Investors are increasingly interested in managing their investments themselves. This is often, regardless of their wealth and applies even more so in a crisis, like the one we are currently living through. Investors want to be hands-on to maintain and enhance the value of their savings and thereby obtain higher returns. It is well-known that one of the essential factors to consider in a financial plan are taxes, which is a topic we need to be well-versed in to be able to minimise effectively and in turn maximise the profitability of our investments.
It is important to note that, although exceptional tax deferrals have been provided for certain models and taxpayers (Medidas Tributarias COVID-19 trans. “COVID-19 Tax Measures”), the deadline for the Income Tax Return (Model 100) has not been modified and runs from 1 April to 30 June 2020.
The purpose of this entry is to summarise key concepts that we’ve seen when providing support to our Partners when dealing with their Income Tax Return. Let’s get to it:
How are my investments taxed? Do they all receive equal treatment in regards to income tax?
Most financial products are taxed on the savings base (such as income from capital gains yield or capital gains/losses). There are, of course, exceptions, such as pension plans or dependency insurance, among others, but we will not discuss these here.
What results do I declare as capital gains or losses and how do I determine their amount?
Capital gains/losses are those variations that are detected as changes in the value of the taxpayer’s assets, unless they are qualified as yields. In other words, the following requirements must be met:
- There is a change in what composes the value of the assets. For example: sales of houses, commercial premises, parking spaces, rural properties, shares.
- There is a change in the value of assets considered as the individual’s personal wealth. The revaluation or loss of value of certain assets, such as shares or capital gains yield, owned by the taxpayer, does not give rise to capital gain/loss until it has actually materialised.
- There is no legal rule that expressly exempts such capital gains from taxation or makes income taxable as a result. Example: compensation as a result of civil liability for personal injury in the amount legally or judicially recognized, certain prizes, etc.
In general, the amount of capital gains or losses will be as follows:
Capital gains/losses = Transfer value (net value of sales-related expenses) – Acquisition value (incorporating purchase-related expenses)
What results are considered as income from capital gains yield (CGY) and how do I determine their value?
For taxation purposes, CGY is considered all profit or compensation, whatever their denomination or nature, of monetary nature or in kind, deriving directly or indirectly from capital gains yield and, in general, from assets or rights not classified as real estate but owned by the taxpayer and not related to economic activities carried out by the taxpayer.
These 3 main categories can be distinguished according to their source or origin:
The amount shall be determined according to the rate of yield in question. In general, for derivatives of holdings in institutions’ own funds and transfers of own capital to third parties:
RCM = Full income – Deductible expenses (*)
(*) Deductible expenses: only those administration and deposit of the shares or holdings expenses that represent the participation in an entities’ own funds, no other expense is admissible.
Amounts shall not be deductible if they are remunerations for discretionary management of an individual’s portfolio, where investments were made on behalf of the owner under a mandate provided by the owner.
In the same quarter I obtained both positive and negative capital gains/losses and GCY. Now what? Can these results be compensated in any way?
Yes, let’s have a look at it on our graph.
The previous graph shows that the taxable base of savings will be constituted by the positive balance of adding the following balances:
- CGYs integrate themselves seamlessly into the savings tax base (positive and negative). If the balance was negative, the amount will be offset by the positive balance of the capital gains/losses declared in the savings tax base up to a limit of 25% on the positive balance.
- Capital gains/losses integrate themselves seamlessly into the savings tax base. If the balance were negative, the amount may be offset against the positive balance of the savings tax base, CGY, up to a limit of 25% on the positive balance.
- In both cases, if after these compensations there is a negative balance, the amount will be compensated over the following 4 years.
These are the amounts deducted from your income that need to be paid to the tax national authorities as an “advance” on your tax liability. Not all financial products are subject to retentions. As a general rule, the retentions applied are on average 19% and must be correctly tailored in the document that supports the transaction.
The following is a link so you’re able to consult the practical instructions for the Spanish Tax Declaration in 2019 [Only available in Spanish].
At Faraday we provide our Partners with the best opportunities to invest in innovative and sustainable business initiatives in their early commercial stages. We structure and manage their investments, enhancing the performance of our investee companies and defend their interests throughout the entire investment cycle. We also work to provide the best legal and tax advice in support of our Partners.
By Lucía Marinelli – Head of Finance and Administration