Spain’s new €150,000 investment account promises tax breaks, but there is a catch

Spain has given the go-ahead to a new savings plan which, in theory, allows its residents to invest up to €150,000, with considerable tax advantages. British expatriates may thus find a means of increasing their savings, without having to pay tax every time they sell an investment at a profit.

However, despite receiving government approval, the account is not yet available to open, and investors will have to wait for further regulations before banks can begin offering it.

The project, which is named Financia Europa, was reintroduced by the Spanish cabinet on the 6th of October, after an earlier version was rejected by Congress. On the 7th it was published in Spain’s Official State Gazette (BOE), and came into force on the 8th.

The idea is to encourage families to put more of their savings in European companies and markets. But how much can you save in tax? And can British residents in Spain participate?

How Spain’s new €150,000 investment account works

The new Financia Europa investment account is intended to encourage long-term investment by offering tax advantages not normally available when buying and selling shares.

Under the scheme, investors can contribute up to €150,000, and the money can be invested in eligible financial products, including certain shares, investment funds, and exchange-traded funds (ETFs).

The great advantage is the possibility of buying and selling securities within the same account without the payment of immediate tax.

Normally, if someone sells shares at a profit in Spain, the profit may be subject to the income tax even if the money goes on reinvestment.

Financia Europa changes the approach to this problem. It is no longer necessary to pay tax on the gains of a deal as soon as it is made. The reinvestment of the gains from any transaction is not immediately subject to taxation; instead the tax is only computed when money is withdrawn.

A favourable situation only arises for longer periods than five years.

Under the legislation, the first €10,000 of qualifying capital gains can be completely exempt from tax, while an additional 20% exemption applies to the remaining eligible gains.

In the case of an investment of €100,000, for example, the value of the portfolio will increase to €140,000 after more than five years.

Of the €40,000 profit, the first €10,000 would not be subject to income tax. A second €6,000, representing twenty per cent of the remaining €30,000, would also not be taxed.

This would leave €24,000 of the original €40,000 in a taxable profit, assuming that the entire gain qualifies under the scheme.

The €10,000 exemption, however, does not constitute an annual allowance. The five-year period is the basis of the calculation of which profits are exempt.

Other limitations also exist. The account is designed to channel investment towards Europe, which means that funds eligible for the account must meet certain criteria in their exposure to European assets.

Dividends also remain subject to the usual Spanish income tax rules.

However, despite the word ‘savings’ in the name, Financia Europa is not a conventional savings account. Its value rises and falls, it does not give any guarantee of return and it does not protect investors against market losses.

Can British expats living in Spain benefit from the tax breaks?

For British nationals who are residents of Spain, the new bank account could be particularly interesting. A special clause in the law enables the opening of bank accounts in the name of persons who are taxed on their personal income, which is called Impuesto sobre la Renta de las Personas Físicas (IRPF).

The rules do not prescribe that the purchaser should be Spanish national. Therefore, any foreigner who is a tax resident in Spain could be eligible, provided they meet the other requirements.

But being in Spain and being Spanish for tax purposes are not the same thing.

Anyone owning a second home in Spain, but remaining tax resident in the United Kingdom, must not think they are entitled to open a savings account in the same way as a person who lives in Spain.

It is a distinction which has a special importance for the retired, the workers away from their place of business, and for those who spend their time between the two countries.

British readers may recognise some similarities with the UK’s Individual Savings Account (ISA), which allows eligible savers to hold certain investments in a tax-advantaged environment.

But Financia Europa is not a Spanish ISA with identical benefits.

As opposed to the British system, the Spanish one has some restrictions as to the nature of investments, the tax treatment of gains on such investments, and the period for which the contributions must remain in the account before they can be considered for the additional benefits.

There is another consideration for expats planning to return to Britain.Under the new Spanish rules, ceasing to be an IRPF taxpayer can trigger the taxation of accumulated gains that have not previously been declared.

That means someone who opens a Financia Europa account while living in Spain and later moves abroad may face tax consequences, even without selling their entire portfolio.

Anyone considering this should therefore reflect on their plans for a longer stay in either country and seek advice about the tax treatment of investments in both countries.

When will Spain’s new investment account become available?

This is where the main catch comes in. Although the government has sanctioned the regulations, the banks cannot yet open bank accounts with Financia Europa for their customers.

According to a report published on October 9 in Cinco Días, financial institutions are awaiting a ministerial order from the Ministry of Finance laying down how account providers would report the information to the Tax Agency.

There is currently no confirmed date for that order.

Another step is the establishing of a register of investment funds that will be admitted to the system by the CNMV, Spain’s securities market commission. The regulator has been given four months from the coming into force of this decree to create the list.

Several financial institutions, including Trade Republic, MyInvestor, N26, and Indexa Capital, are said to be examining how they can offer the new product once it has met all the other conditions.

However, this interest on the part of financial institutions doesn’t mean that customers can already sign up.The decree still has to be confirmed by Parliament after the former draft was rejected.

For now, if the British expatriate is interested in Financia Europa, he will have to keep a watchful eye on his bank and on the Spanish authorities, and not think the account is already available.

The advantage in tax for those who have planned to invest over a few years is considerable; but the conditions of admission, the restrictions on the investment, the fees and the consequences of withdrawing money and the effect of leaving Spain are important matters of consideration.