Investment and Taxation Case Study

Background

Our client, like many expatriates in Spain, felt that his tax planning was best served by leaving his money offshore.  He was therefore horrified to find that his investment was now subject to withholding tax  and this was deducted automatically.  It got worse when he also found out this tax will rise to the very significant figure of 35% each year by 2011.

Solution

Since the European Savings Directive was introduced in 2006, offshore bank accounts have been subject to taxation from one of two methods.  Either withholding tax is applied and deducted automatically or the amount of interest received is sent to the tax authority of the person's residency. 

The solution is relatively straight forward.  When Ireland was admitted to the EU they secured and agreement to special tax treatment for life insurancies  companies based in Dublin.  By investing via one of these companies there was no tax to pay by the investment company on the investment.  Also the client has no tax to pay whilst the money is invested.  When a person makes a withdrawal from this type of investment there is an assessment for tax.  Currently, the rate of tax varies from as little as 1.8% to a maximum of 18%, depending upon the amount of gain withdrawn.  Our client in this study required regular income and we calculated the average tax liability over a period of up to 20 years to be just 7.6%.

 The tax saving, and hence extra income for our client was as follows:

(for full workings of the rate of tax on the European Investment click Spanish Tax Calculation )

This gave the client an extra 86.40€ from exactly the same investment. This figure will increase untill 2011 when withholding tax is 35% when the extra income  from the European investment will be an extra 164€ EACH month.  In fact there were 3 benefits for this client:

• Increased income, less tax
• A fully compliant and legal insurance linked investment  structure allowing the client's wife to sleep at night.

• A portfolio of investments were used and the investment return increased over the rate thas was being paid by the offshore bank account

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