Taxation of unrealised capital gains: exit tax under personal income tax and fair value measurement under corporation tax

One of the most significant, yet often overlooked, issues in tax law is the taxation of unrealised capital gains. Although the general principle under both Spanish Personal Income Tax (Impuesto sobre la Renta de las Personas Físicas – IRPF) and Spanish Corporation Tax (Impuesto sobre Sociedades – IS) is that gains are taxed only when realised, the legislature has introduced exceptions designed to prevent taxpayers from avoiding taxation on gains accrued under Spanish fiscal jurisdiction by changing their tax residence.

In the corporate sphere, this is complemented by the growing debate surrounding the tax consequences of fair value accounting, particularly in the context of corporate restructuring transactions.

This article examines both aspects: the exit tax established under Article 95 bis of the Personal Income Tax Act (Ley del IRPF or LIRPF) and the treatment of unrealised capital gains and fair value measurement under the Corporation Tax Act (Ley del Impuesto sobre Sociedades or LIS).

Unrealised capital gains and the exit tax under personal income tax: Article 95 bis of the Personal Income Tax Act

Introduced by Law 26/2014, with effect from 1 January 2015, Article 95 bis of the Personal Income Tax Act governs capital gains arising on a change of tax residence. It establishes a genuine exit tax, under which unrealised gains accrued on shares or equity interests become taxable when an individual ceases to be tax resident in Spain.

Requirements for the application of the exit tax to unrealised capital gains

The legislation requires two categories of conditions to be satisfied.

• Time-based personal requirement: the taxpayer must have been liable to Spanish Personal Income Tax for at least ten of the fifteen tax periods preceding the final tax year in which they are required to file a Spanish personal income tax return.

  
  

• Objective requirements (alternative thresholds): the charge applies only where either the aggregate market value of the shares or equity interests exceeds €4 million, or where their market value exceeds €1 million and the taxpayer’s holding in the relevant entity exceeds 25%

The scope of the regime is limited to listed and unlisted shares, other equity interests and units or shares in collective investment undertakings.

Calculation of the taxable base for unrealised capital gains

The taxable amount is determined by the positive difference between the market value of the relevant securities at the time of the change of residence and their acquisition cost. The gain is allocated to the last tax period during which the taxpayer was resident in Spain and is declared by means of a supplementary self-assessment tax return.

The Directorate-General for Taxation (Dirección General de Tributos – DGT) has clarified that where the taxpayer moves to a tax haven or to a non-cooperative jurisdiction, the exit tax remains payable even if the individual formally retains Spanish tax residence during the applicable tax residence “quarantine” period.

Deferral, payment by instalments and repayment of the exit tax

The legislation provides two mechanisms designed to reduce the immediate tax burden when transferring tax residence outside Spain.

• Deferral within the EU or the EEA: where the taxpayer transfers their tax residence to another Member State of the European Union or to a State within the European Economic Area, payment may be deferred for up to ten years, provided that the relevant shares are not disposed of and the taxpayer remains resident within those territories.
• Repayment following return to Spain: where the taxpayer becomes tax resident in Spain again within five years, they may apply for repayment of the tax paid, provided that they can demonstrate both their return and the valuation applied at the time of departure.

Unrealised capital gains and tensions with European Union law

Article 95 bis of the Personal Income Tax Act raises questions regarding its compatibility with the fundamental freedoms guaranteed under the Treaty on the Functioning of the European Union (TFEU), particularly in light of the case law of the Court of Justice of the European Union (CJEU) concerning exit taxation. The regime has also been criticised for certain technical shortcomings, including its failure to address subsequent capital losses.

Furthermore, there is a degree of inconsistency between this regime and the corporate exit tax rules contained in Article 19 of the Corporation Tax Act, which, in certain transfers within the EU or the EEA, may prove even more restrictive than those applicable to individuals.

Unrealised capital gains for legal persons: change of tax residence and fair value measurement

Article 19 of the Corporation Tax Act and the corporate exit tax

The corporate regime is governed by Article 19(1) of the Corporation Tax Act, which requires entities transferring their tax residence abroad to include in their taxable base the difference between the market value and the tax value of their assets, unless those assets remain allocated to a permanent establishment in Spain.

Law 11/2021 tightened the rules governing transfers to EU or EEA Member States providing mutual assistance in tax collection. Whereas taxpayers were previously able to defer payment until the actual disposal of the assets, the legislation now generally permits payment only by instalments over a period of five years.

Unrealised capital gains and fair value measurement: Article 17 of the Corporation Tax Act

Separate from the above, although frequently encountered in the context of corporate reorganisations, is the tax treatment of accounting revaluations carried out in accordance with the fair value principle.

Article 17 of the Corporation Tax Act governs the tax consequences of such revaluations. For tax purposes, asset valuation follows the accounting principles established under the Spanish Commercial Code, subject to the adjustments required by the Corporation Tax Act. Consequently, changes in value resulting from the application of fair value accounting under the International Financial Reporting Standards (IFRS) or the Spanish General Accounting Plan (Plan General de Contabilidad – PGC) do not give rise to immediate tax consequences unless recognised in the profit and loss account or in legally required reserves, subject to certain exceptions applicable to specific financial instruments.

This approach reflects the fundamental structure of Spanish corporation tax, whereby the taxable base is derived from the accounting profit, adjusted through extra-accounting tax adjustments. In practice, a voluntary accounting revaluation requires corresponding adjustments in Corporation Tax Return Form 200, thereby preventing the accounting revaluation from affecting the tax liability for the relevant accounting period.

This issue is particularly significant in mergers, demergers and contributions of assets in kind. Where the transaction falls within the tax neutrality regime, the accounting valuation may differ from the tax valuation, giving rise to extra-accounting adjustments that must be monitored until the relevant asset is disposed of or derecognised.

Key points on the taxation of unrealised capital gains

A comparison of both regimes highlights several important conclusions:

• Common objective: both regimes seek to ensure that capital gains accrued in Spain are taxed before either the taxpayer or the relevant assets leave the Spanish tax jurisdiction, although they differ in their technical design.
• Deferral is not automatic: under both Article 95 bis of the Personal Income Tax Act and Article 19 of the Corporation Tax Act, any deferral or payment by instalments must be expressly elected in the relevant self-assessment tax return.
• Fair value does not trigger immediate taxation: an accounting revaluation does not, in itself, constitute a taxable event. This principle of tax neutrality should not be confused with the operation of the exit tax.
• An evolving European legal framework: any transfer to another EU Member State should be assessed in light of the latest CJEU case law concerning the proportionality of exit taxes.

Conclusion: tax planning for unrealised capital gains

Ultimately, the taxation of unrealised capital gains reflects the balance between the State’s legitimate interest in protecting its tax base and the fundamental freedoms guaranteed under European Union law. Effective international tax planning requires a comprehensive assessment of both the taxpayer’s personal circumstances and any relevant corporate structures before any change of tax residence takes place.

Frequently asked questions about unrealised capital gains

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