Spain’s ETFs, equities and funds hit by higher taxes on short term capital gains

Spanish President Mariano Rajoy has confirmed that capital gains tax rates on short term investments will rise next year.

Although the move has yet to be set out in detail, it will hit direct equities, Exchange traded funds and mutual funds held by retail investors for less than one year.

Sicav vehicles, used by high net worth investors to manage family wealth, will also likely be affected. Speculative property investments may hit by the changes.

Tax rates will no rise for deposit accounts and income paid from pensions. Treasury and corporate bonds, pagarés (IOUs often issued by banks) and mortgage-backed bonds will also be excluded, according to tax authority sources.

The move reverses a tax policy introduced in 2006 which treats all capital gains equally irrespective of the length of each investment. The largest plusvalías capital tax gains bills will now double for short-term holdings.

The move is designed to restrict speculative investments. It has also been seen as a populist policy to tax the rich, similar to measures introduced in France this summer.

Capital gains tax rates have risen steadily in recent years. The previous government increased rates to 21%.

More recently, the Rajoy government introduced a graduated system in December 2011. Current rates range from 21% for gains under €6,000 to 25% for gains between €6,000 and €24,000. A top rate of 27% applies on all gains in the top band above €24,000.

The new tax treatment will mimic Spanish income tax rates – known as Impuesto sobre la Renta de las Personas Físicas (IPRF) – for all market investments held for less than one year.

IRPF income tax rates vary from region to region. The highest marginal rate is 56%, applied to residents of Catalunya. For richer investors whose annual gains €300,000, applying the Catalan top rate equates to a doubling of capital gains taxes.

Mariano Rajoy did not specify which investments would be affected, referring only to ‘plusvalías financieras’. The president’s announcement will be fleshed out in the next budget announcement on 27th September.

The measures will be introduced from 1st January next year as part of a package to reduce the Spanish government deficit. They come on the back of recent spending cuts and increases to Value Added Tax rates.

Whether the capital gains tax increases will have any impact on investment patterns or tax revenues remains to be seen. Investors have been reducing market exposure via direct holdings and collective funds.

The Spanish Ibex index has fallen 6.61% year to date, reducing the likelihood of capital gains tax revenues on recent short-term investments.

Traditionally cautious retail investors have also been scared off direct investment by the ongoing sovereign crisis.

Investment funds are also struggling. Figures from trade association INVERCO show outflows of €360 million in August, continuing a multi year trend. The number of investors also dipped a further 40,000 to 4.6 million.

Even the country’s popular guaranteed fund sectors are losing clients. Ahorro Corporacíon says total guaranteed fund assets under management are down €1.15 billion this year.



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