provision, receipt of Spanish Social Security benefits will reduce part of U.S. Social Security benefits.
8. U.S. Trusts do not shelter assets and income from Spanish taxation
Spain has a legal system based on civil law and doesn’t allow for the creation of trusts, which are permitted in common law countries, such as the U.S. and the UK. Spanish resident settlors and/or beneficiaries of U.S. trusts will find that reporting a trust and its income in Spain can be expensive and complex. Gifting into and inheriting from trusts has different tax implications in Spain than it would in the U.S. and can increase your Spanish tax burden.
9. Spanish Gift and Inheritance/Succession Tax Liabilities are Complex
U.S. gift and estate tax rules are uniform for citizens and long-term residents. This isn’t the case in Spain, where gift and inheritance tax liabilities may vary based on the location of the decedent and the beneficiary as well as the situs of the asset. To complicate things further, regional tax rates and exemption amounts can vary greatly and change over time.
Inheritances received by Spanish residents are subject to Spanish inheritance tax. Inheritance tax is owed by the beneficiary rather than the decedent. Therefore, Spanish residents receiving inheritance from the U.S. may face an inheritance tax liability, even where the decedent was not a Spanish resident (nor were the assets located in Spain).
Furthermore, there are no spousal exemptions or lifetime gift allowances in Spain (as there are in the U.S.).
Gift and inheritance planning is best done in consultation with accountants and lawyers with expertise in the relevant region(s).
10. There is no estate tax treaty between the U.S. and Spain
There is no estate tax treaty between the U.S and Spain. Subsequently, the lack of an estate tax treaty puts an additional burden on American expats and multinational families. Non-resident aliens with U.S. assets are subject to U.S estate tax of 40% on U.S. assets whose value exceeds $60,000. However, with proper planning, non-resident aliens can avoid or minimize U.S. estate tax liability, even while owning and investing in the U.S.
There are many reasons why Spain is a top destination for many prospective American expats — just make sure you’re prepared financially before you make the move. Request a meeting with a Wealth Manager from Creative Planning International to discuss your situation as an American expat in Spain, and get the comprehensive wealth management solution that’s right for you.