A rise in income tax for 2012 and 2013 in Spain will leave holders of tax-compliant bonds unscathed while forcing non tax-compliant bond holders to withhold tax for the next two years.
The increase in the Spanish personal income tax regime will not affect tax-compliant bonds sold in Spain if they are not encashed until 2014, according to Skandia International.
By contrast, non tax-compliant bonds will be required to withhold tax each year. If the provider of a non-compliant policy fails to withhold tax correctly and in a timely manner, policyholders may be subject to penalties for non-reporting which can range from 50-150% of the tax due.
Rachael Griffin, head of product law and commercial development at Skandia International, explained “the choices available to investors can be overwhelming. It is crucial 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,” she said.
There are generally 3 types of tax-compliant policies available in Spain: profit policies, policies where the insurer restricts the assets available to EU-domiciled Ucits (excluding bank deposits) and policies where the insurer restricts the assets available to internal funds (including cash funds).
If a policy does not meet one of these requirements then it is likely to be a non tax-compliant policy.
However, Skandia also pointed out that non tax-compliant policies can offer other advantages such as access to a wider investment universe of assets and the ability to offset losses on an annual basis.