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The power to tax is the power to destroy (John Marshall, American Founding Father, Justice of the U.S. Supreme Court)

 Are you a tax resident in Spain? That is, do you spend over 183 days per calendar year in Spain or is Spain the center of your vital interests (your work, your family, your primary home) during the course of the calendar year, regardless of how many days you spend outside of Spain each year? If you answer yes to either of these questions, the Spanish government considers you a tax resident of Spain, regardless of your citizenship. As such, you are subject to all Spanish tax laws, and since ignorance is no excuse under the law, you had better learn about the new Spanish Tax Form 720, and quickly, as the filing deadline is April 30th of 2013.

What is Spanish Tax Form 720? It is a declaration of all of assets and economic rights (including annuities and most pension plans) that a Spanish tax resident holds in bank accounts or owns (e.g. real estate and shares or bonds) outside of Spain anywhere in the world. The filing of this new form is mandatory for all tax residents of Spain beginning in the 2012 tax year, and is described in Royal Decree 1558/2012. This is a new annual obligation, and in future years will be due on the 31st of March following the conclusion of the calendar year. However, this first time the Spanish tax authorities are generously allowing one extra month and thus setting the deadline on April 30th 2013.

If you are a Spanish tax resident, but the total value of all your assets and economic rights held outside of Spain in any of the asset categories included in this new regulation (bank accounts, pension plans, stocks or bonds or company participations, or real estate) do not total more than 50,000 Euros, you are not required to file the form. However, the author recommends that you be very careful with this new requirement, as the penalties for noncompliance are simply draconian. In case of doubt as to whether you are required to file the Form 720, seek professional advice from a qualified tax advisor, as a mistake could be very costly. For example, and only as a starting point, the penalty for late filing of this form is 1,500 Euros. Additionally, there is a 10,000 Euro basic fine for not having filed form 720 if the Spanish tax authorities determine that indeed you were required to file the form.

The punishment for non-compliance with this new tax requirement does not end there. Any assets abroad that the Spanish authorities “discover” that were not included on the tax residents declaration will be taxed for their assessed value at the marginal tax rate of the owner (up to 52%). Additionally, there will be a fine of 150% of the tax due and interest fees for late payment. Simply put, the total penalty for an undisclosed bank account outside of Spain, for example, of 100,000 Euros, could be more than 140,000 Euros. The tax authorities would in effect claim the entire value of this undeclared asset, and an additional 40,000 Euros as well.

Given these brutal fines, what are the chances that the Spanish authorities would discover a bank account or pension plan that the Spanish tax resident did not declare on the Form 720, whether this omission were by choice or by error? No one can answer this question with precision, but it is a fact that the Spanish government participates in a growing network of information exchange platforms with countries throughout the world, particularly with the United States, the other European Union nations as well as Switzerland.

Your author is personally astounded by both the severity of these requirements, and the almost total lack of knowledge of the form 720 filing requirement in the expatriate community in Spain. While the measure is apparently intended to catch Spanish “tax cheats” who hold substantial assets outside of Spain, unfortunately it will also ensnare many law abiding expatriate retirees or business people who have assets outside of Spain as a normal part of their lives as foreigners resident in Spain, for example, a former home which has not been sold or a pension plan corresponding to work performed before coming to live in Spain. While it would be very unusual for a typical Spaniard who was not wealthy to have more than 50,000 Euros of assets outside of Spain, it is perfectly normal for an average expatriate to meet this filing requirement for Form 720.

One might expect that a country with a huge expatriate retiree population and a large number of hard working foreigners in the midst of a severe economic downturn would be careful about implementing new laws which place a severe burden on these valuable foreign-born Spanish residents.

However, this has clearly not been the case. To add insult to injury, the Form 720 itself is a very difficult form to complete requiring very technical information concerning the assets to be declared which most people who are not familiar with financial terminology will find difficult to answer. Given the tremendous penalties for an erroneous declaration, taxpayers would be well advised to seek professional help to complete the form, despite the costs for this service from a competent advisor.

by James Levy—CEO of OSAA

A longtime resident of Madrid, James Levy is an investment advisor to Spanish and American families and businesses. He is the CEO and cofounder of OSAA—Open Source Asset Alliance.

For more information: www.osaa.biz