Tax Information Exchange: can offshore investments really escape the notice of the Spanish Tax Authorities?

International agreements of tax information exchange between countries have advanced considerably in recent years. However, there remains a widespread that holding offshore investments in certain countries — particulary in territories with low or no taxation — making it increasingly difficult for offshore investments to go unnoticed by tax authorities.

But the current reality is quite different. Holding investments abroad can be perfectly justified on economic, business or strategic reasons, and, depending the circunstances, may even receive more effiecient tax treatment. But it should not be confused with opacity or tax evasion.

How does automatic tax information exchange work?

The turning point came with FATCA (Foreign Account Tax Compliance Act), introduced by the United States in 2010, which established the automatic exchange of information on the foreign financial assets of American citizens; Spain and United State of America have taken part in this exchange since 2014, now automatically exchange.

Subsequently (2014), the OECD developed the Common Reporting Standard (CRS), under which a large number of jurisdictions (check the list of jurisdictions here).

This system essentially means that financial institutions must identify their clients’ tax residency and report certain information to their own tax authorities, who pass it on to the tax authorities of the country where those clients are tax resident.

The information to be reported would include the account holder’s identity and tax residency, the account number, the financial institution, the account balance or value and certain interest, dividends and other investment income. And not only for direct account holders, also for the so-called controlling persons in the case of entities or legal persons.

Therefore, interposing companies between individuals and financial accounts does not prevent the exchange of tax information from reaching the people who control them.

Can the Authorities obtain information that is not covered by automatic exchange?

Yes. Spain has a broad network of double taxation treatis with mutual assistance and tax information exchange clauses, and it is a party to the Multilateral Convection on Mutual Administrative Assistance in Tax Matters, MASC, and its successive implementing instruments (financial accounts, crypto-assets, digital platforms, etc.), which enable various forms of cooperation between jurisdictions.

Alongside automatic exchange, there also exists exchange of information upon request, whereby one tax authority may request another for information that is foreseeably relevant to a specific tax audit.

There is even spontaneous exchange, that is, one tax authority may transmit certain tax-relevant information to another without having first received a specific request.

For this reason, we must distinguish between information that can reach the AEAT automatically and information that, while not part of the periodic exchange of tax information, can subsequently be obtained in the course of a tax audit. All of this forms part of the general framework for the exchange of tax information between tax authorities.

This distinction matters, since it would not be correct to claim that FATCA or CRS give the Spanish tax authorities automatic access to the full accounting records and transactions of any foreign company. Each mechanism has a defined scope. But the fact that certain information is not subject to automatic exchange does not mean it is inaccessible to the Spanish tax authorities either.

Is a low-tax planning the same as an opaque jurisdiction?

The answer is no. A juridistion’s tax regime and its participation in internacional information-exchange systems are separate matters.

A country can offer a low rate of taxation, applying a reduced rate of taxation to certain income or establishing exemptions on dividends, while still participating fully in international information-exchange mechanisms.

Some practical examples

Two examples illustrate the point. An individual resident in Spain who holds an intereset in a a holding company based in Dubai. That company receives exempt dividends from differents international companies.

Since the introduction of Corporate Tax in the UAE, it can no longer be said, as a general rule, that companies resident there do not pay tax. However (and without intending to comment on the legislation of other jurisdictions), its regulations do provide for a participation exemption, under which certain dividends from foreign shareholdings may be exempt when the corresponding requirements are met.

Let’s assume that this holding company receives dividends with no effective taxation in the UAE, and that it subsequently distributes profits to its shareholder, with no withholding tax at source, into a Dubai-based account.

But if the shareholder is a Spanish tax resident, the tax analysis cannot end in Dubai.

It will be necessary to determine the taxation applicable in Spain and, depending on the company’s characteristics, its level of taxation, its shareholding percentage and the nature of its income, even to consider whether the Spanish controlled foreign company (CFC) regime could apply.

Furthermore, the UAE participates in international information-exchange mechanisms, and the double taxation treaty signed with Spain contains a specific tax information exchange clause.

Therefore, a holding company in the UAE can be a legitime, and even tax-efficent, structure. What is not correct is to confuse its potentially low taxation with a lack  transparency obligations, when it is owned by Spanish tax residents

Another scenario: a company incorporated in the British Virgin Islands (BVI) that holds a securities portfolio with international banks or brokers.

Let’s imagine that the company was incorporated at a time when its shareholders were not Spanish tax residents, and that they subsequently move to Spain while keeping the structure in place.

From the moment they acquire Spanish tax residency, the company’s taxation must be reviewed, and in particular, the possible application of Spain’s controlled foreign company (CFC) rules — especially when the entity is controlled by its shareholders and its activity consists mainly of holding financial assets.

But there is also a relevant issue from the perspective of tax information exchange.

To determine what information may reach Spain, it is not enough to look at the jurisdiction where the company is incorporated. It will also be necessary to check where the bank or broker is located, what exchange mechanisms exist with that jurisdiction, and how the company is classified for CRS purposes.

If the entity qualifies as a Passive NFE (passive non-financial entity), the CRS rules may require its Controlling Persons to be identified and, where those persons are Spanish tax residents and the remaining requirements are met, the corresponding information to be reported.

Once again, the existence of an interposed company does not necessarily amount to anonymity.

Spain and the United States have their own FATCA Agreement, which establishes the automatic, annual exchange of certain financial information.

Therefore, in a structure made up of, for example, a Spanish resident, a company incorporated in the BVI, and a portfolio held in the United States, each of the jurisdictions involved and the exchange mechanisms applicable to each must be analyzed separately.

Knowing where the company is incorporated is not enough. The jurisdiction of the financial institution and the classification of the account-holding entity itself can be equally relevant.

A structure set up years ago may have been perfectly consistent with its owner’s tax situation at the time, and cease to be so once that person acquires Spanish tax residency.

Before relocating, it is advisable to review, among other things, the nature of the existing entities, the composition and value of their assets, unrealized capital gains, the level of taxation of the foreign companies, the possible application of the CFC regime, and the reporting obligations that will arise in Spain.

In certain cases, it may be advisable to reorganize the structure, change how the investments are held, or even consider relocating the company’s own residence.

What matters is that these decisions be made before certain tax consequences arise, and as part of international planning that is fully transparent and compliant with the applicable rules.

International tax planning and transparency are entirely compatible

The growing exchange of tax information does not mean that the possibilities for structuring international investments efficiently have disappeared.

There are jurisdictions with competitive tax regimes, double taxation treaties, exemptions on dividends or capital gains, and corporate structures that can be well suited to certain investments.

Legitimate international tax planning consists precisely in analyzing these alternatives and selecting the one that, while meeting the corresponding tax and reporting obligations, proves most efficient.

What has changed substantially is the possibility of basing a structure on the expectation that assets or income held outside Spain will remain unknown to the tax authorities.

To sum up, low taxation and opacity are not equivalent concepts. The advance of tax information exchange driven by FATCA, CRS, and the other international cooperation mechanisms requires international investments to be approached from the standpoint of understanding their treatment in every jurisdiction involved, properly meeting the applicable tax and reporting obligations, and, from there, seeking the most efficient lawful alternative within full compliance with the law.

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