Thursday, April 23, 2015

Taxation of mutual funds in Spain

Spain has a pretty bizarre taxation system when it comes to mutual funds. As long as the investment meets the criteria of “collective investment” (500 investors, and you can’t own more than 5% of the capital), you can switch between mutual funds to your hearts content without any capital gains taxes.

Feel nervous about the market? Switch to a money market fund, then switch to Asian equities, etc. As long as you don’t cash in your shares, you don’t have to pay any capital gains in Spain.

In addition, there’s no anti-deferral rules like in the US, so any increase in price due to interest, etc is treated just as a capital gain.

The one thing that isn’t clear is how automatically reinvested dividends are treated. European mutual funds generally don’t do yearly distributions of capital gains, interest, etc, so this doesn’t appear to be anticipated in the rules. From a lawyer I talked to, he thought that automatically reinvested dividends wouldn’t be taxed either. This is very similar to a scip dividend, which aren’t taxed in Spain either, so you have at least two arguments.

Of course, the US doesn’t look at it that way and taxes you as soon switch funds (unless they are shares of different classes in the same fund), so you might be able to do funky things in terms of timing your sales if you want to even out your US/Spain taxation.


Juan said...

I'm glad you brought mutual funds. I could not believe it when a Spanish friend was trying to explain me. Deferred taxes??? In the USA, there are 401k plans that work like this! Don't get me started with SICAVs

Some questions, in case you know:

- Switch funds, what does it mean this, at least with a USA broker? You have to sell fund 1 into cash and then with this cash transform it into fund2, right?

- Reinvestment dividends to defer taxes? You have to set up explicitely the option when you buy the funds through your USA broker. If you do it manually (buy more funds when you get the distributions) is not enough? I consider a pain having to keep track of your cost basis every time you have a distribution.

- What about ETFs? SO if you buy hold VFINX for 5 years you don't get to pay any taxes for 5 years. If you buy & hold VOO for the same time, do you?

- Smart trick: Buy & hold VIVAX (value stocks: dividends and little growth) in USA broker for 20 years while you are Spanish resident. Pay US taxes. Offset your (probably higher) Spanish taxes with that. Then move to US for one year. Sell all your VIVAX this year and pay perhaps a little tax on US (small capital gains since they are value stocks). Pay no Spanish taxes. Next year, go back to Spain and enjoy your retirement. Is this legal?

santcugat said...

There are some more rules in this article:

Seems like there are some additional complications for foreign mutual funds.

My guess is that an account directly with the seller of a family of mutual funds, where you have no intermediary would be safest for arguing you have not received the benefit of the sale.

sp said...

So it looks like enduring high charges from unwanted Spanish intermediaries pays off (maybe).

santcugat said...

Unfortunately most Spanish won't allow you to invest in US markets if you are a US citizen, since FACTA requires them to certify that their customers are not US persons (otherwise they are subject to withholding).


sp said...

It's actually UK brokers that concern me. Is Spain able to insist that only investments made through domestic brokers qualify for this CGT exemption? Surely European rules should apply.

Juan said...

a little confused..

you said

"Unfortunately most Spanish won't allow you".. you meant "Sapanish brokers"?

So if you are US citizen you cannot go to a Spanish broker to trade US stock because a US law (FACTA)? I thought FACTA was supposed to be only for credit reports

What withholding you are talking about? By the Spanish broker for Spanish taxes?

Juan said...

Looking at your article, it seems it talks about moving money from one fund to another one:

"Sobre la base de un informe emitido por la CNMV, la DGT exige que las operaciones y las órdenes relativas a los traspasos de estas IIC se realicen a través de la entidad comercializadora española"

So you would be out of luck if you have an American broker.

I guess automatic reinvestment is the only way that may work, always in the same fund. But of course, it's never said explicitly.

Can you get any low fee fund from a Spanish broker?

ING, who usually has the lowest fees, charges you a 1.09% fee

santcugat said...

Yes, as silly as it may seem, FACTA requires all non-us banks and brokerages to segregate their US and non-us clients. By far the easiest option for banks is just to certify they have no US persons as customers.

So having a non-us brokerage account investing in us securities is generally a big no, as far as banks are concerned. However, if you are not obviously American (no birth in the us and a dual passport), they might not notice.

Juan said...

IS this because if you are a non-US fiscal resident, the IRS is supposed to withhold you a percentage of interests?

US fiscal residents don't get withold and just have to declare it on the 1099s

While being a US resident (not citizen), I open an Investment Fund in la Caixa. I chat with the director about half an hour about my USA adventures. Later on, reading the prospectus, it said.. not to be offered to US citizens or residents.

It's really funny how well is everything organized ;-)